MEETING BEFORE THE CALIFORNIA AIR RESOURCES BOARD BOARD HEARING ROOM 2020 L STREET SACRAMENTO, CALIFORNIA THURSDAY, APRIL 25, 1996 9:40 A.M. Nadine J. Parks Shorthand Reporter PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 ii MEMBERS PRESENT John D. Dunlap, III, Chairman Eugene A. Boston, M.D. Joseph C. Calhoun Lynne T. Edgerton M. Patricia Hilligoss John S. Lagarias Jack C. Parnell Barbara Riordan Ron Roberts James W. Silva Doug Vagim Staff Present and Participating: Jim Boyd, Executive Officer Mike Scheible, Deputy Executive Officer Mike Kenny, Chief Counsel Dean Simeroth, Chief, Criteria Pollutants Branch, Stationary Source Division John Courtis, Stationary Source Division Charles Imbrecht, Chairman, California Energy Commission Susan Brown, California Energy Commission Tom Glaviano, California Energy Commission Richard N. Light, Supervising Deputy Attorney General Peter Venturini, Chief, Stationary Source Division Tom Jennings, Staff Counsel, Office of Legal Affair Robert Ogelsby, Office of Legislative and Intergovernmental Affairs Patricia Hutchens, Board Secretary Wendy Grandchamp, Secretary Bill Valdez, Administrative Services Division PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 iii I N D E X PAGE Proceedings 1 Call to Order 1 Pledge of Allegiance to Flag 1 Roll Call 1, 2 Opening Statement by Chairman Dunlap 2 AGENDA ITEM: 96-3-1 Public Meeting to Update Board on Status of California Cleaner Burning Gasoline Regulation Implementation Efforts Introductory Remarks by Chairman Dunlap 2 Staff Presentation Jim Boyd Executive Officer 5 Mike Scheible Deputy Executive Officer 11 Charles Imbrecht Chairman California Energy Commission 15 Questions/Comments 43 Jim Boyd Executive Officer 68 Dean Simeroth Chief Criteria Pollutants Branch 68 Questions/Comments 70 Continued Presentation by Mr. Simeroth 71 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 iv INDEX, continued. . . PAGE AGENDA ITEMS: 96-3-1 Questions/Comments 73 Continued Presentation by Mr. Simeroth 73 Questions/Comments 78 (Request by Mr. Lagarias) 86, 87 Questions/Comments 87 PUBLIC COMMENTS: Ronald Kiracofe ARCO Products Company 88 Questions/Comments 93 Luncheon Recess 125 Afternoon Session 126 PUBLIC COMMENTS CONTINUED: Lyle Sims Shell Martinez Refining Company 126 Questions/Comments 132 Al Jessel Chevron 152 Questions/Comments 174 Dennis Lamb Unocal 188 Chuck Walz Texaco 193 Questions/Comments 197 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 v INDEX, continued. . . PAGE AGENDA ITEM: 96-3-1 Tom Eveland Kern 202 Wee Yee Mobil 206 Questions/Comments 207 Duane Bordvick Tosco Refining 209 Questions/Comments 213 Bill Dermott Exxon 216 Questions/Comments 218 Lynn Westfall Ultramar 223 Questions/Comments 230 Doug Henderson WSPA 246 Jan Speelman Automotive Trade Organization of California 251 Questions/Comments 261 Dennis DeCota California Service Station Assn. 269 Questions/Comments 273 Barry Berkett Thrifty Oil Company 279 Questions/Comments 285 Bonnie Addario CIOMA 289 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 vi INDEX, continued. . . PAGE AGENDA ITEM: 96-3-1 Questions/Comments 293 Joel D. Anderson California Trucking Association 306 Stephanie Williams California Trucking Association 309 Rich Leimbach CTA 315 Questions/Comments 317 Mark Anders CTA 321 Questions/Comments 324 Janet Hathaway NRDC 332 Tim Carmichael Coalition for Clean Air 335 Questions/Comments 339 Further Conversation with Bonnie Addario and representatives 340 Jim Austin American Automobile Manufacturers Assn. 345 Jim Martens California Dump Truck Owners Assn. 347 David Atwater Van De Pol 352 Questions/Comments 357 Donald R. Brown Oil Chemical & Atomic Workers 359 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 vii INDEX, continued. . . PAGE AGENDA ITEM: 96-3-1 Normal Covell Sacramento Metro AQMD and for CAPCOA 360 Thomas Perardi Bay Area AQMD 363 Questions/Comments 366 David Hyltan San Andreas Mini-Mart 368 Margaret Felts Citizen 372 Questions/Comments 377 Paul Edison Pulliam 381 Questions/Comments 382 R. O. Segraves Anglo American Associates 384 Rev. Reggie Jackson 388 Hamid Amini 391 Questions/Comments 396 Paul Puich 399 Statement by Chairman Dunlap and Discussion 405 Motion by Lagarias 448 Discussion 448 Board Roll Call Vote 450, 451 Adjournment 452 Certificate of Reporter 453 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 1 1 P R O C E E D I N G S 2 --o0o-- 3 CHAIRMAN DUNLAP: Will the April meeting of the 4 California Air Resources Board please come to order. 5 Will the audience please rise while Mr. Parnell 6 leads us in the Pledge of Allegiance. 7 (Thereupon, all persons in the hearing room 8 recited the Pledge of Allegiance.) 9 CHAIRMAN DUNLAP: Thank you, Mr. Parnell. 10 Will the Board Secretary please call the roll. 11 MS. HUTCHENS: Boston? 12 DR. BOSTON: Here. 13 MS. HUTCHENS: Calhoun? 14 MR. CALHOUN: Here. 15 MS. HUTCHENS: Edgerton? 16 MS. EDGERTON: Here. 17 MS. HUTCHENS: Lagarias? 18 MR. LAGARIAS: Here. 19 MS. HUTCHENS: Hilligoss? 20 MAYOR HILLIGOSS: Here. 21 MS. HUTCHENS: Parnell? 22 MR. PARNELL: Here. 23 MS. HUTCHENS: Riordan? 24 SUPERVISOR RIORDAN: Here. 25 MS. HUTCHENS: Roberts? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 2 1 SUPERVISOR ROBERTS: Here. 2 MS. HUTCHENS: Silva? 3 SUPERVISOR SILVA: Here. 4 MS. HUTCHENS: Vagim? 5 SUPERVISOR VAGIM: Here. 6 MS. HUTCHENS: Chairman Dunlap. 7 CHAIRMAN DUNLAP: Here. 8 I would like to remind those in the audience who 9 would like to present testimony to the Board on any of 10 today's agenda items to please see the Board Secretary off 11 to my left. 12 If you have written statements, please provide her 13 with 20 copies so that we may each have a copy. 14 The first item on the agenda today is 96-3-1, 15 which is a public meeting to update the Board on the status 16 of the California Cleaner Burning Gasoline regulation's 17 implementation effort. 18 This, of course, is our first and most weighty 19 issue on today's agenda. And it's my hope the discussion 20 will focus on the increase of gasoline prices in our State. 21 Like most motorists, I am not happy with the current 22 situation at the pump. 23 We are concerned that these events not adversely 24 upset the implementation of a very important clean air 25 strategy; that is, the implementation of the California PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 3 1 Cleaner Burning gasoline program. 2 I am disturbed by the large and rapid increases in 3 the price of gasoline as well as diesel fuel. We understand 4 that the increases are related to multiple factors, 5 including an increase in the price of crude oil, recent 6 seasonal price increases, refinery problems, Iraq and U.N. 7 negotiations, the cold Eastern winter, and, of course, the 8 introduction of our new clean fuel. 9 Nevertheless, the amount of the increases is 10 daunting and, quite frankly, a bit perplexing. I'm also 11 disturbed by some of the communications from some -- from 12 one particular oil company in the middle of the month, where 13 they outlined their decision to raise prices by nearly a 14 dime a gallon, in light of the increases which had already 15 occurred. 16 Other oil companies have followed suit as a 17 result. 18 Today's informational hearing will, however, only 19 be successful if we can illuminate the multiplicity of 20 factors impacting the price of gasoline and diesel 21 throughout the nation and, in particular, here in our State 22 of California. 23 We also hope that today's discussion will provide 24 an explanation of how these factors impact the price at the 25 pump, the price the consumers pay. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 4 1 As part of today's hearing, my colleague, Mr. 2 Chuck Imbrecht, Chairman of the California Energy 3 Commission, and his staff, as well as staff from our own 4 Board, will focus their presentations on the current 5 supply/price situation, including the mechanisms in place to 6 monitor and respond to any potential supply disruptions. 7 We are also looking forward to hearing from 8 representatives of the oil industry and those that use and 9 distribute petroleum products to hear their perspectives on 10 the factors which are influencing the higher prices that we 11 are all paying at the pump. 12 Because of antitrust restrictions, the oil 13 companies cannot discuss some particular elements and, of 14 course, their individual pricing strategies. However, they 15 can discuss the factors that influence the price of fuels at 16 the global, national, and State levels. 17 I would not be honest if I didn't say that I would 18 be extremely upset and angered if the implementation of a 19 program, as critical to California's air quality as Cleaner 20 Burning Gasoline, was being used as a scapegoat for the 21 increased prices that we are all paying at the pump. 22 We recognize that Cleaner Burning Gasoline costs 23 an average of 5 to 8 cents more per gallon to produce, and 24 that some or all of this increase would be reflected at the 25 pump. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 5 1 However, recent increases since the first of the 2 year are three to four times what could be linked to the 3 Cleaner Burning Gasoline program. And we want to better 4 understand the reasons for these significant increases. 5 Let it be no secret that this Board will take 6 necessary actions if we believe that our concerns are not 7 met or addressed. If supply is an issue, we will consider 8 altering the program. 9 We are looking for answers. We need your help to 10 help us get the word out to consumers to better understand 11 the situation. 12 I also know that Mr. Imbrecht feels the same way, 13 and has the ability to take some emergency measures that 14 we'll learn more about if deemed necessary. 15 So, at this point, what I would like to do is turn 16 the time over to Mr. Boyd to introduce this item. 17 MR. BOYD: Thank you, Mr. Chairman. Good morning, 18 Board members. Good morning to the public. Let me just 19 offer maybe an apology to the public for the extreme 20 security precautions that they had to go through to get into 21 this meeting. Unfortunately, the Air Board, courageous 22 enough to hear this issue, has also been subjected to what 23 seems to be the order of the day these days -- extremely 24 outlandish threats against the security of the members, and 25 the staff, and the public, and the physical plant. So, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 6 1 we've had to take these extreme precautions. 2 And I think it's a necessary thing to have to do 3 in these days. 4 This was, as the Chairman indicated, intended to 5 be just our sixth regular routine report to the Board on the 6 implementation of the Cleaner Burning Gasoline program. 7 However, as the Chairman stated in his introduction -- in 8 light of the increasing prices of gasoline and diesel fuel 9 nationally, as well as in the State of California -- today, 10 we are indeed going to focus on the more important matters 11 relating to the price and the supply of gasoline and diesel 12 fuel in California, and this because of our concern that 13 people are associating the introduction of California's 14 Cleaner Burning Gasoline with the total increases in fuel 15 prices. 16 And we want the record set straight so that no 17 harm comes to this program, one that you know and those who 18 follow air quality in this State know yields the greatest 19 air quality public health benefit to the citizens of this 20 State that we've been able to derive for many, many years; 21 perhaps the greatest single measure since the introduction 22 of the catalytic converter a couple of decades ago. 23 And this benefit is instantaneous, in that it does 24 not occur over time with the introduction of new machinery. 25 It occurs the moment you put this gasoline in your fuel PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 7 1 tank. Therefore, this program, as we know, is critically 2 important to our State Implementation Plan and to the public 3 health of the citizens of this State, the State with the 4 worst air quality in the nation. 5 I, too, want to express concern about the 6 magnitude and the rate of the increases in the price of 7 gasoline and diesel fuel. While the price increases are all 8 too real, we are quite concerned that there is a 9 considerable amount of inaccurate information and 10 speculation on this subject, and that we would like to deal 11 with that. 12 Also, unfortunately, we are concerned that some 13 may be taking advantage of this situation, and perhaps the 14 resultant confusion, maybe to implement business or 15 corporate decisions relative to pricing strategies and hide 16 behind the shield of the Cleaner Burning Gasoline 17 introduction. 18 And, unfortunately, we once again have seen those 19 who have a long history of trying to kill fuel quality 20 regulations in the State of California back at it again, 21 because it costs money to their members, and are taking 22 advantage of this situation to try to eliminate the 23 regulations by labeling all of us -- the Board and the 24 staff, you know -- as ill-informed, or incompetent, or 25 pointy-headed bureaucrats. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 8 1 And I would like us to take this opportunity today 2 to perhaps spell out the whole story as to why what 3 motivates us to try to protect the public health of the 4 citizens of this State. 5 As the Chairman has stated, the price increases 6 that have been realized are related to a number of factors 7 at the global, the national, and as well as at the State 8 level. It's not clear that these factors explain in total 9 the magnitude and the rate of the increases that we have 10 been experiencing. 11 We anticipate that today's discussion will help to 12 answer these very important questions and to clarify for the 13 public all of these issues. As you know, for five years, 14 since the passage of this regulation, we have openly talked 15 about the fact that it costs money to make Cleaner Burning 16 Gasoline. And we expected that, and we have made it quite 17 clear that there would be a price increase at the pump at 18 the time this fuel was introduced. 19 And you also are aware of -- and Mr. Scheible will 20 touch on shortly -- the extensive effort that we have made 21 relative to the introduction of this fuel with the public, 22 stakeholders, and industry, and outreach. 23 And I'm happy to say once again, as you've heard 24 before, that the public has continually indicated its 25 support for and its willingness to pay for Cleaner Burning PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 9 1 Gasoline for the improvement of air quality and the health 2 of the public in this State. 3 In this instance, this one instance, you know, the 4 public knows what you're getting for the increase in price 5 that you pay at the pump. It's all the other increases, 6 which far outstrip the cost of Cleaner Burning Gasoline, 7 that have become the mystery that we're trying to address 8 today. 9 Before the staff begins its detailed preparation, 10 I want to mention to you that -- and the Chairman has 11 broached the subject -- that the Air Resources Board and the 12 California Energy Commission's staff have been working very 13 closely together monitoring price and supply for the last 14 several months, not just the last several days or weeks. 15 In fact, the Energy Commission has placed staff at 16 the Air Resources Board to facilitate realtime tracking and 17 sharing of pricing and supply information. This was put 18 into effect in accordance with the plans we made years ago 19 as we worked on the introduction of this fuel 20 This has allowed us to quickly identify and 21 respond to any situations which have arisen, such as the 22 refinery incidents that you will be hearing more about later 23 today. 24 It is because of the Energy Commission's important 25 and, frankly, critical role in monitoring the State's supply PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 10 1 of fuels -- and their being able to respond to avoid any 2 shortages from developing, and to address potential fuel 3 supply emergencies -- that, of course, we will be hearing 4 from them as our first witness of the day. 5 As you know, on April 17th, Chairman Imbrecht 6 implemented the verification phase of the State's Energy 7 Emergency Response Plan. And, therefore, I know we all look 8 forward to Chairman Imbrecht's presentation, as the Energy 9 Commission has the data and it has the tools necessary to 10 put the correct perspective on this fuel price and supply 11 issue. 12 After Chairman Imbrecht's presentation, we'll hear 13 a brief presentation from your staff on the mechanisms that 14 we have put in place to respond to a potential problem, as 15 well as you will hear immediately from Mr. Scheible the 16 extensive work done by the staff and the Reformulated 17 Gasoline Advisory Committee over the past several years to 18 address all the possible issues associated with the 19 introduction of Cleaner Burning Gasoline -- at least we 20 thought at the time "all possible" situations relative to 21 the introduction. 22 With that, I would like to ask my Deputy, Mike 23 Scheible, to give you just a couple of words about these 24 activities before turning it back to the Chairman, who will 25 introduce Chairman Imbrecht. Mr. Scheible? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 11 1 MR. SCHEIBLE: Thank you, Mr. Boyd. 2 For the benefit of the Board and for the many 3 others that are here today that maybe haven't been around 4 the last couple of years, as you've been working on this 5 issue, I'd like to quickly review how we've gone about 6 outreach and providing public education for the program, and 7 then also touch on how we've gone about testing the fuel to 8 make sure that it performs adequately. 9 First and foremost, we went into this program with 10 the sense that we needed to build an effective consensus and 11 partnership with all of those affected by the program -- the 12 people who make the fuel, the people who distribute the 13 fuel, the users of the fuel, which includes all of us. 14 To do this, over two years ago, we established a 15 steering committee with over 70 members. That committee has 16 met continuously at every two or three month intervals. One 17 of the first actions of that committee was to set up a 18 public education subcommittee and performance subcommittee. 19 Those committees go to work and virtually met 20 monthly in late 19-- the second half of 1994, to design the 21 programs that we have implemented. 22 On the public education side, we designed an 23 outreach program. We've produced materials that include 24 brochures, videos, Press briefings, presentations. We have 25 gone out and provided these to the Press. I have made over PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 12 1 200 presentations to various groups. 2 We have secured the support for this program of 3 environmental groups, of fuel users, of the fuel producers, 4 of the CMA, of the L. A. Chamber, of the State Chamber, of 5 many, many different diverse groups; that when we went out 6 and we said, "We have a proposition for you. We're 7 delivering a program that will provide cleaner air for all 8 Californians, something we desperately need, through the use 9 of gasoline that will impact through a predicted price 10 increase in the marketplace." 11 That effort, I think, has produced great 12 dividends, in that the support for this program remains 13 strong among all of those parties. And everyone is looking 14 for a way to make the program work, despite some of the 15 current price difficulties. 16 Recently, there have been reports in the media of 17 performance problems. And people are afraid that, anytime 18 there's a change, there could be a change in performance. 19 And when it's your car, it's a major issue. 20 More than two years ago, as I said, all the 21 parties agreed that something we had to do was a complete 22 and total test program of the performance of this new fuel, 23 so we could assure ourselves and the public that the fuel 24 would perform and be adequate. 25 When we held the initial meeting of our steering PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 13 1 committee, one of the first acts was to form a performance 2 subcommittee. They immediately began work on many aspects 3 of the program. We identified possible issues, designed, 4 and secured test fuel, identified the test fleets, developed 5 test procedures and reporting mechanisms. 6 We established who would do what and spread out 7 the work. We ensured that all significant issues would be 8 examined. That process consumed much of 1994. In 1995, we 9 tested the fuel. It resulted in multiple coordinated and 10 planned test efforts. 11 The largest effort was the one conducted by ARB 12 staff. The program was guided by over 50 entities, 13 including auto companies, oil companies, the service station 14 industry, and others. It was technically directed by over a 15 dozen organizations. 16 We provided the fuel to eight fleets which drove 17 over 5 million miles in 1995 in six months. The clear 18 results were the performance differences between 19 conventional fuel and the new fuel in head-to-head tests 20 were that there were no adverse performance impacts other 21 than the expected slight decrease in fuel economy of between 22 1 and 3 percent. 23 Twenty-four other groups conducted coordinating 24 testing on virtually every conceivable gas-powered engine or 25 fuel system material. Their clear results were that there PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 14 1 was no significant difference between Cleaner Burning 2 Gasoline and existing fuel. 3 We have had these results published. They're 4 available for all parties to see. 5 So, in quick summary, before we turn it back to 6 the Chair to introduce Chairman Imbrecht, we have had 7 extensive and ongoing outreach efforts. We've built a 8 strong consensus and coalition around the program. And we 9 are very thankful, given the events of the past month, that 10 we have done so, because they continue to pay dividends. 11 Thank you. 12 CHAIRMAN DUNLAP: Thank you, Mr. Scheible. I 13 appreciate those words that provide a context for the 14 discussion today. 15 Given the most important role that the California 16 Energy Commission plays in monitoring the fuel supply 17 situation in California, we're fortunate to have Chairman 18 Imbrecht with us, who will provide us with the Commission's 19 perspective on fuel supply and prices, and will also inform 20 us of the CEC's energy response plan, including a 21 description, as Mr. Boyd mentioned a moment ago, of each of 22 the three phases that they can invoke. 23 The phase they're in now is the verification 24 phase, and they have a plan. And Mr. Imbrecht is going to 25 outline that and talk about the mechanisms available for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 15 1 addressing and responding to potential supply problems. 2 With that, Mr. Imbrecht, you're welcome to take 3 the podium. 4 Good morning. 5 CHAIRMAN IMBRECHT: Good morning, Mr. Chairman. 6 Good morning. It's a pleasure to be with you. Is my 7 microphone activated? 8 UNIDENTIFIED SPEAKER IN AUDIENCE: Where are you? 9 CHAIRMAN DUNLAP: Yes. 10 UNIDENTIFIED SPEAKER: There's too many people up 11 in front. 12 CHAIRMAN IMBRECHT: I'm sure maybe you've seen me 13 before. 14 Ladies and gentlemen, it's a pleasure to be with 15 you. Mr. Chairman, members of the Board, I want to thank 16 you for the invitation to make this presentation today. 17 I wanted to stress that we've all recognized the 18 long-standing relationship that we've enjoyed with the Air 19 Resources Board. I think that both of our agencies consider 20 one another to be sister agencies, if you will. And we've 21 worked in a complementary fashion, not only to improve the 22 energy security of the people of California, but also to 23 improve air quality as well. 24 You set the standards and the challenges for 25 technology within California, and we frequently work with PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 16 1 you to try to provide the resources necessary to ensure that 2 that technology meets the expectations of the need for clean 3 air within the State. 4 All that notwithstanding, I think it's important 5 to underscore the fact that the reason we're meeting here 6 today and to discuss these issues is because of the fact 7 that we have experienced unprecedented increases in gasoline 8 and diesel prices at both the wholesale and the retail 9 levels in the last few months. 10 I should underscore that these are reminiscent of 11 the price volatility that we saw following the Exxon Valdez 12 oil spill in March of 1989, and the Iraqi invasion of Kuwait 13 in August of 1990. 14 In fact, if you actually examine the price 15 increases, what we've seen over the last few months exceed 16 both of those occurrences, and yet we've had no clear, 17 precipitating event as was the case in each of those earlier 18 crises. 19 It's also important to note that -- if you could 20 also show for me Figure No. 3, which illustrates the 21 increase -- this shows increase in gasoline; there's the 22 increase in diesel prices. 23 It's important to underscore that dealer margins 24 have been squeezed as the recent increases in the 25 international crude prices area captured in the wholesale PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 17 1 price charged by refiners to both branded and unbranded 2 dealerships. 3 While not unusual during tight supply periods, 4 drastic reductions in dealer margins are causing economic 5 hardships to independent marketers and wholesale 6 distributors. I think those are some of the players in the 7 State that need some additional sympathy from us in the 8 policy end of the equation. 9 Since the first week in January, the average 10 statewide wholesale gasoline prices have increased 65 11 percent, from 62.3 cents per gallon to 102.8 cents per 12 gallon. And wholesale diesel prices have increased 44 13 percent, from 68.5 cents per gallon to 98.8 cents per 14 gallon. 15 Average statewide retail gasoline prices have 16 inclined 28 percent during that same period, from $1.15 17 cents a gallon to a $1.47.3. And frankly, based upon some 18 anecdotal information that we've acquired in the last 24 19 hours $1.47.3 is probably a few cents low in terms of 20 accurate reflection of what the retail price structure is. 21 Retail diesel prices have creased 22 percent 22 during that period, from $1.33.4 to $1.63 per gallon since 23 early January of this year. 24 I should indicate as well that we consider this to 25 be a significant occurrence, because of the fact that this PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 18 1 represents a significant outflow of capital on a daily basis 2 from the economy of California to other States and nations 3 abroad. 4 If you take on a rounded basis the average daily 5 consumption of gasoline within our State of about 900,000 6 barrels per day, multiply that times the $5.00 per barrel of 7 crude oil prices that we've seen in terms of increase -- 8 recognize again in rough terms that we import about half of 9 our oil needs in the State -- that represents a $2.25 10 million direct loss per day of outflow from our economy. 11 And if you use the ordinary multiplier effects that most 12 economists understand, that translates into a $5.2 million 13 per day loss to the California economy. 14 I'm not going to speculate about what that 15 translates to in terms of potential job loss and other 16 sectors of the economy; suffice it to say, again, that if 17 you use simple economics, you can come up with conclusions 18 that range anywhere from 50 to 100 jobs per day. 19 I want to applaud the Air Board's efforts to 20 investigate the underlying causes and to seek conclusions. 21 I also, however, want to caution you not to act prematurely 22 by taking any action to disrupt market mechanisms that are 23 already in place that balance supply and demand within our 24 State. 25 My presentation today is going to take a few PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 19 1 minutes, because this is a very, very complex equation. It 2 reflects a whole variety of factors, and I'm going to do my 3 very best to explain in as simple terms as I can exactly 4 what has occurred, and why we at the Energy Commission, and 5 myself in particular as the State Energy Emergency Response 6 Officer, have taken the actions that we have to date. 7 Chairman Dunlap and your staff made reference to 8 the Energy Emergency Contingency Plan of the Energy 9 Commission. 10 Let me just give you a little perspective. The 11 Energy Commission was created in 1974. We were invested 12 with a wide range of responsibilities, not the least of 13 which was to plan for and oversee the response to any type 14 of energy emergency that might be visited upon California -- 15 whether it's occasioned by natural disaster, such as Loma 16 Prieta or Northridge earthquakes, or by economic 17 circumstances such as those we experienced in the 1973-74 18 period; 1978-79, after the fall of the Shah of Iran, as well 19 as the other incidents that I've already made reference to. 20 On April 16th, this past week, I took action, 21 after consultation with the Governor's Office and Chairman 22 Dunlap, to order the initiation of the verification phase of 23 the plan. That's the first of a three-stage level of 24 response. 25 The verification phase has been activated, I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 20 1 should note for you, on several previous occasions, 2 including the market disruptions occurring as a result of 3 the Valdez spill, the Iraqi invasion, and in each of the two 4 recent earthquakes. 5 That means that we begin formal communication with 6 other related State agencies, including the Office of 7 Emergency Services and your own agency, with key industry 8 players that we have ongoing contact with, and with the 9 Federal Government and their response mechanisms, as well as 10 with neighboring States, because I think it's important for 11 all of us to understand that California is truly the center 12 of the refining industry for the Western part of the United 13 States. 14 We are part of something known as the Petroleum 15 Allocation District 5. That includes all the Western 16 States. Most people are not familiar with the fact that our 17 three immediate neighboring States have no refining capacity 18 whatsoever. 19 As a consequence, California produces essentially 20 all of the fuel consumed in Arizona and Nevada and about 21 half of the fuel consumed in Oregon. The other half for 22 Oregon comes out of the refining center in Seattle. 23 As a consequence, the actions we take within our 24 State have to be carefully balanced in terms of recognizing 25 the interests of our neighbors as well. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 21 1 During the verification phase of the Energy 2 Commission's process, our primary role is energy market 3 monitoring and analysis rather than direct intervention in 4 the industry efforts to enhance fuel supply. 5 Ordinarily, because we are responsible for the 6 implementation of the California Petroleum Information 7 Reporting Act -- which I might add is the most comprehensive 8 petroleum reporting scheme requirements found anywhere in 9 the nation, including anything that's found at the Federal 10 level -- we collect information on a monthly basis. 11 Obviously, when you enter into the kind of 12 circumstances that I've just described, a monthly 13 retrospective snapshot does not provide the kind of 14 information necessary to ensure that we don't experience 15 shortages or supply disruptions in any geographic region 16 within the State. 17 As a consequence, when we implement the 18 verification phase, that means that we require all the 19 sectors of the petroleum production, refining, and 20 distribution industry, whether it be at the retail level or 21 all the way up to the major companies, to provide 22 information to us on a realtime 24-hour basis. 23 So, the information I'm providing to you 24 represents, in our judgment, the latest and most accurate in 25 terms of statistical analysis and data collection that we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 22 1 can provide to you. 2 I might add, as well, that the emergency response 3 plan specifies a menu of options to mitigate the effects of 4 a potential fuel shortage, ranging from data gathering, 5 energy market monitoring to situation analysis, a wide range 6 of public information and outreach activities, voluntary and 7 ultimately potentially mandatory conservation, including 8 rationing schemes such as odd-even plans, and finally the 9 implementation of a petroleum fuels set aside program that 10 is implemented pursuant to the Governor's Emergency 11 Executive Order No. 6. 12 I provided you with an informational packet with a 13 variety of items, including background on the emergency plan 14 and various executive orders that have been adopted by the 15 Governor's Emergency Council, to give you some context. 16 I might add that these two documents represent the 17 detailed analysis that is conducted by us every five years, 18 as the statute requires, in terms of updating and ensuring 19 the plan is up to date in terms of being able to respond to 20 modern circumstances. 21 Ultimately, if we were to move to the last phase 22 of the plan, the emergency phase, I might add that that 23 requires a gubernatorial declaration. We then have broad 24 emergency powers that are predicated upon the State's police 25 powers to undertake the kinds of actions I've just PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 23 1 described, particularly the allocation set-asides, as well 2 as the various options associated with rationing. 3 The last time California used these powers was in 4 the 19978-79 crisis. I want to stress to you that they 5 represent a remedy of last resort, and we are certainly not 6 recommending that we move to that implementation level 7 today. 8 Since the beginning of April, the Energy 9 Commission has provided regular updates on fuel prices and 10 the supply situation for both gasoline and diesel. We've 11 widely distributed these sheets. And you'll find the most 12 recent, again, in the packet that I've distributed to you. 13 That's the situation report of last evening. 14 We've also placed this information,, with our new 15 computer technology, on the Energy Commission's Internet 16 home page. I might add that there is a different version of 17 this document that's provided to the Governor. 18 Under the Petroleum Information Reporting Act, the 19 information that we collect is extremely confidential, 20 because it's proprietary in nature. In fact, the 21 protections assuring the proprietary nature represents some 22 of the most stringent that are found in any State statute. 23 We at the Energy Commission take this 24 responsibility very seriously. And so, we provide to the 25 Governor confidential information that is a company-by- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 24 1 company, refinery-by-refinery, distribution system-by- 2 distribution system level of analysis. 3 And then, for the public, we provide an aggregated 4 form of this information that is consistent with our 5 statutory responsibilities. 6 We should add that this information is designed to 7 provide assistance not only to the administration, but also 8 to your agency -- and I'll talk about that a bit more in a 9 few moments -- and to key members of the State Legislature 10 as well. 11 So, as I indicated, we're requiring realtime 12 information. This information is not something that is just 13 done under these circumstances. As Mr. Boyd indicated, our 14 staff, along with yours, has been engaged in intensive data 15 collection and analysis of the current situation of both 16 wholesale and retail prices and refinery production 17 inventory levels for several months. 18 In fact, over the past the 14 months, we have 19 worked actively with the Board's Reformulated Gasoline 20 Advisory Committee, which is chaired by your Vice Chairman, 21 Board Member Lagarias, through the transition subcommittee 22 deliberations. 23 I've been designated as administration 24 spokesperson on these issues, and I might add to you that I 25 have personally conducted over 100 interviews of both PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 25 1 written and electronic media in the last several days. 2 That's, I think, one of the reasons that I'm a little hoarse 3 this morning. 4 I do a lot of public speaking, but that level of 5 interviewing is a bit intensive. 6 Now, I'd like to turn to some of the reasons why 7 we've experienced -- actually, I think we skipped over -- if 8 you will show me Figure 4. And that will show you a 9 comparison of where we were at the beginning of the year and 10 where we are today, and also reflects the various components 11 that have contributed to the increase in prices. 12 I will be describing those in much greater detail 13 a little later in my presentation. 14 But I think it's important to note that there are 15 a variety of issues there. As you can see, as I indicated 16 earlier, the dealer margins have been squeezed. At the 17 beginning of the year, the dealers had a margin of about 8.3 18 cents per gallon on average statewide. 19 Today, by our calculations, the dealer margin -- 20 although this has been alleviated to some extent by some 21 dealer increases the last couple of days -- the dealer 22 margin's actually a negative number of -1.2 cents. That's 23 the predicate for my suggestion that that element of the 24 industry deserves a reasonable degree of sympathy and some 25 response from us as well. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 26 1 What you'll also see is that the refiner margin 2 has increased quite dramatically during that time period. 3 I'll try to explain, from our perspective, why that is the 4 case. That is the largest single increase. And the next 5 largest increase is a direct reflection of the increase in 6 crude oil costs that are passed through by the refiners 7 throughout the production and distribution system. 8 Finally, I should also note for you -- and I will 9 again spend some more time on this in a few moments -- but 10 it's fair to say that the State also has, to some extent, 11 benefited financially. Because we are one of the few States 12 in the country that imposes a sales tax on gasoline on top 13 of the State and Federal Excise Taxes. And it's actually 14 calculated after all those other expenses are included in 15 the price. 16 And because that is, on average, 8 percent 17 statewide, both State and local sales tax, that means that 18 the "take," if you will, from sales tax as a result of the 19 increased prices has actually increased quite significantly, 20 principally for the State, but also for local governments as 21 well. 22 Now, if I could have Figure 1 -- and I apologize. 23 These were misnumbered. I caught this this morning just 24 before I came over here. 25 I'd like to talk to you about the particular PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 27 1 factors that, in our judgment, are responsible for the 2 increases in price. 3 To begin with, dramatic crude oil price increases. 4 The international price of crude has been increasing 5 steadily since January 1st of 1996. 6 California crude oil prices typically track world 7 oil prices. This shows a steady increase in the price of 8 Alaskan North Slope crude, Lost Hills crude, and Kern River 9 crude, which are the benchmarks that we use in California in 10 our refinery system. 11 For each $1.00 per barrel increase in oil prices, 12 we expect about 2.5 cents per gallon increase in wholesale 13 prices for both gasoline and diesel. 14 The price of Alaskan North Slope crude has 15 increased about $4.77 on average since January per barrel. 16 Kern River has increased $5.00 per barrel; Lost Hills, 5.85. 17 Kern River and Los Hills are representative of the 18 various crudes produced within our State, because we do 19 produce almost half of our total crude requirements. This 20 represents approximately a 12 cent per gallon increase in 21 gasoline prices at the wholesale level since January of 22 this year. 23 The second major item -- and if I may have the 24 next viewgraph, because I think this will help explain each 25 of the items that I'm going to be describing. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 28 1 The first was dramatic crude oil prices. The next 2 is the uncertainty occasioned by the United Nations-Iraqi 3 negotiations potentially to allow Iraq to reenter the world 4 oil marketplace. 5 I have to say this is another illustration of some 6 of the ineptitude on the part of the United Nations by 7 virtue of conducting these negotiations in public, and 8 because of the fact that this has generated speculation 9 within world oil markets. And we have seen some other 10 aberrations in terms of market response. 11 Some oil companies bought short, or delayed crude 12 oil purchases, in anticipation of lower world crude prices 13 resulting from successful U.N.-Iraqi negotiations. 14 If Iraq is allowed to reenter, that means about 15 700,000 barrels of crude a day in additional supply. And 16 the expectation would be that that additional supply would 17 drive prices down, because it would offset the demand and 18 supply equilibrium that exists today. 19 To give you an illustration of what that impact 20 has been, prices for crude oil worldwide will continue to 21 react to delays in these deliberations and discussions, and 22 they will remain volatile in the near term. 23 Just two days ago, as a consequence of the fact 24 that the negotiations appeared to have broken down as a 25 consequence of Iraq's refusal to accept demands from the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 29 1 United States and some of the European countries, the Wall 2 Street Journal reported -- and I believe we've included a 3 copy of this article in your packet -- that the futures 4 markets for June delivery of crude oil jumped $1.17 in one 5 day. 6 That illustrates why it is folly for these kinds 7 of negotiations to be conducted in public. But once again, 8 along with world crude prices, these are obviously issues 9 and circumstances beyond our control and frankly affect the 10 entire nation, if not the entire consuming world, in terms 11 of petroleum products as well. 12 The third item is that we have experienced this 13 year throughout the country an abnormally high demand for 14 heating oil and a lengthy cold winter in the East -- 15 restricted supplies of wide-end petroleum products has 16 resulted, causing upward pressure on U.S. gasoline and 17 diesel prices since January 1st. 18 We've also seen early agricultural demand for 19 diesel products. Agricultural demand at a terminal can 20 increase up to 30 percent while we're in the planting or 21 harvesting seasons. I know Board Member Parnell understands 22 these issues very well. 23 And indeed, we have seen an early introduction of 24 demand largely because of some of the weather conditions 25 within our State. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 30 1 And, unfortunately, this has all occurred as we've 2 been entering the peak driving season. Historically, if I 3 were to show you a graph of that shows trends, we do an 4 upturn in prices as we enter the spring and summer months, 5 as people begin to take their vacations and use greater 6 volumes of gasoline. 7 The fact that all of these events have occurred 8 during this time period have simply exacerbated the problem. 9 The next issue, however, is the other one that has 10 clearly been a significant concern and is much more 11 localized for us here in the West. And that is the fact 12 that we have had unexpected refinery operational problems at 13 a number of refineries throughout California. 14 Refinery problems at the Arco diesel production 15 unit in mid-March; the Shell refinery in Martinez, which has 16 had several fires in its gasoline production units in April, 17 temporarily restricted the supplies of both diesel and 18 gasoline. 19 We've also had unscheduled outages at many other 20 refineries in Northern and Southern California since 21 February, causing tight supply situations for both gasoline 22 and diesel. We are obtaining daily reports about the 23 current status for all refineries. 24 To date, most of these refinery problems have been 25 corrected. One outage at a major refinery is expected to be PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 31 1 corrected in the next few days, releasing some additional 2 production of Phase 2 reformulated gasoline into the 3 California gasoline market. 4 But to put this in perspective for you, last week, 5 when I ordered the implementation of the verification phase, 6 we were actually falling short on a daily basis of about 7 100,000 barrels of gasoline production versus demand. 8 In California, we consume, on an average, about 9 864,000 barrels of gasoline daily. And we were about 10 100,000 barrels short last week. And I can report to you, 11 with some satisfaction, that gap has closed to about 24,000 12 barrels as we meet here this morning. 13 That still is not quite equilibrium; ultimately, 14 we hope to be back in a position where we should be, and 15 that is with slight product capacity surpluses that will 16 allow us to refill inventories. 17 The reason we have not had explicit shortages at 18 distribution systems throughout the State is because of the 19 fact that we have substantial inventories at most of the 20 refineries in California. They have been able to rely upon 21 those inventories -- draw them down, if you will -- to 22 offset the shortage in actual production. 23 Next, clearly, Phase 2 reformulated gasoline 24 product costs have contributed to this issue. With the 25 Phase 2 Cleaner Burning Gasoline, we've already seen some PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 32 1 increases in wholesale and retail prices to reflect the 2 additional costs associated with producing this new fuel. 3 I should add that we participated very closely in 4 the deliberations of your Board before these regulations 5 were adopted. We agreed with your estimates of the broad 6 range with respect to the maximum production cost would be 7 up to 15 cents per gallon, with a low end of about 5. 8 Since that time, we have investigated the issue in 9 great depth as we have watched the investment in new 10 production capacity. I might add that the Energy 11 Commission, through its energy facility licensing authority, 12 has been involved in a number of these capital investment 13 projects on the licensing end. 14 And I might say, then, as a consequence, that in 15 our judgment, the more realistic range is at most 5 to 8 16 cents; and if passed on to customers, we expect the increase 17 to be one of a less significant factor in all of these 18 retail gasoline price increase circumstances that I have 19 described. 20 Let me say that again. Our view if 5 to 8 cents 21 maximum range. And frankly, we have looked at some data 22 that suggests it's closer to 6 to 7. 23 And that, I might add as well, is a combination of 24 both capital investment requirements -- the numbers that 25 you've heard associated with the 4 to $4.5 billion capital PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 33 1 investment -- but also, and an important additional caveat 2 that should be understood, is that about 3 cents of that per 3 gallon is really not a reflection of recovery of capital 4 investment. It's a pass-through of the cost associated with 5 oxygenate requirements or MTBE additives in gasoline. 6 I think it's important to distinguish those two 7 factors. If you take out the pass-through cost for the 8 additive of 3 cents, then you're looking at a range that's 9 more in the neighborhood of 3 to 4 cents per gallon 10 associated with actual capital recovery costs that the 11 companies would naturally expect to pass through to the 12 consumer. 13 On April 16th, ARCO Petroleum Products announced 14 that its wholesale and retail customers -- actually, that 15 its wholesale prices would increase 9.25 cents, or nine and 16 a quarter cents per gallon for all of its products. And it 17 attributed this increase to Phase 2 reformulated gasoline. 18 This action signaled other companies to follow 19 ARCO's lead, and virtually all of the other majors announced 20 similar or slightly lower increases for their tank wagon or 21 wholesale prices as well. 22 I think it's important to note -- ironically, 23 however -- that ARCO quickly retracted this erroneous 24 contention. And I'm sure that's an issue you might want to 25 explore further. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 34 1 Using volume control market measures, some 2 refiners have allowed wholesale rack prices to rise to avoid 3 run of the rack purchases -- that's one of the reasons that 4 you've seen the refiner margin in that earlier slide 5 increase to the extent it has -- and to ensure that there 6 are not any unnecessary reductions in sales to their 7 contract customers, their traditional purchasing group. 8 And finally, as I indicated earlier, State sales 9 tax increases have also contributed to the overall retail 10 price increase. Fuel tax on retail gasoline prices are 11 fixed with Federal excise taxes and State motor vehicle fuel 12 taxes; however, the State sales tax varies from 7.25 cents 13 to 8.25 cents per gallon by county, and is added after these 14 other taxes have already been added to the price. 15 So, it clearly can be and fairly characterized as 16 a tax on a tax. With rising fuel prices, State sales tax 17 revenue increases proportionately, and the tax affect is 18 compounded. 19 We estimate that the recent rise in gasoline 20 prices has caused a 2.4 cent increase per gallon in the 21 State sales tax to consumers; and, overall, in terms of 22 revenue for both State and local government, somewhere in 23 the neighborhood of 4 to $500 million annualized if these 24 price increases were to continue throughout the entire 25 fiscal year. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 35 1 Now, I'd like to talk a little bit about market 2 fundamentals. 3 The gasoline and diesel supplies are tight, but 4 they are adequate as refiners rely, as I said, on inventory 5 drawdown and imports of gasoline, diesel, and blendstocks 6 from outside of the State to blend into California complying 7 fuel. 8 And there are cargoes destined to California of 9 both CARB diesel and gasoline. We expect them to arrive on 10 a serial basis beginning in early to mid-May. 11 Pipeline companies are reporting that volumes at 12 terminals are within normal range. There are no reported -- 13 and this is something that we have been checking very, very 14 carefully -- there are no reported shortages of either 15 gasoline or diesel at the end user level. 16 Some refiners are maximizing production of 17 gasoline at the expense of other light-end product to 18 increase supplies of both refined gasoline and diesel. And 19 they should be applauded for taking this action. 20 I can't go into a refinery-by-refinery description 21 in a public forum because, as I indicated, this is 22 proprietary information. Suffice it to say, though, that 23 those refineries that are operating are literally operating 24 with the pedal to the metal, if you will. They are 25 operating above their normal operating capacity ranges in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 36 1 order to try to offset some of the shortages that are 2 associated with the refineries that are having operational 3 difficulties. 4 The current production levels at refineries, as of 5 April 24th, are as follows: Current production, 846,000 6 barrels per day of gasoline versus an estimated statewide 7 demand, as I said earlier, of 864,000 barrels. Or actually, 8 we're now down to about an 18,000 barrel deficit on a daily 9 basis. That's even a further closure from the numbers I 10 mentioned a moment ago. 11 On the diesel side, current production is about 12 174,000 barrels a day. The statewide average demand is 13 173,000 barrels. So, we actually have now offset the 14 shortages there. 15 And I might add, as well, that this represents a 16 peak demand from a seasonal standpoint, because about 40,000 17 barrels a day of demand right now is directly attributable 18 to the agricultural sector within California. 19 I'm sure you'd also like to hear a little bit 20 about near-term price outlooks. And here I am wading into 21 very dangerous territory, because looking into that 22 ephemeral crystal ball is something that has brought down 23 many people that have held energy agency positions, such as 24 my own, in the past. 25 And so, therefore, I'm going to punt to a certain PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 37 1 extent by saying that crude oil prices will remain volatile 2 in the near term until additional supplies enter the 3 international oil market occasioned by the Iraqi-U.N. 4 negotiations, or a decision by other producers to increase 5 production. 6 I think it's fair to say that the OPEC nations 7 realize that, if they drive prices up too high, they will 8 the same phenomenon that developed in the past, and that is 9 a radical reduction in demand and see the bottom fall out of 10 their market. 11 At the same time, there's no obvious incentive for 12 them to increase production if they can somehow ratchet the 13 prices up slightly and increase the benefits to their own 14 economy. 15 So, whether it be American companies that are on 16 the producing side of the equation or whether it be foreign 17 nations that are on the producing side of the equation, they 18 have all benefited quite dramatically in terms of revenues. 19 And, again, I've included some newspaper articles 20 in the packet I provided to you that illustrates exactly 21 that point, because we have seen some announcements in the 22 last few days of record returns for companies that find 23 themselves in that position. 24 It's important to distinguish that some companies 25 are able to both produce crude oil and also to refine and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 38 1 sell it in the retail marketplace. 2 Others are refiners only, and you should not 3 broad-brush in looking at the industry, because they are in 4 very different positions from an economic perspective. 5 It's difficult to predict with certainty when 6 wholesale and retail prices will reflect declining oil 7 prices. Suffice it to say, there is generally a lag period 8 of anywhere from two to four weeks. 9 Market mechanisms are already in place to increase 10 supplies and to reduce demand through price induced volume 11 control measures. Cargoes of both CARB diesel and gasoline 12 are destined for California, as I said, by mid-May. 13 Refinery operating problems are being resolved, 14 further improving the gasoline and diesel supply outlook. 15 Current production levels at refineries are tight, 16 but along with inventory drawdowns -- and I again want to 17 emphasize this point -- they are adequate to meet demand. 18 Finally, government mechanisms are in place to 19 address supply issues. The ARB variance mechanism -- and 20 I'm going to let you discuss that, because you're much more 21 attuned to those issues, although we certainly have worked 22 with you in designing them in the past. And I know that you 23 utilize our supply and demand information in terms of your 24 decision process as to when it's appropriate to authorize 25 them. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 39 1 We've already discussed our emergency response 2 plan, our petroleum fuel set-aside authority that's 3 available if we need it, as well as the exercise of the 4 Governor's broad emergency powers to mitigate economic 5 dislocations from fuel shortages or regional supply 6 problems. 7 If we were to go to that level, we have the 8 ability to respond, not only to ensure adequate supplies for 9 emergency requirements associated with health and safety in 10 the State -- police, fire, ambulance, and the like -- but 11 also to deal with economic dislocation. 12 I'll use an anecdote that goes back to '78 and 13 '79, when I was a member of the Legislature, I had a company 14 in my district that manufactured forklifts. They produced 15 about a hundred of them a week with 400 employees. 16 And they had purchased on the spot market. As a 17 consequence, their jobbers were unable or unwilling to 18 provide gasoline to them. They needed one gallon of 19 gasoline to drive a completed forklift from the end of the 20 assembly line onto the delivery truck. And yet they could 21 not buy 100 gallons of gasoline a week. 22 It was a classic illustration of but for the nail, 23 the shoe is lost, et cetera, et cetera. 24 And, as a consequence of the emergency allocation 25 system that we have the ability to implement, we were able PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 40 1 to them a 100-gallon a week -- doesn't seem like very much-- 2 allocation. 3 There are obviously thousands of similar examples 4 throughout California. 5 Finally, in terms of some recommendations for 6 Board action, and then I would like to talk a little bit 7 more about this figure, and if you could also put up Figure 8 6. 9 I'm going to try to explain to you, as best I can, 10 how we have arrived at these conclusions. But let me offer 11 some recommendations. And I don't want to be presumptuous, 12 but I hope you will take these in the nature in which they 13 are offered. 14 First, I would urge you to direct our joint staffs 15 to continue intensive data gathering and energy market 16 assessments and to report back to your Board on any 17 significant changed circumstances. 18 Each of the elements that I have described could 19 change. It is certainly not impossible. We can experience 20 additional difficulties at refineries in the State, as well 21 as the volatility associated with crude prices that I've 22 already discussed. 23 I would urge you to avoid midcourse changes in the 24 current regulations and the intermarket mechanisms that are 25 already in place by causing uncertainty and delay in supply PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 41 1 enhancement. 2 I think one of the fundamentals about rational 3 regulation is that, once they're in place, they need to have 4 some predictability and staying power absent truly emergency 5 circumstances. 6 Those that have made capital investments 7 predicated upon those regulations should not have their legs 8 cut out from under them unless it is absolutely essential. 9 Even if rules are temporarily suspended, the price effect, 10 as I've already indicated -- and I'm referring to rules with 11 respect to reformulated gasoline -- the price effect would 12 not, in our judgment, be significant, the major portions of 13 the price increases are clearly attributable to factors 14 other than reformulated gasoline production costs. 15 So, I guess I would say that you should be ever 16 vigilant. Don't act hastily. Rely instead upon our 17 verification process to verify whether there have been 18 sufficient changed circumstances that justify an action in 19 the future. 20 And I will rely upon your judgment in that regard. 21 Suffice it to say, we will continue to work in our 22 hand-in-glove basis with you to assure that you have the 23 most current information upon which to draw those judgments. 24 Now, if I could turn to Figure 6 to give you a 25 little further explication of how we arrive at these PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 42 1 conclusions. To begin with, the crude oil costs that are 2 reflected are of 54.7 cents per gallon is based upon the 3 following assessment: 4 When we convert the crude oil cost to a per gallon 5 cost, it is calculated by using the price of Alaskan North 6 Slope crude on the West Coast divided by 42 gallons, which 7 is what a barrel contains. So, that represents $23, divided 8 by 42, or 54.7 cents per gallon. 9 The refiner margin is equal to the California 10 wholesale price of regular gasoline less the cost of crude 11 oil. 12 So, that's arrived at -- at 101.2 cents minus the 13 54.7, and that equals 46.4 cents per gallon. 14 The dealer margin is equal to the retail price 15 minus the wholesale price minus the Federal excise tax, 16 minus the State fuel use tax, minus the sales tax. And for 17 purposes of this calculation, we are assuming 8 percent as a 18 statewide average. As I indicated, there are variations 19 from county to county, but it would be too confusing for us 20 to provide you county by county calculations. 21 That then would mean 147.3 minus 101.2 minus 18.4, 22 which is the Federal excise; minus 18, the State excise; 23 minus 10.9, the State sales. That equals a negative 1.2 24 cents per gallon dealer margin. 25 And finally, the tax calculations are fairly PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 43 1 straightforward. 2 There is only one other item that I didn't 3 indicate on there, and this has nothing to do with one of 4 our former Presidents, but there is a 1995 tax calculation 5 that also includes a .1 cent per gallon LUST tax. And LUST 6 stands for leaking underground storage tanks. And that goes 7 into a Federal tax account. 8 Mr. Chairman, members, that completes my 9 presentation. I appreciate your indulgence of your time. I 10 hope that this description and the explication has been 11 useful for you in your deliberations. 12 If you have questions, I'd be happy to try and 13 respond. 14 CHAIRMAN DUNLAP: Thank you, Mr. Imbrecht. 15 What I'd like to do at this juncture is ask my 16 Board member colleagues if they have any questions of Mr. 17 Imbrecht. 18 There's a lot of information there. And I think 19 it illuminated and I think demystified certain areas of this 20 thorny issue for us. But I think we probably have a few 21 questions. 22 Supervisor Vagim. 23 SUPERVISOR VAGIM: Thank you, Mr. Chairman. 24 First of all, thank you, Chairman Imbrecht, for 25 your presentation. Do you have and can we get copies of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 44 1 overheads? We don't have them. 2 CHAIRMAN IMBRECHT: Yes, absolutely. 3 We do have it prepared. That gives me a perfect 4 segue if I would just follow instructions of my staff. We 5 had those, and I forgot to hand those out. 6 SUPERVISOR VAGIM: Thank you very much. 7 CHAIRMAN IMBRECHT: And if I could take this 8 moment, I would also just like to acknowledge quickly that, 9 in addition to the whole team at the Energy Commission, five 10 people in particular have been working almost around the 11 clock over the last week -- Susan Brown, who's here, and the 12 head of -- actually, the Deputy of our Forecasting 13 Assessments Unit and head of this whole team; Mr. Tom 14 Glaviano, Mr. Jim Fore, Gordon Schremp, and Sherry Stoner, 15 who provided clerical support and was up most of the night 16 typing up some of these comments and presentations. 17 CHAIRMAN DUNLAP: Supervisor Vagim? 18 SUPERVISOR VAGIM: I just have one or two quick 19 questions, because you probably have tons of questions out 20 there that could be asked. 21 But in the interest of time, lots of information 22 presented today, briefly, and you did mention the fact that 23 there were differences in the folks that refine this and the 24 fact that some refine only and others are downstream all the 25 way to the gas station; is that correct? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 45 1 CHAIRMAN IMBRECHT: That's correct. 2 SUPERVISOR VAGIM: Did you find in the volatility 3 of the pricing, was there a greater increase for those that 4 have all the way downstream than there were those stop at 5 the refinery? 6 CHAIRMAN IMBRECHT: No, we did not, and largely 7 because those companies that are both upstream and 8 downstream tend to segregate those aspects of their business 9 in separate operating subsidiaries. 10 So, I'm sure they will expand on this. But they 11 try to maintain -- at least from their perspective -- an 12 arm's-length relationship between the two elements of their 13 business. 14 SUPERVISOR VAGIM: So, when you examined the 15 separation, where was the most volatile price increase? At 16 the crude and refinery point or at the downstream 17 postrefinery -- 18 CHAIRMAN IMBRECHT: I would say -- 19 SUPERVISOR VAGIM: -- in relationship to -- 20 CHAIRMAN IMBRECHT: -- at the refinery points at - 21 - both in terms of input and in terms of crude, and the 22 refinery margins. 23 And if you refer to -- actually, that's the last 24 we had on the Board, Figure 6, I think, and compare that to 25 Figure 5, the beginning of the year -- same data -- I think PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 46 1 you'll see clearly that those two factors are far and away 2 the most significant. 3 SUPERVISOR VAGIM: So, postrefining to the 4 retailer downstream is then less margin than -- 5 CHAIRMAN IMBRECHT: (Interjecting) Yes, that's 6 what I indicated earlier. And we've seen this phenomenon in 7 the past. 8 When you get down towards the retailer, the 9 margins get squeezed under these circumstances. 10 SUPERVISOR VAGIM: You mentioned a letter -- I 11 presume we can talk about the letter a minute -- from one of 12 the refiners. 13 The letter was indication of a price increase, and 14 I guess a direction to increase the price overnight. To me, 15 that's an indication of the downstream increase. Obviously, 16 we know what the letter said. You mentioned the fact that 17 they had talked about California fuel in the letter, but in 18 a sense that they sent it, we all understand that. 19 But I'm trying to find -- obviously, that letter 20 is not that far off of probably a standard procedure that 21 goes on in the industry on a regular basis; communications 22 happen between the folks that sell this at the retail versus 23 the folks that produce it. 24 Was that indicated, though, in your examination, a 25 pass-through of an upstream cost, or was that just a spot PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 47 1 market, "We got it," and there's an anomaly, the confluence 2 of all these events is a perfect timing, "Let's just do it"? 3 CHAIRMAN IMBRECHT: Well, I'll try to choose my 4 words very carefully. Suffice it to say, I think that was 5 an unfortunate effort to scapegoat one out of a myriad 6 number of issues in terms of justifying the price increase. 7 And I do not believe, and I do not believe they 8 will contend today that that was an accurate reflection of 9 the facts of what was generating the increase. 10 SUPERVISOR VAGIM: If indeed, though, you have a 11 short market supply, as you have said, of 24,000 barrels or, 12 as of right now, 18,000 barrels -- which means, I presume, 13 we're going into reserves and that type of thing -- 14 CHAIRMAN IMBRECHT: That's correct. 15 SUPERVISOR VAGIM: -- if we get to a point where 16 reserves are being diminished even further, you mentioned 17 there's some red flags. 18 At what point do you get excited? 19 CHAIRMAN IMBRECHT: Well, I would say that, if we 20 saw the kind of drawdowns of reserves that we've seen from 21 those companies who have had significant refinery problems, 22 and we saw that across the board, I would certainly be in 23 talking about moving to the pre-emergency at an absolute 24 minimum, which is described in some of the other documents 25 that I've given to you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 48 1 Let me just put this in a little bit of 2 perspective. Total inventory right now in California is a 3 little less than 10 million barrels. So, translate that on 4 the basis of about 900,000 barrels of demand a day, and 5 you're looking at something in the neighborhood of 11 or 12 6 days of cushion even if the entire refinery capacity of the 7 State were to crash tomorrow. 8 So, we do have adequate inventory on hand. That 9 is not consistent with respect to all the companies in 10 California. Some are in a much better position than others. 11 I might add that the inventory here in Northern 12 California is slightly stronger than it is in Southern 13 California. 14 SUPERVISOR VAGIM: There was an item that Dr. 15 Boston was mentioning a figure -- I don't know if you want 16 to mention it or not -- but that was an interesting figure. 17 It was for every -- 18 DR. BOSTON: One cent per gallon increase was a 19 billion dollars per year. 20 SUPERVISOR VAGIM: Annualized. Is that a correct 21 assumption? 22 CHAIRMAN IMBRECHT: I believe that's pretty close, 23 yes. Yeah. 24 SUPERVISOR VAGIM: A one cent increase per gallon 25 translates to, annualized, $1 billion in revenue. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 49 1 CHAIRMAN IMBRECHT: Well -- 2 SUPERVISOR VAGIM: And we're looking at how much? 3 We're looking at 46 cents or something like that? 4 CHAIRMAN IMBRECHT: That's correct. 5 SUPERVISOR VAGIM: So, you divide -- 6 CHAIRMAN IMBRECHT: No, actually, we're -- on the 7 retail end, it's less than that. At the retail end, 1.15 -- 8 and actually, we're using 147.3 for our calculation. But 9 the easiest way to say is that it's about 35 cents. 10 I believe we'd say now it's probably about a buck- 11 fifty. So, a dollar -- 12 SUPERVISOR VAGIM: So, to annualize that, it would 13 be $35 billion of revenue. 14 CHAIRMAN IMBRECHT: Yes. 15 SUPERVISOR VAGIM: Is that correct? 16 CHAIRMAN IMBRECHT: Yes. 17 SUPERVISOR VAGIM: Divide that by the number of 18 days it's been running. We just paid for the refinery 19 rehabs. 20 CHAIRMAN DUNLAP: Mr. Scheible? 21 (Applause from the audience.) 22 MR. SCHEIBLE: If I could add, California's demand 23 for gasoline is about 13 billion gallons a year. So, one 24 cent on 13 billion gallons is 130 million. So, 10 cents is 25 1.3 billion. So, it's 35 billion. It's a lot of money PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 50 1 however you look at it, though. 2 SUPERVISOR VAGIM: So, 10 cents per billion. 3 MR. SCHEIBLE: Yes. 4 SUPERVISOR VAGIM: And we've increased it 34 5 cents? 6 CHAIRMAN IMBRECHT: 35. 7 SUPERVISOR VAGIM: 35. 8 CHAIRMAN IMBRECHT: Roughly. 9 SUPERVISOR VAGIM: Annualized, 3.5 billion or 10 thereabouts. 11 CHAIRMAN DUNLAP: Okay. 12 SUPERVISOR VAGIM: Thank you very much. 13 CHAIRMAN DUNLAP: Mr. Lagarias, then Supervisor 14 Roberts. 15 MR. LAGARIAS: Mr. Imbrecht, I know you gave these 16 figures, but in looking at these eight major factors 17 affecting oil prices, two of them are determined by 18 worldwide issues -- the crude oil price increase and the 19 U.N. negotiations with Iraq. And we cannot do much about 20 that. 21 CHAIRMAN IMBRECHT: That's correct. 22 MR. LAGARIAS: Four of them involve national 23 issues -- the abnormal demand for high heating oil, the 24 early agricultural demand, peak driving season, and perhaps 25 the refinery problems. And those are national issues. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 51 1 And then there are three that are unique to 2 California -- the reformulation of gasoline, sales tax price 3 increase, and the refinery operation problem. 4 It would be helpful to us to know what these 5 various costs are, if we could put them all on the same 6 basis, or is the staff planning to present this information? 7 Maybe we can delay it until they present it? You 8 will give us this information? 9 MR. SCHEIBLE: We'll give you the perspective, but 10 there are parts -- parts of the pie you can't slice 11 accurately. 12 CHAIRMAN IMBRECHT: That's correct. Actually, 13 I've already given you the numbers on two of those pieces -- 14 the sales tax of about 2.4 cents per gallon and the 15 reformulated gasoline, if you include the pass-through of 16 MTBE, of somewhere between 5 and 8 cents a gallon. 17 In terms of breaking out the refinery difficulties 18 vis-a-vis the crude oil price, refiner margins, and so 19 forth, that's more difficult. 20 But clearly, as I indicated, the demand reduction 21 strategy that's reflected in the refiner margin, is 22 increased tank wagon prices. 23 If you look at the 9.25 cents increase by ARCO of 24 a week ago; Chevron announced a day later 8 cents for 25 Northern California, 9 cents for Southern California. Some PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 52 1 other refiners announced increases of between 3 and I 2 believe 7 cents a gallon. 3 So, that probably gives you a little bit of a 4 perspective, although I can't contend to you -- and I 5 wouldn't want to -- that that is precisely accurate. 6 MR. LAGARIAS: But we should have some kind of 7 historical records on what the seasonal demand does to 8 prices. 9 CHAIRMAN IMBRECHT: Oh, yes, we do. We do have 10 that. 11 Do we have that? 12 MS. BROWN: Two cents. 13 CHAIRMAN IMBRECHT: About two cents is what I'm 14 told. 15 CHAIRMAN DUNLAP: Has it been about two cents 16 historically, Ms. Brown? 17 MS. BROWN: Yes. 18 CHAIRMAN DUNLAP: During the spring-summer driving 19 season? 20 MS. BROWN: Yes, Chairman Dunlap. That 2 cents 21 represents the seasonal swing, and I guess -- I believe it's 22 gasoline price during the high driving season. 23 CHAIRMAN DUNLAP: But that's been borne out 24 historically over the last decade or so? 25 MS. BROWN: That is correct. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 53 1 CHAIRMAN DUNLAP: Okay. 2 Anything else, Mr. Lagarias? 3 MR. LAGARIAS: No. 4 CHAIRMAN DUNLAP: All right. Supervisor Roberts. 5 SUPERVISOR ROBERTS: Thank you. 6 Mr. Imbrecht, help me with something. I don't 7 know if we have the analysis or the data, but we didn't talk 8 much about California's prices as compared to what's 9 happened in the rest of the nation. 10 And I read in the local paper here this morning 11 that there's been quite a significant change in the 12 comparison between our prices and what we've seen as 13 increases elsewhere. 14 As I recall, and I don't have it in front of me, 15 but there was a chart that showed, in June or July of last 16 year, California was about a nickel a gallon more. And 17 that, as you tracked it across to now, we are now -- 18 although the price of gas has gone up across the nation -- 19 now, there's a difference of about, I'm going to say, 25 20 cents a gallon more. 21 You've suggested that some of that comes from 22 CARB, 6 or 7 cents -- the reformulated gasoline. That 23 leaves a big gap. 24 CHAIRMAN IMBRECHT: Well, for openers, you've got 25 about 11 cents directly attributable to sales tax on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 54 1 gasoline. 2 SUPERVISOR ROBERTS: Increased sales tax? 3 CHAIRMAN IMBRECHT: No. The fact of it is we have 4 a sales tax. To begin with, none of our neighboring States 5 has sales tax on gasoline. 6 SUPERVISOR ROBERTS: But I'm talking about the 7 increase. Because I'm trying to compare apples and apples. 8 We had a sales tax last year -- 9 CHAIRMAN IMBRECHT: Right. 10 SUPERVISOR ROBERTS: -- in June or July. So, 11 we're talking about an increase -- 12 CHAIRMAN IMBRECHT: I understand. 13 SUPERVISOR ROBERTS: -- not a total, so -- 14 CHAIRMAN IMBRECHT: Right. 15 SUPERVISOR ROBERTS: -- again, we're talking about 16 a 25 cents per gallon differential in increased prices. 17 CHAIRMAN IMBRECHT: And let me -- 18 SUPERVISOR ROBERTS: I think you said the sales 19 tax increase was about 2 cents? 20 CHAIRMAN IMBRECHT: 2.25. 2.4 actually. 21 SUPERVISOR ROBERTS: Okay. 22 CHAIRMAN IMBRECHT: Let me just note for you, as 23 well, that the differential in prices, if you take out the 24 tax issues and if you take out RFG, you'll find that all of 25 the Western States are similarly positioned at a much higher PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 55 1 level than the rest of the United States. 2 PADD 5 generally is higher That has to do with 3 the nature of the crude supplies that go into our refinery, 4 where they come from, and the nature of our refinery 5 configurations and so forth. 6 SUPERVISOR ROBERTS: What would account, though, 7 for this? Less than a year ago, we were seeing a 8 differential that was not nearly as significant and, as I 9 say, has increased -- 10 CHAIRMAN IMBRECHT: The rest of it -- 11 SUPERVISOR ROBERTS: -- has increased by about 25 12 cents a gallon. And so far, we're accounting for maybe six 13 or seven cents on RFG and maybe two cents on increased sales 14 tax. 15 But there seems to be something missing in this 16 picture. 17 CHAIRMAN IMBRECHT: The refinery difficulties here 18 in the West is probably another -- 19 SUPERVISOR ROBERTS: Those are 18, 19 cents a 20 gallon? 21 CHAIRMAN IMBRECHT: I am hesitant to give you 22 specific numbers about any of these issues. But those 23 factors, in conjunction with one another, are the reason we 24 have a differential here in the West. 25 SUPERVISOR ROBERTS: Well, I guess what we're PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 56 1 having here today is a search to try to find out what this 2 difference is. And I'm not going to start with an 3 assumption that it's not the California fuel, but I'd like 4 to figure out what it is, to what extent that is 5 contributing, and how to explain some of these -- some of 6 these missing numbers. 7 Now, the one thing that was clear -- and I'm not 8 quite sure what explains it, but perhaps you could go back 9 and address it again -- the refinery margins are up 10 significantly on all of your charts. 11 CHAIRMAN IMBRECHT: That's correct. 12 SUPERVISOR ROBERTS: And it's not the dealers. 13 You made it clear that they're down. 14 CHAIRMAN IMBRECHT: That's correct. 15 SUPERVISOR ROBERTS: The guys pumping the gas to 16 the customers are -- looks like they're suffering right now. 17 But the refiner margins are up and -- 25, what was it, 25 18 cents? 19 CHAIRMAN IMBRECHT: Actually, the refiner margin 20 went from 21.3 at the beginning of the year to 46.4, the 21 single largest -- 22 SUPERVISOR ROBERTS: 25 cents a gallon. 23 CHAIRMAN IMBRECHT: Even if you were -- yes. And 24 even if you were to assume the CARB is 15 cents of that, 25 you've still got a 10 cent difference. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 57 1 SUPERVISOR ROBERTS: That's why I'm looking at 2 this missing piece. 3 CHAIRMAN IMBRECHT: Well, I would encourage you to 4 ask those -- 5 SUPERVISOR ROBERTS: Well, I intend to. 6 CHAIRMAN IMBRECHT: -- responsible for that. 7 SUPERVISOR ROBERTS: But, I'm just trying to find 8 if there's maybe something I'd missed. 9 CHAIRMAN IMBRECHT: No. 10 SUPERVISOR ROBERTS: You were saying that CARB is 11 6 or 7 cents. So, again, that leaves a missing -- 12 CHAIRMAN IMBRECHT: Yes. 13 SUPERVISOR ROBERTS: -- about 18 cents a gallon. 14 CHAIRMAN IMBRECHT: Substantial delta. 15 SUPERVISOR ROBERTS: Okay. Now, I'm looking from 16 a different perspective. I still come up with the missing 17 ingredient there. 18 Let me just finish by asking a couple questions. 19 You said California's losing $5.2 million a day? 20 CHAIRMAN IMBRECHT: That's based on a multiplier. 21 SUPERVISOR ROBERTS: On a multiplier. 22 CHAIRMAN IMBRECHT: Yes. Actual direct -- 23 SUPERVISOR ROBERTS: But that's not -- 24 CHAIRMAN IMBRECHT: -- cost of about 2.25 million 25 a day. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 58 1 SUPERVISOR ROBERTS: I understand. But that's 2 basically to the economy. That's probably a good estimate. 3 But you also said we're not in an emergency and we shouldn't 4 do anything yet. 5 And I'm kind of concerned about -- 6 (Laughter and applause from audience.) 7 SUPERVISOR ROBERTS: -- when do we get in an 8 emergency? 9 CHAIRMAN IMBRECHT: That's a significant loss. 10 But, obviously, in the context of the size of our economy, 11 it is relatively modest. 12 It's not something to be ignored by any stretch of 13 the imagination. I guess what I'm trying to suggest is, we 14 don't think that direct market intervention at this point in 15 time is the appropriate response. 16 And I might add, as well, that even if we were to 17 attempt to do that, as has already been indicated, many of 18 these factors are really beyond California's individual 19 control. 20 SUPERVISOR ROBERTS: Well, what about one of the 21 elements that's not beyond California's control? And that's 22 the California and local government, which I participate in, 23 is reaping a little bit of windfall with the increase in the 24 sales tax. 25 Have there been any discussions about doing PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 59 1 anything about that? 2 (Applause from the audience.) 3 CHAIRMAN IMBRECHT: Let me say that we have raised 4 that issue. I think it's being evaluated. And I think it 5 clearly represents a policy call for our elected officials 6 in the State. 7 I'm hesitant to express a personal opinion on it, 8 but I would have to say that, generally speaking, I think 9 that we should be chary about either local or State 10 governments benefiting from something that is clearly a 11 negative for our economy. 12 SUPERVISOR ROBERTS: Let me just conclude and make 13 sure we're on the same track. 14 After all your presentation and all your analysis, 15 it sounds like you share with me some uncertainty as to why 16 some portions of this -- 17 CHAIRMAN IMBRECHT: That's correct. 18 SUPERVISOR ROBERTS: -- have gone up so quickly, 19 and some additional questioning of people as they testify 20 here today is appropriate and needed. 21 CHAIRMAN IMBRECHT: You must be a member of my 22 profession, because that's clearly a leading question. But 23 I'll take the bait and say, yes, I agree with your judgment. 24 SUPERVISOR ROBERTS: Okay. Thank you, Mr. 25 Chairman. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 60 1 CHAIRMAN DUNLAP: Okay. Supervisor Roberts, while 2 I have an opportunity, we've invited the oil company 3 representatives to be here. They'll be coming up after we 4 hear from staff in a moment. We'll get a chance to ask some 5 of those questions. 6 SUPERVISOR ROBERTS: Thank you. 7 CHAIRMAN DUNLAP: Ms. Edgerton. 8 MS. EDGERTON: Mr. Chairman, the direct 9 responsibility of this Board, as you well know and well 10 explained, is for reformulated gasoline standards. 11 And you've indicated that our new fuel is, in your 12 view, one of the less significant factors in the increase. 13 My question to you is, in your view, have the 14 capital investments -- the approximate 3 to 4 cents -- 15 already been made by the oil companies, such that any change 16 in our rule wouldn't recapture the 3 or 4 cents anyway as a 17 reduction -- would not achieve a reduction in the prices at 18 the pump anyway? 19 CHAIRMAN IMBRECHT: Certainly not of that 20 magnitude. 21 MS. EDGERTON: So are -- go. 22 CHAIRMAN IMBRECHT: That's correct. The bottom 23 line is, you could suspend the rule today and you would not 24 recapture all of that in terms of price reductions, unless 25 there were voluntary restraints, a decision on the part of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 61 1 the companies involved. 2 And that obviously -- I think that they would 3 question, in terms of whether they were fulfilling their 4 fiduciary responsibility to their own investors if they were 5 to take that kind of action. 6 MS. EDGERTON: So, if I understand you right, a 7 suspension, even if we were to consider a suspension at some 8 point, it would not achieve a reduction of any substantial 9 amount -- 10 CHAIRMAN IMBRECHT: That is correct. 11 MS. EDGERTON: -- in the price. However, it would 12 result in our losing the benefit of the clean air emissions 13 reductions? 14 CHAIRMAN IMBRECHT: That is correct. 15 MS. EDGERTON: Thank you. 16 CHAIRMAN DUNLAP: Mr. Imbrecht, I have a quick 17 question. I'm going to try to avoid asking you to dust off 18 that crystal ball here. 19 But I want to talk a bit or have you talk a bit 20 about supply. Are you able to forecast a supply trend, at 21 least a trend that you or our team's comfortable with, in 22 the information you've received -- that you've been 23 reviewing -- from the oil companies? 24 And, if so, what specific factors have you 25 identified that cause you to have some comfort that the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 62 1 supply trend is going in the right direction, is positive, 2 and that we won't revisit, absent some kind of refinery 3 problem like we received? 4 CHAIRMAN IMBRECHT: Well, the supply issue, 5 frankly, has been -- you have to separate supply issues from 6 what's happening in terms of prices. They are driven by 7 some of these other factors that I've described. 8 The supply issue has been directly a consequence 9 of the refinery problems. And basically, the one remaining 10 large refinery that still has problems we have been assured 11 will be back on line in a relatively near term. 12 When it comes back on line -- and that refinery, I 13 might add, has a normal capacity of 106,000 barrels a day -- 14 clearly, we will not have any difficulty in terms of supply. 15 CHAIRMAN DUNLAP: Okay. Any other questions of 16 Chairman Imbrecht? 17 Yes, Dr. Boston. 18 DR. BOSTON: Chairman Imbrecht, a couple years 19 ago, we introduced a reformulated diesel fuel. 20 CHAIRMAN IMBRECHT: Uh-huh. 21 DR. BOSTON: And now we're introducing the new 22 Cleaner Burning Gasoline. And at both of those times, it 23 seems like there was suddenly some refinery shutdowns that 24 occurred. 25 I'm wondering, did you verify the major of these PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 63 1 refinery shortages and shutdowns, what the problems were on 2 both occasions? 3 CHAIRMAN IMBRECHT: Well, I -- you know, I have 4 tried in my presentation to be balanced and to try to be 5 balanced in this regard as well. 6 When you make major mechanical changes to 7 operating systems that are as complex as today's refineries, 8 I think it's unrealistic to expect that they are going to 9 immediately operate at full capacity. 10 If you've ever visited a modern refinery, these 11 are immense, enormously complicated industrial facilities. 12 And, to me, it seems quite reasonable to expect that you're 13 going to have some initial start-up difficulties. And I 14 think, in many cases, that's what we're talking about. 15 I happen to be quite familiar with the Shell 16 refinery, because we licensed the cogeneration facility that 17 is a key element in that total project of $1.1 billion. I 18 visited the site myself on many occasions. You can't -- 19 it's hard for me to properly give a verbal description of 20 how immense and giant this facility is and how complex it 21 is. 22 And to expect that every design expectation is 23 going to be met immediately is probably unrealistic. 24 And they were facing a fairly tight time frame in 25 some cases. And I think if you talk to the companies PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 64 1 involved, most of them will offer that same explanation, and 2 I think it's a plausible one. 3 CHAIRMAN DUNLAP: Supervisor Vagim. 4 SUPERVISOR VAGIM: Chairman Imbrecht, the actual 5 retailer does not have to sell California fuel till June 1st 6 as I understand it. 7 What percentage of the fuel system right now is 8 California fuel? 9 CHAIRMAN IMBRECHT: I think it's a very high 10 percentage. We have -- almost all? 11 MR. SIMEROTH: Virtually a hundred percent. 12 CHAIRMAN IMBRECHT: Yes. 13 SUPERVISOR VAGIM: So, all the previous -- 14 (Thereupon, both speakers spoke simultaneously.) 15 SUPERVISOR VAGIM: -- washed out totally, even 16 though it's -- 17 CHAIRMAN IMBRECHT: Yeah, it's -- frankly, they 18 have been introducing it into the system since around March 19 1st. And by and large, it's already moved through the 20 system. 21 SUPERVISOR VAGIM: Thank you. 22 CHAIRMAN DUNLAP: Okay. If there are no other 23 questions at this time -- Mr Calhoun, did you have one? 24 MR. CALHOUN: Yes. 25 CHAIRMAN DUNLAP: Okay. Sorry. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 65 1 MR. CALHOUN: Chairman Imbrecht, looking at Tables 2 5 and 6, in Table 5, you use a price of a $1.15 per gallon, 3 and it shows the dealer margin of 21.3 cents per gallon -- 4 CHAIRMAN IMBRECHT: That's refiner margin. 5 MR. CALHOUN: That's correct. The refiner 6 margin's 21.3 and a dealer margin of 8.5. And four months 7 later -- five months later, in April, it shows a price of 8 $1.47, and a refiner margin of 46 cents per gallon, and a 9 dealer margin of -- 10 CHAIRMAN IMBRECHT: A negative 1.2. 11 MR. CALHOUN: -- negative 1.2. In other words, 12 the dealers are losing money on this particular product. 13 CHAIRMAN IMBRECHT: First off, I should stress 14 that this is an illustrative example. It is not reflective 15 of every circumstance in the State and every dealer in the 16 State, and so forth. 17 Some dealers have been able to increase their 18 prices because their local competitive market allows them to 19 do so. 20 One of the other things that I think is important 21 to say about gasoline prices in California, even if you just 22 drive around one of our larger urban areas, you will 23 discover that there's a fairly substantial price 24 differential. 25 Gasoline prices are very, very geographically PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 66 1 oriented. Most people do not drive substantial distances to 2 find cheaper fuel. And they purchase fuel within their own 3 neighborhoods or in the normal course of travel between home 4 and employment. 5 As a consequence, the retail prices are largely 6 set based upon what the competitive situation is within a 7 relatively compact geographical area. 8 What happens with respect to one station in an 9 intersection will drive what happens with respect to other 10 stations at that intersection, or within a relatively small 11 radius of a few city blocks. 12 So, I can just say anecdotally, we know a couple 13 nights ago, in a popular Press report here in Sacramento, 14 that a lot of the ARCO retailers increased their prices 15 about 6 cents a gallon. 16 And my guess is that they did that because they 17 realized that their competition had higher prices, so they 18 could afford to increase their prices, offset this negative 19 dealer margin, and still be competitive with other brands in 20 their area. 21 MR. CALHOUN: Then it would be inaccurate to draw 22 any specific conclusions from this as it applies to any 23 given situation. 24 CHAIRMAN IMBRECHT: That's correct. 25 MR. CALHOUN: Thank you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 67 1 CHAIRMAN IMBRECHT: It's almost impossible for us 2 to do. First off, we cannot do it under law on a 3 company-by-company basis. 4 But I might add, as well, that you should also 5 understand that most of the dealers in the State are 6 independent business people. And so, they can set their 7 prices based upon what the market in their own area will 8 bear. 9 CHAIRMAN DUNLAP: Okay. Any other questions of 10 Chairman Imbrecht? 11 Thank you for a most illuminating presentation. 12 Chuck, if I could ask you to stay for a while, I'd be 13 grateful, as we get into the testimony. I know you have a 14 prior commitment, but if I could try to keep you towards the 15 noon hour, I'd be grateful if you stay. 16 With that, I'd like to ask staff -- Mr. Boyd, I 17 know you and your team have a few words you'd like to share 18 with us, and then I'd like to get into the witness list. 19 At last read, we have about 45 people that wish to 20 testify. I'd like to explain to the audience that we have 21 sent a letter -- Mr. Boyd sent a letter to the oil 22 companies. They've sent representatives. We are going to 23 take them first to hear their perspective, and then we'll 24 get in to hearing from the citizenry and others. 25 So, please, indulge us in allowing us to follow t PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 68 1 his format. 2 With that, Mr. Boyd, why don't you continue with a 3 few thoughts from your team. 4 MR. BOYD: Thank you, Mr. Chairman. As I 5 indicated earlier, staff would take you through some of the 6 process. 7 We're going to hear form Dean Simeroth, who's 8 going to tell us about the mechanisms we have for addressing 9 the potential supply situation, probably touch on a few 10 points that the Energy Commission did touch on already. 11 We're going to walk through our fuels variance 12 process using, as an example, the variance which we recently 13 granted to ARCO for their diesel fuel introduction. 14 He's also going to brief you on the status of 15 refineries' capacity to deal with the production off Cleaner 16 Burning Gasoline. And following that, as indicated, then we 17 will hear from the oil companies, of whom we individually 18 invited to testify here today. 19 With that, I'd ask Mr. Simeroth, if you would. 20 MR. SIMEROTH: Thank you, Mr. Boyd. 21 Chairman Dunlap, members of the Board, some of my 22 presentation will be a little bit repetitious, and I ask 23 your indulgence. I'll try to expedite that part of the 24 presentation this morning. 25 I'd like to start the slides going. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 69 1 I'll be giving a quick review of why we're here 2 and the benefits, and use the ARCO situation as an 3 illustration of how the variance process works, quickly 4 review the diesel situation in terms of price, the gasoline 5 situation, and finally a few words on supply and demand. 6 I'd first like to start with the review. 7 The benefits of California reformulated gasoline, 8 as you're aware, is that it reduces smog-forming emissions 9 by about 300 tons a day. This is equivalent to removing 10 about 3.5 million vehicles from the road. 11 The average cost to produce, by our calculations, 12 is about 10 cents per gallon. I was pleased to hear Mr. 13 Imbrecht's assessment that it may be even lower, but there 14 also may be some explanations on that as well. 15 In terms of fuel economy, there is a slight 16 penalty in terms of fuel economy. The average impact is 1 17 to 3 percent for individual vehicles, for individual 18 feelings that would be a much wider impact (sic). 19 The implementation has been phased in. March 1st, 20 refiners had to comply; April 15th, primary distribution 21 points -- the terminals had to comply; service stations, as 22 you've heard, have to comply June 1st. 23 In terms of compliance, the refiners were on 24 schedule and the terminals met their April 15th compliance 25 date. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 70 1 The regulations provide flexibility to the 2 production of fuel. We have a predictive model and also 3 averaging provisions in the regulations to provide 4 flexibility in normal operations. 5 If something occurs beyond normal -- if you have a 6 major upset, a breakdown situation occurs, we have the 7 variance provisions that allow production of noncomplying 8 fuel or import of noncomplying fuel. 9 MR. SCHEIBLE: I'd just like to add real fast, 10 that the predictive model and the averaging allowance have 11 become major factors in the refiners that are up and running 12 being able to up their capacity. So, we have seen the 13 advantage of that flexibility, because they've been able to 14 take advantage to change the formulas and up their 15 production in this time of tight demand. 16 MR. SIMEROTH: That's exactly correct. 17 SUPERVISOR RIORDAN: Mr. Calhoun, did you have a 18 question to -- 19 MR. CALHOUN: Yes. Since we've been focusing on 20 the predictive model, do most of the refiners use the 21 predictive model? 22 MR. SCHEIBLE: That is correct. Most of the 23 refiners did use the predictive model, and what some of them 24 have done is they've relooked at it, and said, "How can I 25 blend more volume using the predictive model," changing from PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 71 1 the one they were using to a different one that allowed 2 higher volume of gasoline to be delivered. 3 MR. CALHOUN: Thank you. 4 MR. SIMEROTH: In terms of variance provisions, a 5 variance is to buy temporary relief from regulatory 6 requirements -- emphasize the word "temporary." A variance 7 is allowed if the inability to comply is beyond the 8 applicant's reasonable control and the situation's 9 temporary. 10 Emergency variances are allowed and can be issued 11 virtually overnight. 12 Talking about ARCO, I'd like to give a little 13 scene-setting first. 14 Earlier in the year -- Phoenix is supplied by 15 about 60 percent by California, 40 percent by refineries in 16 West Texas. 17 Earlier in the year, refineries in West Texas 18 experienced problems. The fact is, the supply out of West 19 Texas went down to virtually nothing. 20 California refineries in Los Angeles increased 21 their production to compensate for this. This was happening 22 in the February-March time frame. One of the major 23 suppliers in Southern California postponed the scheduled 24 maintenance to be able to continue supplying fuel over to 25 Phoenix. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 72 1 This put a -- obviously put a strain on the 2 system, and also meant that that refiner who had postponed 3 their maintenance had -- the refiner who had postponed their 4 maintenance meant that they were now going to do their 5 scheduled maintenance in late March. And they had to do 6 this because it was on the verge of failing. 7 So, ARCO had problems in the middle of March. By 8 March 28th, it became apparent they were not going to be 9 able to come back up on their schedule. Their inventories 10 were on the verge running out. Also, I would like to 11 emphasize that ARCO was still able to produce about -- or 12 process about 50 percent of their crude. 13 On March 28th, at 10:30 a.m., we got a telephone 14 call from ARCO, requesting -- or informing us that they had 15 an impending variance application. 16 By 1:00 p.m., we had issued a hearing notice out 17 to interested parties that they wanted to be noticed of such 18 hearings.s 19 On March 29th, at 8:00 a.m., we received a formal 20 application from ARCO by fax. 21 At 9:39 a.m., we commenced the -- a telephone 22 conference hearing. The teleconference hearing ended at 23 12:00 p.m. By 5:00 p.m., that same day, the variance order 24 was issued. 25 So, we do have the capability of processing a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 73 1 variance quickly. 2 MR. SCHEIBLE: And, as the Board may remember, 3 March 28th and 29th were not low level days for us. It was 4 the date of our ZEV hearings. So, clearly, staff was 5 working hard on two fronts, and if you didn't see me down 6 here then, that's where I was. 7 CHAIRMAN DUNLAP: Right. Okay. 8 MR. SIMEROTH: The diesel situation I'll review 9 quickly. What I'd like to add, if you look historically, in 10 April of '94, we were about 2 cents higher than Phoenix; 11 April of '95, we were 9 cents lower than Phoenix; the middle 12 of March, we were still 6 cents lower than Phoenix. But by 13 the middle of April, we were 15 cents higher than Phoenix. 14 So, there have been historically fluctuations. 15 Surrounding the middle of March situation, reflects the 16 problems that Phoenix was having on their supply. 17 This illustrates what Mr. Imbrecht has always 18 indicated, that the retail margins are to virtually zero, or 19 by today, may be slightly negative. This is not abnormal 20 when we have steeply rising prices, and then the prices 21 adjust in the margins for the dealers' return. 22 You can see the crude prices increase and also 23 refinery margins have increased. 24 On this one, the March 28th line -- it's the far 25 right line -- indicates when Atlantic Richfield, or ARCO, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 74 1 applied for a variance. You can see that prices were 2 starting up, reflecting somewhat the situation in the middle 3 of March, when ARCO went into their maintenance turnaround, 4 reduced their production, and then the other problems 5 occurred, and then the variance was issued. 6 Shortly after, we had continued rising because of 7 other problems, which I'll talk about later. 8 During that situation, another major refinery was 9 in turnaround. Two other refineries had some restricted 10 production. 11 In terms of the wholesale prices, you see here how 12 we compare to surrounding States and other places around the 13 country. 14 In terms of the retail prices, you can see that 15 we've increased higher than some of other places around the 16 country. Give you two retail prices of April 23rd: 17 California, the average is $1.56; for Nevada the average is 18 $1.44; Connecticut, the average is $1.44; Massachusetts, 19 $1.47, and New York went down slightly to $1.43. 20 In terms -- this is a slide for diesel. You saw 21 something similar for gasoline from Mr. Imbrecht. 22 Texas went up slightly, dealer margins went down. 23 The refinery margin went up significantly, and crude oil 24 price went up significantly. 25 Putting numbers to those changes, crude oil on the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 75 1 19th of April was about 12 cents' increase. Sales tax went 2 up about 2 cents. There was about a 5 cent seasonal 3 increase that's normal for this time of the year in the 4 spring planting. That varies some from year to year, but 5 the average seems to be about 5 cents. 6 The 6 cents I've identified as "other," if you 7 adjust it to reflect that the dealer margins are down, that 8 becomes 11 cents. So that "other" really is 11 cents. And 9 that's the part we're trying to address today. 10 In terms of the gasoline situation, the beginning 11 of the summer, this is L.A., Phoenix and Dallas. Dallas 12 tends to be consistently low, but there are times 13 historically when they can be higher than us. Phoenix has 14 been high. If you look back historically, they ran the same 15 as us in '92; in '93, they were 5.7 cents higher; in '95, 16 they were about the same. The middle of March, Phoenix was 17 12 cents higher due to their situation I referred to 18 earlier. By April, we were 7 cents above them due to our 19 situation. 20 Gasoline, again, agreeing with what was presented 21 by Mr. Imbrecht, deal margins are down to nonexistence or 22 maybe negative by today. Refinery margins are up and crude 23 price is up. 24 Two lines, March 1st is when the regulation went 25 in; about the middle of March is when the ARCO situation PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 76 1 took place. April 1st, which was about two days before ARCO 2 resumed normal production, is when the Shell situation 3 occurred, and the other refinery situations were still 4 continuing. 5 Shortly after April 1st, ARCO -- actually, April 6 3rd, was back on. Shortly after that, the other majors who 7 were having problems were back up to normal production. 8 This illustrates the wholesale prices. You can 9 see we're up about 36 cents. Surrounding States have gone 10 up significantly. Also, look at Dallas. It's gone up 20 11 cents. 12 Looked at retail prices. Need some additional 13 information. 23rd, California averaged $1.47; Connecticut, 14 $1.44; Nevada average is $1.42; Montana average is $1.39. 15 So, we're not alone around the country. 16 This is virtually the same slide Mr. Imbrecht did. 17 The numbers are slightly different. We have April 19th, 18 again, a little date that reflects most of the differences. 19 Again, crude is up. Refiner margins, they're 20 showing 10 cents a gallon CaRFG. That's part why the 21 refinery's up and it doesn't account for all of it by any 22 means. And dealer margins disappeared. 23 What does that mean in terms of where these 24 occurred? Crude is about 12 cents, 10 cents CaRFG, 2 cents 25 sales tax. We're doing the 2 cents seasonal effect that you PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 77 1 heard in earlier presentations 2 The 6 cents other, again, if you reflect the 3 shrinkage and the dealer margin into that, that becomes 12 4 cents. So, there's 12 cents that's basically to be 5 accounted for. 6 In terms of supply, supply is currently balanced 7 with demand. Any reductions in production are being 8 satisfied from inventories that you've heard mentioned, 9 increased production by other refineries, product exchanges 10 between refineries, and there have been imports into the 11 State, particularly in the month of March. And we're 12 expecting more in May. 13 Inventory status for the terminals. Mary Morgan 14 is here from Santa Fe Pacific. I think she'll concur that 15 we're in probably the low end of the normal range for 16 inventory gasoline. Inventory for diesel in the terminals 17 is good. 18 This doesn't reflect who owns this or marketing 19 practices on the distribution of those fuels. 20 We do have the variance mechanism in place, if 21 needed, to allow marketing of noncomplying product. 22 And that concludes my presentation this morning. 23 Thank you. 24 CHAIRMAN DUNLAP: Thank you, Mr. Simeroth. Any 25 questions of staff? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 78 1 Mr. Lagarias. 2 MR. LAGARIAS: Mr. Simeroth, of this 32 cent per 3 gallon increase on gasoline, what benefits are accruing from 4 these various components? 5 The only one I can see is that the 10 cents per 6 gallon for reformulated gas that we're responsible for is 7 going to result in something positive -- and improvement in 8 cleaner air. 9 What positive things, if any, can you tell me 10 about the others? 11 MR. SIMEROTH: The only other one is -- I can tell 12 you about is the negative dealer margin, where the dealers 13 have their margins down to practically nonexistent. 14 UNIDENTIFIED SPEAKER IN AUDIENCE: That's 15 positive? 16 MR. SIMEROTH: I view that as a negative. 17 MR. LAGARIAS: That's all I wanted to ask. 18 CHAIRMAN DUNLAP: Any other questions of staff 19 before we get into the witnesses? 20 All right. Mr. Scheible. 21 MR. SCHEIBLE: I'd just like to make one point. 22 When we show daily production at being very close to daily 23 demand, I just want to emphasize that production does not 24 include imports. 25 Imports are taken out of inventory, and we have PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 79 1 had in the month of March a significant influx of imports, 2 and some in April. So, actually, importing a gallon is the 3 same as reducing a gallon in terms of providing to the 4 market. So, there have been augmentations through imports 5 that have helped us through this period. 6 CHAIRMAN DUNLAP: Thanks for clarifying that. 7 Mr. Scheible or Mr. Simeroth, could you give us 8 perhaps a quick comment on diesel fuel prices, say over the 9 last six months ago, relative to rack prices, how California 10 has fared compared to other markets? 11 I know you covered it briefly, but could you -- 12 MR. SCHEIBLE: I can do that. I should go back 13 five years. 14 If you look at the period between 1990 and 1993, 15 prior to our implementation of the CARB or cleaner diesel 16 regulation, the prices in California were in the order of 63 17 cents a gallon on average. 18 In 1994 and 1995, years in which we enjoyed the 19 benefits of clean diesel, prices actually averaged between 20 57 and 58 cents. 21 So, we were able to implement a major regulation 22 that brought cleaner fuel. And however the market was 23 working crude or whatever, we were able to deliver that. 24 CHAIRMAN DUNLAP: Costing less than -- 25 MR. SCHEIBLE: Costing less than it had in the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 80 1 previous three-year period. 2 Secondly, in 1994, I think we were a couple of 3 cents above the Phoenix market in terms of what it costs to 4 buy diesel at the rack. 5 In 1995, that reversed, and we were 2 to 3 cents 6 below. 7 So, we had a long period of stability that really 8 ran from -- once the price hike that occurred and caused so 9 much trouble in October of '93, receded, until this most 10 recent series of events, where you had several waves of 11 crude prices and refinery problems on top of each other. 12 CHAIRMAN DUNLAP: Okay. Very good. That gives an 13 historical context. 14 Yes, Supervisor Roberts. 15 SUPERVISOR ROBERTS: Just a quick question. The 16 differential between your RFG cost and the RFG cost that Mr. 17 Imbrecht had given, it wasn't clear to me what the reason f 18 or that was. 19 MR. SCHEIBLE: Our RFG costs are when -- we did 20 the calculation quite a while ago, and we said it was 21 between 5 cents for a refiner that did -- was able to make 22 the changes the cheapest, and 15 cents for the one where it 23 cost the most, an average of 10 in our estimate. 24 We'll have to get together with the Commission, 25 because they -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 81 1 SUPERVISOR ROBERTS: It's fair to say that that 2 was an estimate of what we thought those costs were going to 3 be? 4 MR. SCHEIBLE: Yes. 5 SUPERVISOR ROBERTS: So, it really isn't what we 6 know the cost to be; it's what we thought the cost might be? 7 MR. SCHEIBLE: Right. 8 SUPERVISOR ROBERTS: What we're looking for today 9 is what the costs are? 10 MR. SCHEIBLE: Right. And if we take the 5 to 8 11 cent figure, 3 to 4 cents of that in all of Southern 12 California and a good part of the Central Valley is not 13 before our discretion, because that's the oxygenate cost and 14 the cost of the Federal reformulated gasoline. 15 And that is something that the Federal Government 16 and Congress has mandated, and we don't have any ability to 17 influence. 18 So, our part from the State program is actually 19 smaller than the whole number. 20 CHAIRMAN DUNLAP: Thank you for that question, 21 Supervisor Roberts. To use a sports metaphor, you have a 22 nose for the goal. 23 Supervisor Vagim. 24 SUPERVISOR VAGIM: Thank you, Mr. Chairman. 25 SUPERVISOR ROBERTS: No comment on that, Mr. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 82 1 Chairman. 2 SUPERVISOR VAGIM: One thing that is missing out 3 of this discussion today -- because we've been overwhelmed 4 by just the pure price -- if you remember last year 5 sometime, when we were talking about this, and I said, "If 6 we ended up with a situation, as we are today, I was going 7 to go to Brazil," except I can't afford the gas to get there 8 anymore. 9 So, the issue that doesn't seem to be coming up is 10 problems with the engines, the fuel itself as -- i.e. the 11 diesel situation. 12 Any quick report on the -- any reported problems 13 with anybody anywhere? 14 MR. SIMEROTH: We have a 1-800 complaint line 15 that's been talked about as part of our public outreach. If 16 we get 100 calls in a day, which is relatively high until 17 recently, one of those calls would be on a problem, maybe 18 two. And a very high day, we'll get three calls about 19 problems. 20 The problems have been centered on things that 21 either are explainable; that they were earlier in the 22 program before would actually be using reformulated 23 gasoline, or it would be something that wouldn't be 24 associated with gasoline, whether it was reformulated or 25 conventional gasoline. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 83 1 We have found no pattern as we did in the diesel 2 situation. 3 CHAIRMAN DUNLAP: Supervisor Vagim, on that point, 4 Mr. Boyd, if you'd comment. I've been interested in this 5 issue. In speaking with Jim Boyd in the last day or two, we 6 talked about the extraordinary lengths he is having staff go 7 to to respond to any such concern or allegation. 8 Jim, why don't you take a moment and say a word 9 about this. 10 MR. BOYD: Well, thank you, Mr. Chairman. 11 Having learned a painful lesson from diesel fuel 12 years ago, we've had a plan in place for years to deal with 13 these types of situations. And we have a team in place 14 ready to respond to any complaint about the entire program. 15 But, in particular, we're now talking about performance 16 issues. And we solicit people's concerns, and we 17 immediately follow up and investigate those concerns. To 18 elaborate a little more on the answer to Supervisor Vagim's 19 question, there is no doubt that in the past few days, in 20 all of the concern and excitement -- let me call it -- 21 surrounding this issue, we have heard more -- at least in 22 the media -- about alleged performance problems. And we are 23 following up on those situations. 24 The thing I wanted to point to you -- and to the 25 media, whom we don't see at our routine Board meetings -- is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 84 1 that you have seen presentations time and time again of the 2 years of testing of this fuel that have taken place, the 3 five million miles of driving, the hundreds of thousands of 4 gallons in fuel, and the types of fleets that have been 5 tested throughout this State for days, weeks, and months. 6 And that did take place relative to this fuel and 7 before the introduction of this fuel. And with all the 8 stakeholders present, time and time again, we've reported on 9 those successes as have the independent fleets and the 10 independent car owners reported on the use of those fuels; 11 and the boat owners, and the chain saw operators, and ad 12 infinitum. And they're just -- and the extensive bench 13 testing and field testing by all the manufacturers of every 14 conceivable engine you can imagine, and there has just been 15 no record of performance problems. 16 In fact, in a few cases, it's been providing 17 improvements. I'm afraid, and I feel for the people, but 18 anyone who may suffer a normal mechanical or materials 19 failure today, it's an exhaustion of a particular component 20 of a car, frankly due to its normal weathering, aging, is 21 going to -- because of all the notoriety -- assume that this 22 new product played a part in the dilemma that they're 23 facing. 24 And it will take us a long time, but we will try 25 to weed out and point out where it is routine and where it PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 85 1 is maintenance. We saw an awful lot of it in diesel fuel. 2 Diesels were running -- people were running parts 300,000 3 miles that manufacturers said should be replaced in 100,000 4 miles. 5 And then when they failed, it was attributed to 6 the new diesel fuel, and you know the rest of the story. 7 Well, we're trying to prevent that now, and we're 8 going to do everything in our power to clear that up for the 9 customer, who admittedly doesn't understand all the 10 technical aspects. 11 CHAIRMAN DUNLAP: A key point, though, just to 12 summarize this, we take those allegations seriously. 13 Staff has made it a priority to talk to those 14 folks, to answer questions. And those of you that are here 15 today from the media could help all of us by passing on the 16 concerns, the sincere concern we have in this regard. 17 But the testing that's been done, as you well 18 know, Supervisor, we believe has clearly shown that there 19 aren't problems brought on by the use of the fuel. 20 SUPERVISOR VAGIM: And my car is still running. 21 CHAIRMAN DUNLAP: Yes. Go ahead, Supervisor. 22 SUPERVISOR VAGIM: All right. One thing, just for 23 the record, I have constituents who are calling me, and 24 every -- when you have something that has got a little bit 25 of a problem, everyone wades in to make sure -- they PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 86 1 guarantee that that's the fault. 2 And the folks that are doing smog checks now are 3 starting to blame the California reform as lack (sic) of 4 meeting the smog test, because they're saying it's not 5 burning the fuel and it's emitting hydrocarbons. And that's 6 why they're failing the test. 7 So, perhaps if you could get the Department of 8 Automobile Repair to weigh in with some letters to these 9 folks to say, "C'mon, that's not the issue." Or if it is, 10 let's find out if it is the issue. 11 MR. BOYD: Well, I appreciate you raising that 12 point, because we want to get on that right away. It defies 13 the laws of physics, because this is a cleaner fuel and 14 should actually help people, quite frankly. 15 SUPERVISOR VAGIM: Right. 16 MR. LAGARIAS: Mr. Chairman? 17 CHAIRMAN DUNLAP: Yes, Mr. Lagarias. 18 MR. LAGARIAS: The extensive performance 19 evaluations that took place last year on the cleaner burning 20 gas were all done with closely supervised fleet testing 21 programs. 22 And now, the general public is burning the Cleaner 23 Burning Gasoline. I think it would be helpful to the Board 24 if the staff, when it gets these -- any concerns or 25 complaints from the public, report back to the Board on what PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 87 1 they've heard and what the results have been, so that we can 2 get a better feel for how the Cleaner Burning Gasoline is 3 operating. Let's remember that there is no single formula 4 for Cleaner Burning Gasoline, and that each refinery is 5 making its own formulation. 6 And we may be able to get some useful information 7 from the nature and the source of the complaints that may 8 help us further along in this program. 9 MR. BOYD: That's an excellent point, Mr. 10 Lagarias. We appreciate it. And we'd be glad to keep the 11 Board members informed. You are our ambassadors in the 12 field when you go back home. 13 CHAIRMAN DUNLAP: Thank you. 14 Supervisor Riordan, do you have a comment? 15 SUPERVISOR RIORDAN: No. 16 CHAIRMAN DUNLAP: Okay. 17 If there are no other questions of staff, what I'd 18 like to do is move into the witness list. I'm going to call 19 five names and ask you to queue up, if you haven't already, 20 and come before us. 21 Ronald Kiracofe from ARCO, Lyle Sims from Shell, 22 Al Jessel, Chevron; Dennis Lamb, Unocal; and Chuck Walz, 23 Texaco. 24 If I could get Mr. Kiracofe to come forward. As 25 he's coming forward, I'd like to let the record show that we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 88 1 received a letter from our Secretary of State, Bill Jones, 2 which will be added to the record. 3 The Secretary of State expresses the frustration 4 that we are all sharing because of price increases. And 5 he's outlined a number of suggestions in his letter focused 6 on increasing supply of fuel and other strategies that might 7 be employed as a result of this matter. 8 So, I'll make sure that the Board Secretary gets 9 this letter. 10 Good morning. 11 MR. KIRACOFE: Good morning. Thank you, Chairman. 12 My name is Ron Kiracofe. I'm Senior Vice 13 President of Manufacturing, Engineering, and Technology for 14 ARCO Products Company. 15 And I'm here today at your invitation to discuss 16 issues related to the supply of CARB Cleaner Burning 17 Gasoline and diesel fuel in California. 18 Let me say at the outset, ARCO has worked closely 19 with the Air Resources Board over the years in preparing for 20 the introduction of Cleaner Burning Gasoline in California. 21 We were the first refiner in the United States to introduce 22 emission control gasoline. We have been supportive of your 23 efforts in requiring cleaner burning fuels, and we believe 24 these programs are a proper method for helping to reduce 25 vehicle emissions in the State. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 89 1 We will continue to support your efforts to curb 2 air pollution in this way. 3 We have submitted a great deal of information to 4 you and the California Energy Commission regarding CARB 5 Cleaner Burning Gasoline and CARB diesel. Much of this 6 information is proprietary in nature, such as manufacturing 7 capabilities, individual product inventories, as well as 8 information related to our costs, including capital 9 expenditures. 10 I am prepared to discuss our current ability to 11 supply Cleaner Burning Gasoline and diesel fuel to 12 California. What I cannot do in this forum, for antitrust 13 reasons, is discuss ARCO's specific pricing mechanisms or 14 what we think the price of fuels will be in the future. 15 I can talk generally about the factors that affect 16 movements in the marketplace, and that I will now do. 17 Let me interject that many of the things I'm going 18 to talk about were the same things that you heard from 19 Chairman Imbrecht earlier, because these are the factors 20 that are moving the market. 21 The first thing about the increases in gasoline 22 and diesel fuel over the last few months is the 23 supply/demand situation. 24 On the supply side, a dramatic increase in the 25 worldwide price of crude oil, up 6 to $7.00 a barrel in the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 90 1 last two months; this had an affect. This represents 15 to 2 17 cents a gallon across all products from a barrel of 3 crude. 4 This has been caused, at least in part, by 5 historically low crude oil inventories nationally and 6 worldwide. This is caused by refiners' concerns that the 7 United Nations' negotiations with Iraq will allow Iraq to 8 export large volumes of crude, which would drive down the 9 value of the inventories they hold. 10 This uncertainty continues to keep inventories 11 low. 12 There's also, as been mentioned, an extraordinary 13 increase in demand for heating oil and diesel fuel in the 14 East, which has depleted those inventories. 15 Particularly on the West Coast, unexpected 16 refinery disruptions, unscheduled maintenance shutdowns, and 17 difficulties in start-up of operations of equipment have all 18 contributed to lower supplies of all light products. 19 During the month of March, ARCO's Los Angeles 20 refinery was forced to reduce production due to 21 unanticipated maintenance and the temporary shutdown of a 22 key unit of production of CARB diesel and CARB Phase 2 23 gasoline. 24 The refinery problems reduced production of all 25 light products, including the CARB diesel and gasoline. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 91 1 As a result, ARCO had to purchase fuels on the 2 spot market to supplement supplies for our customers. These 3 purchases were made at prices that were not recovered in t 4 he marketplace. 5 This situation of supply disruptions with low 6 inventories has caused a short-term supply and demand 7 imbalance, which has resulted in price increases on all 8 light products nationally, particularly here on the West 9 Coast. 10 These supply related effects were compounded in 11 California by the introduction of higher value Cleaner 12 Burning Gasoline, which became mandatory out of the 13 refineries on March 1st, 1966 (sic). 14 However, the CARB Phase 2 increase are (sic) only 15 one of a number of facts as you've heard this morning. I'm 16 sure you're interested in what steps ARCO has taken to date 17 surrounding these issues and what further steps we are 18 contemplating. 19 Over the last 20 days, our Los Angeles refinery 20 has been operating normally and producing as much Cleaner 21 Burning Gasoline and CARB diesel as possible. These volumes 22 are consistent with our plans that were previously submitted 23 to CARB and to the CEC. 24 ARCO's Cleaner Burning Gasoline and CARB diesel 25 customer lifting has not been and have not been restricted, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 92 1 and we have not had any terminal runouts. 2 As to future activity, we are exploring ways to 3 increase Cleaner Burning Gasoline and CARB diesel production 4 at the Los Angeles refinery. In addition, we are 5 investigating our ability to bring in components from the 6 Gulf Cost as well as Cleaner Burning Gasoline from our 7 Washington State refinery to help augment our California 8 supplies. 9 Based on industry publications, we would expect 10 that others are taking similar actions. The market is 11 working as would be expected. 12 With regard to what action the ARB may choose to 13 take in responding to this situation, we do not recommend 14 the suspension of either Cleaner Burning Gasoline or CARB 15 diesel regulations. We believe to do so would increase the 16 level of uncertainty in the marketplace, thereby limiting 17 the ability of producers to make informed supply decisions. 18 A suspension of the rules will have little to no 19 impact on our ability to provide fuel to California in the 20 short term. It is not feasible to switch back and forth 21 between conventional and Cleaner Burning Gasoline in the 22 short term and maintain integrity of the cleaner burning 23 fuel. 24 Nor is there any substantial volumetric benefit to 25 ARCO by doing so. The long-term supply issues will be PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 93 1 solved in the marketplace. Lacking regulatory certainty, 2 potential suppliers would likely take a wait-and-see 3 attitude rather than risk the financial losses that would 4 accompany a constantly changing regulatory environment. 5 A more prudent course of action for the Board to 6 take would be to allow the marketplace to adjust to the 7 normal supply and demand forces and to grant specific 8 variance requests when warranted. 9 As I have stated, the introduction of CARB fuel is 10 one of many of the factors relating to the overall market 11 increase. Relaxing the CARB specifications and losing their 12 associated clean air benefits would be counterproductive. 13 Hopefully, most of the refining problems are 14 behind us; worldwide crude oil markets will normalize, and 15 product inventories will return to levels, which should 16 reduce the recent volatility in the marketplace. 17 The bottom line is that prices are dictated by 18 supply and demand; that is, competition. ARCO's committed 19 to remaining the most aggressive competitor it can be. We 20 suggest the Board allow the marketplace to correct the 21 current situation. 22 This completes my testimony. I'd be glad to 23 answer any follow-up questions the Board or staff may have. 24 CHAIRMAN DUNLAP: Supervisor Riordan. 25 SUPERVISOR RIORDAN: Yes. Mr. Kiracofe, thank you PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 94 1 very much for your testimony. 2 Maybe you said it and maybe I couldn't understand, 3 but you were experiencing some difficulty in a refinery in 4 Southern California, and then you went on to talk as if that 5 has been overcome. 6 Did I hear that correctly? 7 MR. KIRACOFE: That is correct. 8 SUPERVISOR RIORDAN: How many days did you have 9 that difficulty? 10 MR. KIRACOFE: Approximately 12 days. 11 SUPERVISOR RIORDAN: Thank you. 12 CHAIRMAN DUNLAP: Supervisor Vagim, then Dr. 13 Boston. 14 SUPERVISOR VAGIM: Thank you, Mr. Chairman. You 15 said you went out to the spot market when you had your 16 refinery problems. I presume that was the spot market for 17 California reform fuel; is that correct? 18 MR. KIRACOFE: That is correct. 19 SUPERVISOR VAGIM: Where is that supply on the 20 spot market? 21 MR. KIRACOFE: The spot market hasn't been 22 referred to this morning. And it's basically a market for 23 large volume purchases between refiners, importers, and then 24 resellers of the product. 25 Generally, prices are quoted in the Los Angeles PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 95 1 and the San Francisco area for California in the spot 2 market. 3 SUPERVISOR VAGIM: Was there a significant supply 4 of California reform in the spot market? 5 Was there a significant supply -- 6 MR. KIRACOFE: Gasoline? 7 SUPERVISOR VAGIM: Yes. 8 MR. KIRACOFE: There has been gasoline available 9 in the spot market at prices that have risen significantly; 10 in fact, faster than the prices you've seen today. 11 SUPERVISOR VAGIM: I presume they rose much faster 12 than the non-CARB fuel; is that correct? 13 MR. KIRACOFE: Actually, those two and the one 14 location where those are both quoted, which is Los Angeles, 15 have risen pretty much in tandem. 16 SUPERVISOR VAGIM: You produce still both CARB and 17 non-CARB gas for your other States? 18 MR. KIRACOFE: At the Los Angeles refinery, we've 19 been producing only CARB gasoline since March 1st. Our 20 Washington State refinery produces conventional gasoline. 21 SUPERVISOR VAGIM: If, indeed, there is a supply 22 or was a supply -- looking back a week or so, or even 23 further -- in the spot market, why then did we have such a 24 shortage and going to reserves of what Chairman Imbrecht 25 told us is somewhere in the neighborhood of 24,000 barrels? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 96 1 MR. KIRACOFE: I'm not sure I understood. 2 SUPERVISOR VAGIM: He said we had a supply 3 differential between demand and 24,000 barrels a day. 4 And yet, you were able to go in the spot market 5 and buy it. 6 MR. KIRACOFE: That's on an aggregate basis. 7 Within that aggregate, some people will have supply -- 8 SUPERVISOR VAGIM: Those are some holdbacks? 9 MR. KIRACOFE: -- some people will not. 10 SUPERVISOR VAGIM: Those are some holdbacks from 11 the marketplace, with the idea that perhaps the spot market 12 would be a better place to go? 13 MR. KIRACOFE: I'm not aware of that. 14 SUPERVISOR VAGIM: Thank you, Mr. Chairman. 15 CHAIRMAN DUNLAP: Gene? 16 DR. BOSTON: Mr. Kiracofe, MTBE is the oxygenate 17 that most people are using for the cleaner burning fuel? 18 MR. KIRACOFE: I can't speak for others. It is 19 the oxygenate we are using, yes. 20 DR. BOSTON: Is there an alternative to that? 21 MR. KIRACOFE: Alternatives? 22 DR. BOSTON: Alternative oxygenates? 23 MR. KIRACOFE: There could be alternative 24 oxygenates. I believe most of them would be less 25 cost-effective than MTBE. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 97 1 DR. BOSTON: So, MTBE is the cheaper of the 2 available oxygenates that you could use? 3 MR. KIRACOFE: That is correct. 4 DR. BOSTON How about phenol? Ethanol, sorry. 5 MR. KIRACOFE: Ethanol is an oxygenate that could 6 be used. 7 DR. BOSTON: But do you think that the MTBE is 8 actually more cost-effective for your company? 9 MR. KIRACOFE: In summertime operation of low 10 vapor pressures, yes. 11 DR. BOSTON: Regarding that recovery of the 3 12 cents conversion cost that the company apparently has 13 exhibited, after the recovery of the 3 cents per gallon, 14 that would take about six weeks by my calculation. Would 15 the cost normally come down again? 16 MR. KIRACOFE: I'm not sure I understand your 17 question. 18 DR. BOSTON: Apparently there were some costs -- 19 well, we were told $4 billion for the refineries to convert 20 to this new Cleaner Burning Gasoline. And from the volume 21 that's sold, it looks like that would take about six weeks 22 to recover that cost. 23 Do we expect at that time that there'll be a 24 reversion to the previous level? 25 MR. KIRACOFE: I would be interpreting the answer PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 98 1 given previously. And I would ask somebody to correct me if 2 I interpret it incorrectly. 3 But I believe that answer was that that 3 cents 4 would be there on every gallon produced over the life of the 5 capital investment, which would normally be 20 years. 6 DR. BOSTON: I see. 7 CHAIRMAN DUNLAP: On that point, Ms. Brown, can 8 you help us with the math there for a moment? I think 9 that's what Dr. Boston is trying to get at. 10 Remember Chairman Imbrecht's comment about that? 11 MS. BROWN: I recall the mention of the 3 cents 12 capital recovery -- 13 CHAIRMAN DUNLAP: Okay. 14 MS. BROWN: -- as being -- 15 SUPERVISOR VAGIM: Close to 2 cenTs. 16 MS. BROWN: It was 2 to 3 cents. Again, that's 17 going to be something that varies by refinery and by 18 facility. 19 MR. SIMEROTH: Chairman Dunlap, I think part of 20 the confusion goes back to -- if the 32 cents is realized 21 for an entire year on the retail end, that would be $3 22 billion, which would be the recovery of most of the capital 23 on the investment that we estimated at $4 billion, and 24 other's have been slightly lower. 25 CHAIRMAN DUNLAP: Right. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 99 1 MR. SIMEROTH: But it would take an entire year 2 for that to happen, not in the past few weeks. 3 CHAIRMAN DUNLAP: Gene, I don't want to take words 4 out of your mouth, but it seems to me that Gene's trying at 5 how long one would expect to recover -- using a finite 6 number, how long a period of time based upon volume, that's 7 all, just to get a sense. 8 MR. SCHEIBLE: I think the difficulty is different 9 accounting techniques to pencil out their investments to see 10 whether they're worthwhile. The market controls how much 11 you get back out of it. 12 When we did our calculation, we assume a ten-year 13 recovery period. 14 CHAIRMAN DUNLAP: Okay. 15 MS. BROWN: It's not something we can address with 16 the data that we have, I guess, as another way of saying it, 17 on a company-specific basis. 18 CHAIRMAN DUNLAP: Dr. Boston, anything else? 19 DR. BOSTON: No. 20 CHAIRMAN DUNLAP: Okay. Yes, Mr. Parnell, and 21 then I'll come to you, Supervisor Roberts. 22 MR. PARNELL: My questions would be directed at 23 supply. And based on what we've heard today, we're hearing 24 that there are ample supplies at a price. 25 My concern with a question is, with respect to our PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 100 1 farmers, we have an $18 billion industry out here that 2 absolutely requires that they have adequate supplies of fuel 3 to get crops in the ground and that sort of thing. 4 Additionally, then, we heard that the ambiguity 5 that was presented by the Iraqi oil, whether it would or 6 would not enter system and what effect that might have on 7 your existing stocks -- the cost associated with your 8 existing reserves, can you speculate for me at all, if 9 that's resolved, how soon that might have an effect in the 10 marketplace? 11 MR. KIRACOFE: The Iraqi situation? 12 MR. PARNELL: The Iraqi situation. 13 MR. KIRACOFE: That would be pure speculation. I 14 think you can look in the Wall Street Journal's futures 15 pages, which would indicate future price expectations for 16 oil, which has some of that built in. That's a place where 17 the free market makes those bets. 18 My interpretation would be of no value. 19 MR. PARNELL: My situation is that I receive phone 20 calls on a regular basis from farmers who have great holding 21 capacity and intend to fill it when they can fill it when 22 the market is most advantageous. 23 Obviously, they've passed that window of 24 opportunity, and I suspect through the course of these 25 hearings we're going to get some impression of where we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 101 1 might see market conditions change so that they can 2 anticipate when the proper time to buy their diesel fuel 3 might be. 4 Can you shed any light there at all without -- 5 MR. KIRACOFE: Everybody has to make those 6 personal decisions on their own. They can look at 7 historical data. They can look at future price increases. 8 If people would care to and have the resources, 9 they could speculate on the futures market and lock in a 10 future price. 11 But any interpretation I would have of what's 12 going to happen in the future would be pure speculation and 13 of little value. 14 CHAIRMAN DUNLAP: Supervisor Roberts. 15 SUPERVISOR ROBERTS: Thank you, Mr. Chairman. 16 Mr. Kiracofe, could I ask you a couple of 17 questions, and I don't want to get into any of your specific 18 proprietary issues. 19 But, generally speaking, we have a presentation by 20 the Chairman of Energy Commission. He suggested six or 21 seven cents would be the contribution to this increase for 22 the reformulated gasoline. 23 Based on everything you know, is that in the ball 24 park? 25 MR. KIRACOFE: What I would have to say is that, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 102 1 the original CARB view of 5 to 15 cents price possibility 2 for different refiners, I believe, covers that spectrum, and 3 we are inside that envelope. 4 SUPERVISOR ROBERTS: Okay. Well, even if I took 5 the average of that, and then subtract that from the refiner 6 margin, I'm left with -- initially, I was left with 18 7 cents, but maybe I'm left with 15 cents. Is there any -- 8 there seems to be something wrong with the picture, and I 9 was wondering, is there anything you could contribute that 10 would help us to understand that? 11 MR. KIRACOFE: Well, only to the extent that -- 12 once again, all these markets are a function of supply and 13 demand. And in a situation where we don't have enough 14 production out here in the short term to meet the demand 15 needs, i.e. the supply is short, the price has to rise to 16 attract alternative -- either alternative production or 17 alternative volumes into the market. 18 If you go back and look at the spot markets say -- 19 as I mentioned earlier, you would see that the price for 20 CARB and for conventional gasoline have both risen 21 dramatically in Los Angeles. 22 Obviously, the conventional gasoline in Los 23 Angeles is for Las Vegas and Phoenix, an assumption, but it 24 is quoted there. 25 And it has risen just as dramatically as the CARB. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 103 1 And it has risen in an attempt by the market to attract 2 alternate volumes into the marketplace. 3 If we believe industry publications, that is 4 working. I believe Chairman Imbrecht reported this morning 5 that there were several cargoes that he has read about that 6 are coming to the West Coast. I have no direct knowledge of 7 those, but I read those in the Press, also, and would expect 8 that that's true. 9 SUPERVISOR ROBERTS: Well, help me. Then, it's 10 not the refiner's margin then that's really the missing 11 element here? 12 MR. KIRACOFE: It's a differential between the 13 price of crude and the price of product. Whether you call 14 that a refiner's margin or whether you call it the price of 15 crude in the marketplace and the price of an individual 16 product in the marketplace, I would take difference with how 17 that's characterized. 18 SUPERVISOR ROBERTS: Maybe I'll be able to at 19 subsequent testimony get to this, but let me ask one other 20 question. 21 Both you and the Chairman of the Energy Commission 22 came to the same conclusion, and that was that we shouldn't 23 do anything about this, because there might be something 24 unsettling on the marketplace, and the free economy, and 25 everything else. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 104 1 It's not clear to me. It seems to me, if there's 2 this enormous shortage, if we were to have access to other 3 supplies, nonreformulated gasoline that we'd allow in the 4 State, that that would take care of the shortage and perhaps 5 alleviate some of these increases. And yet, you say that 6 would be unsettling. 7 MR. KIRACOFE: Well, as I tried to say, the 8 market, the spot market for conventional gasoline in Los 9 Angeles is currently -- I'm going to quote a number, and I'm 10 not sure. This is yesterday's number. It was in the order 11 of 7 to 8 cents under CARB. 12 So, removal of -- that says that product is in 13 very short supply, also. Removal of the requirements for 14 CARB gasoline is not going to make large supplies available. 15 That price is high, also, trying to attract 16 conventional gasoline into that marketplace. 17 CHAIRMAN DUNLAP: Anything else, Ron? Anything 18 else? 19 SUPERVISOR ROBERTS: No. I'll come back to this. 20 SUPERVISOR VAGIM: Mr. Chairman, I have one other 21 point -- 22 CHAIRMAN DUNLAP: Let me ask a question. I 23 appreciate very much your coming. I know it takes some 24 courage, particularly with all the attention this issue's 25 has garnered lately. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 105 1 It might be, and you did -- you touched on it in 2 your presentation about what action you think we should 3 avoid. 4 Tell me, if you can, what you think we ought to be 5 about today on this issue? 6 Your counsel is to hold the line, keep the reg in 7 place. How can we affect all of these other factors? Is 8 there anything you see us as being able to have an impact 9 on? Or are we somehow tied to all of these factors that's 10 just taken us where it's going? 11 MR. KIRACOFE: My testimony comments are directed 12 at the economics of the situation. I guess I -- my giving 13 advice around the politics of the situation would be foolish 14 on my part. 15 CHAIRMAN DUNLAP: Not so much politics as policy 16 implications. I mean, how can we affect this beast? 17 MR. KIRACOFE: Well, I don't think, personally, 18 that you should affect the marketplace. What you should, in 19 my view -- personal view -- is by bringing the information 20 to the public, getting an understanding of what the price 21 effect of CARB is, CARB regulation in this, is what your job 22 is about. 23 I assume it's the Energy Commission's function, if 24 supply and demand were to stay out of balance for a longer 25 period of time and the marketplace couldn't correct, to come PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 106 1 up with ways to try and have that marketplace correction 2 take effect. 3 CHAIRMAN DUNLAP: Okay. One -- before I turn it 4 over to you, Supervisor Vagim -- one comment I'd make. It 5 seem, by reputation, ARCO has been a low-price leader, and I 6 acknowledge that. That is a positive thing and, 7 historically, that's been the case. 8 For what it's worth, I would encourage you to 9 remain so as things get tough. 10 MR. KIRACOFE: I would hope that you and the 11 audience find that our prices have been and will remain 12 aggressive in that in any environment. 13 CHAIRMAN DUNLAP: Thank you. Supervisor Vagim. 14 SUPERVISOR VAGIM: Just one point of notice. 15 During our staff report, they showed market price based on 16 December versus April 19th. And Phoenix, would you say, 17 primarily comes out of the L.A. market; is that correct? 18 MR. KIRACOFE: I believe it was testified earlier, 19 it comes out of the L.A. market and the West Texas market. 20 SUPERVISOR VAGIM: And they are 26 cents increase 21 versus California was 32, and that's a six cents 22 differential in CARB, basically, if you add it up that way. 23 Does the non-CARB fuel reach the -- 24 MR. KIRACOFE: I'm not sure I have those numbers 25 in my head. But that's an interpretation you could make. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 107 1 SUPERVISOR VAGIM: But yet, Phoenix was involved 2 in an impact of supply problem -- West Texas and the 3 Southern California refineries. Yet, Portland, which was 4 serviced by -- a lot of their fuel comes out of Washington 5 State, I understand, and California -- was only at 19 cents. 6 So, you still have a 7 or 8 cents kind of where 7 did it all come from. Was it a primarily -- a supply 8 dilemma in which we had some anomalies, and the downed 9 refineries, and that kind of thing. 10 MR. KIRACOFE: It's a supply dilemma coupled with 11 the low inventories everybody was trying to carry, and it 12 continues to try to carry. 13 SUPERVISOR VAGIM: The question I've got is, in 14 that trying to carry low inventories, I understand that the 15 reserves, the national reserves were let drop by the majors, 16 primarily with the anticipation of Iraqi oil coming into the 17 marketplace. 18 Thus, they would be able to have much cheaper 19 crude versus having to go buy higher; is that correct? Our 20 reserve level dropped; is that --- 21 MR. KIRACOFE: Well, you can think about it in 22 terms of buying at a later date or you can think in terms of 23 the value. All the inventory that you have in place is 24 devalued instantly when the price of crude oil goes down. 25 SUPERVISOR VAGIM: But if you didn't have this, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 108 1 let's say, uncertainty of whether Iraqi oil will be there or 2 not, I presume the major would have combined the same crude 3 as they had over the years; that the inventory or reserve 4 problem would not have been where we are today. 5 MR. KIRACOFE: If the crude oil markets had been 6 in sort of a normal pattern, the expectation would be that 7 there would be higher inventories of both crude oil and 8 product. 9 So, that's where it begins, that anticipation. 10 That would be my belief, yes, sir. 11 SUPERVISOR VAGIM: The question is: Did we really 12 win the Gulf War? 13 CHAIRMAN DUNLAP: That's a rhetorical question, 14 Supervisor. 15 Ms. Edgerton, followed by Mr. Lagarias. 16 MS. EDGERTON: Mr. Kiracofe (pronouncing)? 17 MR. KIRACOFE: Kiracofe. 18 MS. EDGERTON: Kiracofe, I'm sorry. 19 Could you inform this Board, please, about the 20 steps, if any, that you took to clarify with the public your 21 revised opinion that it wasn't -- that the increase was not 22 due to the CARB fuel? 23 It's my understanding that -- of what Mr. 24 Imbrecht's said, you first had an announcement that you were 25 going up nine cents because of the CARB fuel. And then you PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 109 1 retracted that? 2 And I would appreciate your -- I'm sure that 3 you've been quite cooperative in trying to make that clear 4 to the public, but I would appreciate your informing me of 5 the steps that you've taken to clarify that. 6 MR. KIRACOFE: The announcement that was -- that's 7 being -- has been referred to several times this morning was 8 an announcement to our dealers. 9 It was not meant in any case to be a public 10 pronouncement. And in our internal view, it was only one of 11 several factors that were occurring in the marketplace that 12 caused us to take that price increase at that time. 13 When we found out that this announcement had been 14 made public, we followed it up relatively quickly with a 15 more detailed explanation to the same people who had gotten 16 the first announcement -- our dealers who, in many cases, 17 are our interface with the public, trying to explain a lot 18 of the facts that I've tried to explain today as to what is 19 happening to the price of gasoline in the marketplace, and 20 that CARB was just one of the facts. 21 CARB costs was just one of the factors involved in 22 the recent run-up in prices. 23 MS. EDGERTON: Thank you. So, I have a follow-up 24 question, because I have gotten this question myself. A 25 consumer asks me about the increase in price attributable to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 110 1 the CARB fuel. 2 And I say, for example, that one of the 3 refineries, or two of them, had some manufacturing 4 difficulties and that prices, therefore, went up. 5 And this consumer is very astute and says, "Well, 6 then, why didn't they come back down?" 7 Can you tell me what you would say there, now that 8 you only had your manufacturing down for 12 days? 9 I have my own answers. I think -- I've learned 10 enough to have my own answers. 11 But I'd be interested in knowing what you're 12 saying to the public. 13 MR. KIRACOFE: Well, it's -- in any individual 14 refiner's case, it's immaterial. It's the aggregate of the 15 supply and the aggregate of the demand. 16 For example, when we talk about refinery margin, a 17 refinery that isn't producing product is making no margin. 18 That's only available to people that are operating. 19 So that, in the case of when you have a problem 20 and you come back up, you price your product in the 21 marketplace. On a day-to-day basis, you have to -- you have 22 to set a price that will allow the marketplace to move your 23 product out then to the end -- to the consumer, be it 24 diesel, be it CARB gasoline, be it jet fuel, or any other 25 refinery product. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 111 1 And I guess the expectation that Chairman Imbrecht 2 said, I would not take -- I would not disagree with, is that 3 once all supplies were available, then you would expect the 4 market and the marketplace to have plenty of supplies, and 5 it would correct itself. 6 MS. EDGERTON: Thank you. 7 CHAIRMAN DUNLAP: Mr. Lagarias. 8 MR. LAGARIAS: Mr. Kiracofe, my question is really 9 to Mr. Imbrecht. We've been focusing on gasoline and 10 diesel, but those are energy sources. And with this change 11 in gasoline and diesel prices, have we noticed any 12 difference in alternative fuels? 13 Have they been tracking on a BTU basis -- natural 14 gas, coal -- or is this unique to the oil industry alone? 15 CHAIRMAN IMBRECHT: I'm trying to activate this 16 microphone. 17 Actually, natural gas prices are up somewhat. But 18 for some time, gas and oil, which historically in the past 19 have tracked almost simultaneously, have been decoupled, 20 largely because of the fact that they now are utilized in 21 very, very different markets. 22 The other alternative fuels don't have large 23 market penetration. But because they use entirely different 24 feedstocks, we have not seen commensurate increases in their 25 prices. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 112 1 I would just note for you, during the run-up on 2 the Gulf War, it was an interesting phenomenon that the 3 least expensive transportation fuels available in those 4 stations that offer it happened to be M85, or methanol. 5 And I would expect that that same circumstance 6 would occur today as well. 7 So, the answer is, this is largely a petroleum 8 focused phenomenon. 9 MR. LAGARIAS: But the reason I asked that 10 question is we've been hearing that a large of the price 11 increase is attributed to worldwide prices of the crude. 12 And that's an energy source. 13 I would think that coal and gas prices would be 14 reflected on that, unless this is unique. 15 CHAIRMAN IMBRECHT: That used to be the case when 16 fuel switching was a possibility in most of the end-use 17 applications. 18 But largely because of a variety of different 19 factors, fuel switching is just simply not the situation 20 that existed as it did in the past. 21 For example, in the past, natural gas and fuel oil 22 were both used in electric generating facilities here in 23 California. And today, because of air quality 24 considerations, fuel oil is essentially nonexistent. Less 25 than one percent of our electricity comes from fuel oil. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 113 1 So, as a consequence, as I said, the end-use 2 markets are entirely different today than they were, let's 3 say, 20 years ago. 4 And, as a consequence, the coupling that existed 5 in the past in terms of prices has ended and has, frankly, 6 been nonexistent for the better part of the last decade. 7 MR. LAGARIAS: Well, what I'm seeking -- is this 8 opening a window for alternative fuels in California? 9 CHAIRMAN IMBRECHT: If these prices continue, in 10 my judgment, it clearly would. And I know this won't be 11 popular with some of my friends in the petroleum industry, 12 but it's important to say that, if we had been more 13 successful in terms of diversifying the transportation fuel 14 mix in California, clearly, we would -- in my judgment -- 15 see some natural market restraint, because we would have 16 fuel on fuel price competition. 17 That's something that we have believed would make 18 sense from an economic standpoint for some period of time. 19 It has been difficult to do because of the low gasoline 20 prices that we've had for the last decade or so. 21 But if the prices stay high, clearly, it makes the 22 other alternatives much more competitive, if not much more 23 attractive for other reasons as well. 24 MR. LAGARIAS: Well, we've been even-handed in our 25 approach to fuels from a pollution point of view, their PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 114 1 contribution to pollution. 2 But it would seem that we have to consider our 3 alternatives as well, and maybe change expectations. 4 CHAIRMAN IMBRECHT: Well, you know, it's -- low 5 prices allow all of us to get complacent about these issues. 6 I want to make it clear that I don't welcome the 7 circumstances that find us meeting here on these issues 8 today. 9 But at the same time, I think it does underscore 10 the fact that our transportation sector, which is 11 responsible for over half of the total energy demand in 12 California, is about 99 percent dependent on a single fuel 13 feedstock. 14 And when you see the price increases, as we've 15 experienced, it illustrates how relatively vicarious our 16 circumstances actually are. 17 MR. LAGARIAS: Well, we're making a great case for 18 the electric vehicle and the bicycle. 19 Thank you. 20 (Laughter.) 21 CHAIRMAN DUNLAP: Thanks, Mr. Imbrecht, for those 22 insightful comments. It helped. 23 Yes. Ms. Edgerton, followed by Supervisor 24 Roberts. 25 Lynne, hold on one moment. Do we have any more PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 115 1 questions for the witness? 2 SUPERVISOR ROBERTS: I do. 3 CHAIRMAN DUNLAP: Hold on. Our court reporter's 4 changing tape. 5 (Thereupon, there was a pause in the 6 proceedings to allow the reporter to 7 replenish her Stenograph paper.) 8 CHAIRMAN DUNLAP: We're going to ask Mr. Kiracofe 9 and his colleagues to stay close during the hearing, for the 10 duration of the hearing. And if they're able, we can get 11 back to them if we need to. 12 Supervisor Roberts, please. 13 SUPERVISOR ROBERTS: Thank you. 14 Mr. Kiracofe, again, I'm trying to get to the 15 bottom of something here. You said you bought fuel on the 16 spot market for 12 days? 17 MR. KIRACOFE: During that period. 18 SUPERVISOR ROBERTS: Something in the neighborhood 19 of 12 days. And we've got -- I didn't hear you raising any 20 concerns over the analysis that Mr. Imbrecht gave us, and 21 generally is -- are you in agreement with -- 22 MR. KIRACOFE: Just generally, yes. 23 SUPERVISOR ROBERTS: -- the breakdown. And you 24 said that the reformulated gas might be in the neighborhood 25 of 5 to 15 cents a gallon? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 116 1 MR. KIRACOFE: I said I agreed with the CARB 2 initial analysis, yes. 3 SUPERVISOR ROBERTS: Okay. If I took his refiner 4 margin of 25.1 cents per gallon, and I took that range then, 5 that leaves something between 10 and 20 cents a gallon 6 unaccountable. 7 Is it inconceivable that 12 days of buying fuel on 8 the spot market could account for a 10 to 20 cents a gallon 9 increase in cost? 10 MR. KIRACOFE: Well, we're mixing things here. 11 We've bought both diesel and CARB gasoline on the spot 12 market. 13 We are not the only purchasers. And, in fact, I 14 would guess we are not even the major purchaser that is 15 driving that market. 16 SUPERVISOR ROBERTS: But I'm trying to understand 17 why we are having a 25 cents per gallon increase attributed 18 to that section of this process. 19 And, basically, you told me it was the spot market 20 when we talked earlier. 21 And I'm asking you, if it's the spot market, and 22 the CARB is where you say it is, the RFG, and the other 23 factor is the spot market -- and Mr. Imbrecht can't tell me 24 why that's increasing, and you are telling me it's the spot 25 market, how does 12 days of buying on the spot market PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 117 1 account for 20 to -- 10 to 20 cents a gallon increase? 2 MR. KIRACOFE: If you're asking whether I believe 3 our 12 days of buying on that market created that amount of 4 increase, I would have to answer no. 5 Whether, if you're asking me does -- can 12 days 6 of buying by any number of people from sellers who have 7 product,, in their belief of short supply, can that raise -- 8 it can raise the price that much in a day. 9 SUPERVISOR ROBERTS: Do we -- what do we know 10 about the history of the spot market prices? Do we have 11 information on that? 12 CHAIRMAN IMBRECHT: Yes, we do. I don't have it. 13 Ms. Brown may be able to help. 14 CHAIRMAN DUNLAP: Ms. Brown or Mr. Simeroth? 15 MS. BROWN: Specifically, you're asking for spot 16 prices which tend to track retail prices? We have a number 17 of charts for both gasoline and diesel. They have tracked 18 upward consistent with the charts that Mr. Simeroth and we, 19 through Chairman Imbrecht's presentation, presented. 20 Is there a specific question that I might respond 21 to, Supervisor Roberts? 22 SUPERVISOR ROBERTS: Well, I'm trying to figure 23 out here -- there seems to be a lack of explanation for this 24 25.1 cents per gallon increase. 25 It's the most significant increase, according to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 118 1 Mr. Imbrecht. And Mr. Kiracofe's not disputing that. So, 2 I'm trying to find -- I'm really trying to find out how 3 could that occur when each of them are agreeing that the 4 reformulated gas still leaves a lot to be explained. And 5 I'm looking for that explanation. 6 Mr. Kiracofe suggests at least some of it lies in 7 the spot market. And so, I'm trying to see if there's been 8 some incredible change in the spot market where a few days' 9 worth of buying might affect these prices in the way he's 10 suggesting. 11 MS. BROWN: Based on the data available to us, 12 we're not in a position to explain it. I think that that is 13 a mystery as well, which Chairman Imbrecht raised in his 14 testimony, that there are certain components of refinery 15 margin that we can explain that are known and there are 16 others that are not known. 17 SUPERVISOR ROBERTS: Well, I guess I thought that 18 was the whole point of today; he's going to explain what's 19 going on here, and -- 20 (Applause from the audience.) 21 MS. BROWN: Yes. Your question is well taken. 22 CHAIRMAN IMBRECHT: Supervisor Roberts, the point 23 that I was trying to make is I don't, frankly, believe that 24 it is either our obligation or prerogative to explain that 25 differential. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 119 1 I think that it is appropriate that you address 2 those questions to the industry. 3 SUPERVISOR ROBERTS: Well, I'm trying, and I'm 4 just trying -- 5 CHAIRMAN IMBRECHT: The bottom line is we can't 6 explain it either. And what we've tried to do is identify 7 for you where the various components of the increase are and 8 those which we can tie down as clearly as we can. 9 And that is, in our judgment, the piece that is, 10 to some extent, the black box. 11 CHAIRMAN DUNLAP: Supervisor Roberts, there are 12 another 10 oil company -- 13 SUPERVISOR ROBERTS: Yeah, I don't -- 14 CHAIRMAN DUNLAP: -- representatives here. 15 SUPERVISOR ROBERTS: -- I don't want to hog this. 16 CHAIRMAN DUNLAP: No, no, I'm just saying that 17 perhaps -- 18 SUPERVISOR ROBERTS: I just never felt that 19 anybody's helping me to get to even forming the question of 20 where this missing ingredient is here. 21 Because that didn't come out of any presentation 22 so far. And I, with all due respect to the Energy 23 Commission, I mean, I'm hearing things like now it's the 24 spot market. 25 But there's a big gap in here that nobody has PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 120 1 explained yet, and nobody wants to focus on. And it seems 2 to be in this category called "refiner's margin." 3 MR. KIRACOFE: Can I just make -- 4 CHAIRMAN DUNLAP: Certainly. 5 MR. KIRACOFE: -- one comment? Prices on any 6 given day are not set by costs to make a product across any 7 number of commodities. They're set by what it -- what the 8 cost is to obtain that product, not the base cost. 9 And what you're seeing happen in this marketplace 10 is the fact that the prices have had to rise to supply this 11 market to a point to attract end product from other 12 locations, giving -- to attract in that product, you have a 13 time variable. And we've talked about how people are 14 concerned about what's going to happen to their inventory if 15 it takes three weeks to sail a ship here, and the price 16 drops significantly in that three weeks, they've lost. So, 17 they have that part of it. 18 And that price is what is the clearing price of 19 this product. 20 Now, over time, ourselves, our competitors make 21 investment decisions, will make long-term operating, will 22 make shutdown or start-up decisions based on cost recovery. 23 But in our operation on a day-to--day basis, it's 24 simply a matter of what is the marketplace demanding for our 25 product. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 121 1 CHAIRMAN DUNLAP: Mr. Kiracofe, you do understand 2 that the reason this issue has so much attention is people 3 want answers. 4 And what we've tried to do is the responsible 5 thing, with respect to a body of this nature and public 6 policy, is find out where our impact is on price. 7 We've gotten, at least thus far, a pretty clear 8 read. There seems to be consensus. 9 You've affirmed Ms. Imbrecht's findings on the 10 range. We're trying to understand. We are not experts as 11 to what's going on in the marketplace. But we do know one 12 thing. Our phones are ringing off the hook with people 13 asking us to explain it to them. 14 So, the nature of the inquiries today are not so 15 much to box you in as an individual company representative, 16 but to understand the big picture so that we might respond 17 and tell the public what our part is, what the market's part 18 is, and what individual companies' pricing strategies are in 19 general. 20 And that's what we're trying to get at here. So, 21 what I'd like to do is thank you for your time. You've been 22 on the hot seat a while now. I'd like to move on with the 23 witness list, with the exception of Mr. Calhoun, who 24 seemingly a question. 25 MR. CALHOUN: I can't resist asking this question, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 122 1 Mr. Kiracofe. 2 Based on your last statement, it suggests to me 3 that there's no direct relationship between cost and price. 4 And the statement that you made is that, on any given day, 5 the cost of -- what your costs are don't really determine 6 what your prices are; is that correct? 7 MR. KIRACOFE: There is obviously a long-term 8 direct relationship -- direct relationship between cost and 9 price. But I'm saying, on any given day, if the futures 10 market drops the price of oil about $5.00 a barrel tomorrow, 11 which it could do -- 12 MR. CALHOUN: Right. 13 MR. KIRACOFE: -- and the prices dropped because 14 of that, the cost hasn't been involved in that relationship. 15 Our marketplace has been involved in that relationship. 16 And that's what I'm trying to relate, and I do not 17 want to seem defensive about this, but you can't try and add 18 up all the cost components and come to an answer for a 19 problem that's occurring over a one-month to 45-day period, 20 because there are other factors in the marketplace at work. 21 The marketplace will cure that, also. When that 22 is, I'm not sure, but it will cure it. 23 MR. CALHOUN: Thank you. I have no further -- 24 CHAIRMAN DUNLAP: Okay. Thank you, Mr. Kiracofe. 25 What I'd like to do is move through one more PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 123 1 witness and then break for lunch. 2 MS. EDGERTON: Can I ask Mr. Imbrecht one 3 question? 4 CHAIRMAN DUNLAP: Certainly. 5 MS. EDGERTON: Mr. Imbrecht -- 6 CHAIRMAN DUNLAP: Mr. Imbrecht, we have a question 7 for you. While you're up, just go to the podium, Chuck. 8 That'll be fine. 9 MS. EDGERTON: If I understood you correctly, you 10 said that the electricity market is not experiencing the 11 same price fluctuations as the oil market, petroleum market. 12 CHAIRMAN IMBRECHT: That's correct, because thus 13 far, we don't see a reflection in natural gas prices that is 14 a reflection of petroleum price increases, nor do I expect 15 that that would occur, largely because of the fact that the 16 natural gas market here in California today enjoys a level 17 of competition that is historically unique. 18 Today, we have gas supply pipelines that reach 19 into five major supply basins in the Western part of North 20 America, ranging from Alberta, Canada down through West 21 Texas. And the net result is that we have gas on gas price 22 competition to service the California market. 23 And it's that very same kind of market restraint 24 that we believe would be appropriate in the transportation 25 sector if we could indeed induce an adequate level of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 124 1 competition from other fuel sources. 2 MS. EDGERTON: And if I understand correctly, in 3 the electricity market as well, what -- well, I'll ask you. 4 What percentage of the electricity that we have in 5 our State is from renewables? 6 CHAIRMAN IMBRECHT: About 20 percent. 7 MS. EDGERTON: About 20 percent. And what percent 8 of that -- 9 CHAIRMAN IMBRECHT: Far and away the largest in 10 the world, I might add. 11 MS. EDGERTON: The largest in the world. And of 12 that, what is that, about 10 percent cogeneration and the 13 balance is the other four? 14 CHAIRMAN IMBRECHT: Geothermal, wind, solar, and 15 biomass. 16 MS. EDGERTON: So, the renewables are helping us 17 as well to keep the competition -- 18 CHAIRMAN IMBRECHT: We have the most diversified 19 electric generation system in the world in California. 20 MS. EDGERTON: And I'd like -- 21 CHAIRMAN IMBRECHT: And that diversity represents 22 an insurance policy against price spikes in any given fuel 23 source or technology. 24 That's been the philosophy that has driven energy 25 policy in this State for the last 20 years. And we have PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 125 1 been successful in all of the arenas of energy consumption 2 with the exception of transportation. 3 MS. EDGERTON: And I have one final remark. And 4 that is to note that a lot of the success that we've had 5 with respect to renewables and world leadership on 6 renewables has been attributable to your leadership of the 7 California Energy Commission. 8 And I think that Californians can thank you, also, 9 for having stable electricity today. Thank you. 10 CHAIRMAN IMBRECHT: That's very kind. Thank you. 11 CHAIRMAN DUNLAP: Looking at our next witness, 12 which will be Shell, and we're going to need some time to 13 discuss with them some of the troubles they've had, I'd like 14 to break now for lunch. 15 We'll reconvene a little after one o'clock. So, 16 we'll stand in recess. 17 (Thereupon, the luncheon recess was taken.) 18 --o0o-- 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 126 1 AFTERNOON SESSION 2 --o0o-- 3 CHAIRMAN DUNLAP: If I can get you to take your 4 seats, we'll begin. 5 I'm going to call the next five witnesses forward. 6 Lyle Sims from Shell; Al Jessel, Chevron; Dennis Lamb, 7 Unocal; Chuck Walz, Texaco; Chuck Morgan, Mobil. 8 Mr. Sims, good afternoon. 9 MR. SIMS: Good afternoon. I'm Lyle Sims, Vice 10 President and Chief Operating Officer of the Shell Martinez 11 Refining Company. 12 I'd like to thank you for inviting me to speak 13 here today. 14 First, let me assure you that Shell remains 15 committed to supplying our customers with competitively 16 priced products that meet the environmental needs of the 17 State of California. 18 We understand the Board's and the public's concern 19 over the recent increase in the price of refined products 20 here in California. 21 As people have said this morning, these factors -- 22 or the price increase is due to a number of factors. And 23 I'll speak to some of those today. 24 Since January the 1st, the wholesale price of 25 motor gasoline at the pump has risen about 32 cents per PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 127 1 gallon. 2 Among some of the reasons that there's been that 3 increase is the supply tightness talked about -- that has 4 been brought on by refinery operating problems, a strong 5 regional demand for gasoline, combined with the industry 6 operating at near capacity, high manufacturing costs due to 7 rising crude oil prices, and the transition to Cleaner 8 Burning Gasoline. 9 In addition to the operating problems at other 10 companies, on Monday, April 1st, Shell's Martinez refinery 11 experienced a fire that forced a shutdown of our light oil 12 processing unit, which essentially reduced our gasoline 13 production to zero. 14 Unfortunately, the incident in Martinez occurred 15 during a period when other West Coast refiners were also 16 experiencing operational difficulties, and the industry was 17 in the final stages of preparation for the changeover to 18 Cleaner Burning Gasoline in California. 19 Inventories of conventional gasoline were drawn to 20 very low levels as tanks were prepared for the changeover to 21 Cleaner Burning Gasoline. 22 Shell is doing all that we can to alleviate our 23 supply problems. Immediately following the fire, we began 24 initiating alternate supply arrangements. Short-term, these 25 include increased production from our Anacortes refinery of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 128 1 California clean fuels, our purchasing of products from 2 other refiners and suppliers. 3 On the longer-term basis, these include purchases 4 from foreign refineries. 5 Shell is doing everything in its power to restore 6 normal operations to the Martinez facility, consistent with 7 our practice of operating in a safe and environmentally 8 sound manner. 9 By this weekend, we anticipate having all but two 10 units back to normal operation, and we'll be able to meet 11 the majority of customer demand for our own products -- from 12 our own production. 13 We're working to expedite repairs to the remaining 14 two units, and expect to have them returned to operation by 15 June. 16 I would now like to address some of the other 17 factors that have contributed to the market tightness and 18 higher product prices on the West Coast. In the first 19 quarter of 1996, demand for oil products was very strong in 20 the United States, especially in the Western States. 21 The Department of Energy reported that motor 22 gasoline deliveries in the Western States increased 9.9 23 percent in January compared to January of 1995. For the 24 first quarter, as a whole, it's estimated that gasoline 25 deliveries were 4 percent higher than a year ago. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 129 1 The total oil-product deliveries were 6.3 percent 2 higher than last year. During the same period, API data 3 shows that West Coast capacity utilization was operating at 4 the highest level in more than five years. 5 The Western States have historically been fairly 6 well balanced in terms of meeting local demand from local 7 supplies. 8 When a disruption occurs, product must be imported 9 from other refining centers. In order to attract product 10 from other parts of the world, prices must rise by at least 11 the cost of transportation. 12 For example, the cost of transporting gasoline 13 from the Caribbean refineries to the West Coast is about 8 14 cents per gallon. Typically, product imported into the West 15 Coast from the rest of the United States and overseas 16 represents only 5.6 percent of consumption. 17 However, the supply situation during the first 18 four months of 1996 was not typical. 19 Another factor influencing wholesale gasoline 20 prices is the higher manufacturing cost associated with 21 California's Cleaner Burning Gasoline. The California Air 22 Resources Board and California Energy Commission have 23 previously estimated the cost of producing of Cleaner 24 Burning Gasoline as between 5 and 15 cents per gallon, as we 25 heard earlier today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 130 1 This is borne out by the recent 10 cents per 2 gallon difference in the spot price of Cleaner Burning 3 Gasoline over the conventional gasoline in California. 4 In addition to the higher cost associated with 5 producing Cleaner Burning Gasoline, refiners have also been 6 faced with a significant increase in raw material costs. 7 The price of crude oil has been climbing since the 8 beginning of the year as a result of high demand, tight 9 supplies, and uncertainly, particularly around whether the 10 U.N. would lift sanctions on Iraqi oil. 11 The International Energy Agency estimated that, in 12 the first quarter, global demand for all oil products 13 averaged 73 million barrels per year -- per day, an increase 14 of 1.7 million barrels per day over the first quarter of 15 1995. 16 To meet the soaring product demand, refinery runs 17 were sustained at all time seasonal highs in Europe, the Far 18 East, and the United States. 19 High refinery runs increase refiners' demands for 20 crude oil and put upper pressure on crude prices. 21 The unusual in the first quarter influenced crude 22 oil supply as well as demand. The general perception of 23 global crude supplies is one of surplus. OPEC produced an 24 average of 26 million barrels per day in the first quarter. 25 This was 1.7 million barrels above their quota PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 131 1 system. Expectations were that, with OPEC's overproduction 2 and a forecast surge in non-OPEC production, that there 3 would be sufficient supplies to meet even extraordinary 4 winter demands. 5 However, production from new North Sea fields were 6 delayed and stormy weather disrupted supplies from Canada, 7 Mexico, and Australia, as well as the North Sea and Alaska. 8 In order to continue to meet consumer demands, 9 refiners were required to draw down stocks, which were 10 already lean as a result of the currently significant 11 financial risk associated with holding high crude 12 inventories. 13 As a result of these tight market conditions, some 14 crude prices -- crude oil prices rose by as much as $8.00 15 per barrel during the first quarter. Here on the West Cost, 16 the price of Alaska North Slope crude increased from a low 17 of $16.20 per barrel at the end of January to $22 per barrel 18 on April the 19th. 19 The $6.00 per barrel increase contributed to a 14 20 cents per gallon rise in the cost of refined products. 21 The events that have led to the supply tightness 22 on the West Coast are unusual and are temporary. It's very 23 difficult to predict what will happen to the price of crude 24 oil and petroleum products. In the past, prices have 25 stabilized or declined when the supply deficiency was PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 132 1 corrected. 2 Let me close by reiterating that Shell has 3 supported and will continue to support the efforts of 4 California to meet clean air standards with cleaner burning 5 fuels; that we remain committed to supplying our customers 6 with competitively priced product which meets the 7 environmental needs of the State of California. 8 Thank you. 9 CHAIRMAN DUNLAP: Thank you, Mr. Sims. I 10 appreciate your attendance here today. 11 Could you say anymore about the challenges you've 12 had at your Martinez facility? I know you've been working 13 diligently to bring that facility up on line. Can you 14 personalize or humanize that a bit more for us? 15 MR. SIMS: We've been very busy. The fire that we 16 had on April 1st predominantly was in two hydrotreating 17 areas of two small units. The problem was that it also 18 affected a pipe rack and some instrumentation that went 19 through connecting units. 20 We've wired around that now, and we've got some 21 production of gasoline at this point. By this weekend, we 22 will have the vast majority of it. That, combined with the 23 increased production that we have generated out of our 24 refinery in Washington and the purchases that we've made 25 offshore, will give us a balance that covers our customers' PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 133 1 needs. 2 CHAIRMAN DUNLAP: Okay. You represent -- maybe 3 it's best to direct it to Mr. Scheible. I don't know. 4 What percent of the CBG market does Shell 5 represent? 6 MR. SIMEROTH: Chairman Dunlap, it's approximately 7 10 percent. 8 CHAIRMAN DUNLAP: Statewide market, North 9 California, it's what? 10 MR. SIMEROTH: We're about half of the supply, so 11 it would be about twice that. 12 CHAIRMAN DUNLAP: Okay. All right. Very good. 13 Any questions of our witness? Mr. Lagarias. 14 MR. LAGARIAS: Mr. Sims, I could see the smoke 15 from Walnut Creek where I live from your refinery. 16 MR. SIMS: Yes, sir. 17 MR. LAGARIAS: Did the Bay Area District take any 18 action as a result of that fire? 19 MR. SIMS: There have been a number of 20 investigations. We did receive some citations, nuisance 21 citations from the district. There were no toxic hazardous 22 materials released as a result of that. There hasn't been 23 anything like that. 24 OSHA, of course, has been in it as part of the 25 investigation, along with our own internal investigation. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 134 1 MR. LAGARIAS: And the most recent fire, which I 2 think was in some kind of a drainpipe -- 3 MR. SIMS: Right. 4 MR. LAGARIAS: -- has that been corrected? 5 MR. SIMS: We're in the midst of doing that, and 6 that's what will get these units up this weekend. 7 MR. LAGARIAS: Thank you. 8 CHAIRMAN DUNLAP: Mr. Sims, If I might, do you 9 have a perspective -- some have commented -- in your 10 industry -- have commented about the fact that if the Board 11 were to take certain types of action regarding this new 12 program, that it would be bad, it would cause problems for 13 them, and would send mixed messages. 14 Do you have any views on any such options? 15 MR. SIMS: Our great concern, I guess personally, 16 is that by overemphasizing a problem that I think is in 17 balance now, you could actually create a problem. You could 18 create an hysteria in the public's mind. You could create 19 an hysteria through the media's coverage that got every 20 consumer to rush out and fill their car up. 21 That would be a very bad thing to do. It would 22 move the inventory into cars, and you would generate a false 23 shortage as a result of that. I know I can only speak for 24 our company. We have supplies for our customers, our normal 25 needs that we have. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 135 1 And I think your material balances show very 2 little imbalance right now within the State. And there are 3 imports coming into the State, which weren't mentioned in 4 that balance of flow. 5 So, I think that you've got a supply and demand 6 situation that got disconnected. It's coming back together 7 again. You could potentially do more harm than good if you 8 weren't careful. 9 CHAIRMAN DUNLAP: Okay. Supervisor Vagim. 10 SUPERVISOR VAGIM: Yes. Thank you. 11 Perhaps you said this, but pardon me. But when 12 will you be up to 100 percent of production capabilities? 13 MR. SIMS: That will be in June. 14 SUPERVISOR VAGIM: June. 15 MR. SIMS: Right. 16 SUPERVISOR VAGIM: It was testified today by 17 Chairman Imbrecht that you have 160,000 barrel a day plant? 18 MR. SIMS: I can't comment on my capacity. 19 SUPERVISOR VAGIM: But if you're up to full 20 capacity in June, where are you right now, percentage? 21 MR. SIMS: After this weekend, we will have the 22 majority of our production; that, along with the increased 23 production that we, you know, boosted in our Washington 24 refinery, as well as ships that we chartered. 25 As soon as the event happened, we went out and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 136 1 bought gasoline and chartered ships. And one of those ships 2 is due -- we've received one cargo. A cargo is due this 3 weekend, and then there's one due in a few weeks. 4 So, we've got them staged out. When you add all 5 that up, it covers our customer base. 6 SUPERVISOR VAGIM: How much -- what percentage did 7 you have to go out, during the time when you were down, to 8 the spot market? 9 MR. SIMS: Well, when we were down, as far as what 10 came out of our location, we were a hundred percent down for 11 a short period of time. So, part of that came out of 12 inventories that we drew down and part of it came out of 13 purchases in the spot market from other California 14 suppliers, because that was the only place you could get 15 stuff fast. 16 Part of it was from the Anacortes Refinery that we 17 have, and then the longer-term deliveries of these ones that 18 come from a distance. I takes some time to get here. 19 SUPERVISOR VAGIM: Did you sell any on the spot 20 market? 21 MR. SIMS: I don't know if we sold any. I think 22 we were mostly buying. 23 SUPERVISOR VAGIM: Well, if you did, would that 24 indicate, though, that you didn't really rely on inventories 25 as much as perhaps utilizing the spot market as somewhat of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 137 1 a vehicle of commodity trading. 2 MR. SIMS: I don't quite understand your question. 3 SUPERVISOR VAGIM: Well, you had short supplies 4 and you were down, and you have your own inventory. But 5 then you sell some of your inventory on the spot market, 6 wouldn't that indicate that perhaps the spot market was a 7 lucrative place to be? 8 MR. SIMS: I don't know necessarily, because our 9 centralized office does all their buying and selling. But 10 you could have a situation where, in one place, you have an 11 oversupply and another place you had an undersupply, and you 12 didn't have a way to deliver it between those two. 13 So, you might have a neighbor who was short and 14 might buy from you. And, on the other hand, you were over 15 here buying from somebody else. And they're geographically 16 placed so that you cannot transport them between them. So, 17 you -- there are times where you simultaneously doing that. 18 And I don't know from this time period whether we 19 were or weren't. But it's certainly possible because of 20 that transportation system issue. 21 SUPERVISOR VAGIM: Was there a significant amount 22 of discussion amongst the refiners during this period? 23 MR. SIMS: We go to jail if we discuss anything 24 with each other, because of the Sherman Antitrust Act. So, 25 we do not -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 138 1 SUPERVISOR VAGIM: You said there was -- 2 MR. SIMS: -- do that. 3 SUPERVISOR VAGIM: You said there was no 4 collusion. 5 (Laughter.) 6 MR. SIMS: I can't speak for everybody else. But 7 I know I didn't. 8 (Laughter.) 9 SUPERVISOR VAGIM: Thank you. 10 CHAIRMAN DUNLAP: Any other? Supervisor Roberts 11 and then Ms. Edgerton. 12 SUPERVISOR ROBERTS: Mr. Sims, when you buy from 13 the spot market, you said, when you did that, it was 14 basically other California refiners? 15 MR. SIMS: Uh-huh. 16 SUPERVISOR ROBERTS: Is that generally the case? 17 MR. SIMS: Generally the case for the spot market. 18 One of the comments earlier this morning implied that 19 there's some other market out there, there's some place that 20 has gasoline other than somebody that's here. 21 And there really isn't. It's what inventory there 22 is. That is the spot market. The spot market is just a way 23 of describing that thing. If three people have gasoline and 24 one person doesn't, you go to him and say, "Can I buy 25 gasoline?" And you get whatever the lowest price you can PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 139 1 get out of that, and that defines the spot market. 2 SUPERVISOR ROBERTS: Right. 3 MR. SIMS: But they're really pulling out of their 4 inventory. It can be everything from people who have 5 speculatively bought gasoline and put it in tankage. It can 6 be people who have -- who are manufacturers who have extra 7 inventory. 8 So, it can be a variety of people. It's not just 9 the manufacturer that has that inventory. 10 SUPERVISOR ROBERTS: But generally speaking, it's 11 California dealers going back and forth between one another? 12 MR. SIMS: Right. 13 SUPERVISOR ROBERTS: The refiners. 14 MR. SIMS: For one thing, you're inhibited in a 15 couple of ways. The specifications of gasoline is one 16 inhibition. The other is time. 17 If there are not connections that rapidly move 18 gasoline from one part of the world to another, or one part 19 of the country to another; so, the West Coast is somewhat 20 isolated by delivery systems. So, there's a lot of internal 21 movement of products, but not much coming in. 22 But if the price gets high enough, it gets on 23 ships and -- 24 SUPERVISOR ROBERTS: Okay. 25 MR. SIMS: But generally speaking, you've got a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 140 1 buyer and seller, and they're both companies that are here. 2 SUPERVISOR ROBERTS: Right. And so, if the price 3 goes way up, the downside is one guy is paying that price; 4 but the positive side -- is somebody else receiving all that 5 money? 6 MR. SIMS: Yeah. There's a -- you know, yeah, 7 somebody's buying; somebody's selling. 8 SUPERVISOR ROBERTS: And within that, it's kind 9 of, in a sense, a zero-sum game? I mean, you've got a buyer 10 and you've got a seller, and you're both here with respect 11 the, you know, the overall price of gasoline. Looking in 12 the aggregate right now, I know that we should have one 13 company that's got -- 14 MR. SIMS: Yeah. 15 SUPERVISOR ROBERTS: -- more expense, but we 16 should have another company that's made a lot of money. 17 MR. SIMS: Yeah, that's a fair assessment. 18 SUPERVISOR ROBERTS: Okay. I guess the difficulty 19 I'm having -- I'm still trying to figure out this refiner 20 margin here. Okay? 21 And when I heard it was spot market, it would also 22 suggest to me that, based on what you're saying, that there 23 should have been some winners. There should have been an 24 equal amount won by somebody or some group of somebody's as 25 there was for those companies that were paying that added PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 141 1 costs. 2 So, in the aggregate, that shouldn't be the thing 3 that's driving this. 4 MR. SIMS: I think that's true to a certain 5 extent. But keep in mind crude oil prices, and California 6 imports a lot of crude oil. 7 SUPERVISOR ROBERTS: I've accounted for that -- 8 MR. SIMS: (Interjecting) That's part of that 9 equation. 10 SUPERVISOR ROBERTS: Yeah, I've accounted -- we 11 talked about crude oil. 12 MR. SIMS: Okay. 13 SUPERVISOR ROBERTS: Okay? I mean, we started 14 with the fact that the crude oil was up. That was the 15 second highest category. And I've sort of left that alone. 16 MR. SIMS: Okay. 17 SUPERVISOR ROBERTS: I'm assuming that that's 18 right. That was an increase of 14.4 cents? 19 MR. SIMS: Something in that neighborhood. 20 SUPERVISOR ROBERTS: Okay. I'm just counting. 21 I'm saying, okay now, I've got 25 cents, 25 cents left. 22 MR. SIMS: Uh-huh. 23 SUPERVISOR ROBERTS: And the gentleman from ARCO, 24 at least somehow wanted to connect that to the spot market, 25 and they bought on the spot market for 12 days. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 142 1 I didn't ask how many days they sold. But the 2 fact is within the group of you, you're buying and selling, 3 and this is -- over time, I suppose -- leveling out. But at 4 the very least, if somebody has paid an awful lot, somebody 5 else has made an awful lot, and yet the prices are uniformly 6 going up all the way across the board for everybody. 7 MR. SIMS: I don't know how to explain -- 8 SUPERVISOR ROBERTS: You're as puzzled as I am. 9 MR. SIMS: I don't know. I think that you're 10 looking at a market dynamic and we're trying to explain 11 something that is really tied to the dynamic of supply and 12 demand. And the fact that you've got a time lag in bringing 13 material in, and you've got a cost of transportation that is 14 pretty substantial when you have to bring that ship in to 15 California. 16 And the marketplace consumes what you have and 17 people start getting nervous, and they start buying more. 18 So, if the three of you have gasoline to sell and I want to 19 buy, depending on how much of a bind I'm in, and I don't 20 want my customers to run out; I don't want to disrupt brand 21 loyalty, so I want to keep supplying them at the stations. 22 So, you know, I'll pay you more. 23 SUPERVISOR ROBERTS: Right. 24 But let's say I'm a company that sells and I made 25 a lot of money off of you, because you needed it, and I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 143 1 still continue to let my price go up, and that's -- 2 MR. SIMS: But that's part of the market dynamic 3 that would happen. 4 If you sold to me and then you kept your price 5 very low, within a few days, you would have no production. 6 The marketplace would take all of your production. 7 Because your cost went up, then I've got to lift 8 my cost to keep pace with you, or your entire inventory 9 disappears. 10 The consumer will go to -- you know, that's the 11 market dynamic. The flow of the customer will go to the 12 marketplace, and it will drain that marketplace dry. 13 If you went tomorrow, and they announced there's a 14 station two blocks from here and they're selling gasoline a 15 dollar cheaper than anybody else, you would drain that 16 station in nothing flat. 17 And that's what happens in a market dynamic of 18 rising prices. So, it's basically the -- it's kind of 19 driven by the guy who has to pay the most for the gas. 20 Because the thing is always moving up and down. It's driven 21 by the cost of replacement of product. 22 CHAIRMAN DUNLAP: Mr. Sims, if I may piggyback. 23 It's the marketing side of your operation that sets prices? 24 MR. SIMS: Absolutely. 25 CHAIRMAN DUNLAP: You have a team of people that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 144 1 do that. 2 You've illustrated a bit for us, you know, the 3 market tracking, the dynamics associated with, you know, 4 trying to anticipate what might be done. For example, 5 relative to inventory of preproduction product or 6 postproduction product, people guess. Some guessed wrong, 7 got caught short. 8 Have you all changed your strategy, short term or 9 long term, relative to your marketing strategy, as a result 10 of what's happening at your facility? Or, when you get up 11 to production, is it just going to be the way it's always 12 been? 13 MR. SIMS: I don't understand your question. 14 CHAIRMAN DUNLAP: What I'm getting at is there's 15 been -- the marketplace has changed because of all these 16 factors. We've heard a lot about it. The Chairman of the 17 Energy Commission outlined that. 18 I guess, has there any lesson learned -- by Shell 19 in particular -- that you could share with us relative to 20 marketing strategy and the like? 21 I mean, are you smarter now than you were two 22 months ago? What have you learned from all this? 23 MR. SIMS: Again, I'm having trouble understanding 24 about marketing strategy. 25 Our main dilemma that we've been dealing with for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 145 1 the last few weeks is a shortage of supply; how do we cover 2 that supply by either increased production, or buying 3 production, or getting this plant restarted. 4 I don't quite -- 5 CHAIRMAN DUNLAP: Well, I guess -- 6 MR. SIMS: I'm having trouble with the question. 7 CHAIRMAN DUNLAP: Yeah, maybe I"m asking it 8 improperly. 9 What I was trying to get at is, because of the 10 price of crude and how much product that you keep in 11 inventory on hand, whether you saw what's going today as a 12 long-term or short-term phenomenon? 13 I guess that's what I was getting at. 14 MR. SIMS: I think, from what we see -- for just 15 our part of the market -- is that we are going to be in 16 balance with our customers. And it's a short-term problem. 17 You know, this was not the kind of event that happens at a 18 plant frequently. 19 We have amassed an enormous investigation to 20 ascertain why we had the fire and to correct it so that we 21 don't have that again. 22 And so, it's not the kind of event you would 23 expect on a routine basis. So, it would not materially 24 change the way we're running the plant, because it is an 25 anomaly. It is an unusual situation. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 146 1 CHAIRMAN DUNLAP: Okay. I'm sorry, Supervisor 2 Roberts. Go ahead. 3 SUPERVISOR ROBERTS: No, that's all right. I have 4 one other question. It has something to do with what you 5 said earlier. 6 I'm not necessarily advocating this, but if we 7 were to lift the requirement for reformulated gasoline, you 8 seemed to suggest that that would cause a shortage? 9 MR. SIMS: No. I didn't -- I didn't -- I think 10 that you'd probably not see a big relief from it, from this 11 price. 12 If you're doing it to relieve yourself of price, I 13 think your own analysis has shown you that you're not going 14 to get much relief. The culprit here is not California 15 reformulated gasoline. 16 It added what we all predicted that it would add, 17 and it did. The marketplace has demonstrated that to us. 18 SUPERVISOR ROBERTS: You say that that's not the 19 culprit, and it wouldn't provide any relief? 20 MR. SIMS: I don't think it would provide relief. 21 My caution to you was that you get -- by the way we present 22 stories to the public and we try to look for sensationalism, 23 that we create a panic, an unnecessary panic. 24 Because there is not a supply shortage. Your own 25 data shows that. And you could cause problems if you caused PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 147 1 that panic. 2 SUPERVISOR ROBERTS: And I don't mean to suggest 3 there is a supply shortage. In fact, what we've been 4 discussing is the fact that we've got a price that's causing 5 the problem, not a shortage. 6 And we're trying to figure out how we got there. 7 MR. SIMS: Well, you do have a drawdown. You have 8 a drawdown of your inventory. You have a drawdown of your 9 capability to fill the system. And you are bringing in -- 10 the way you're filling that gap is by bringing in more 11 expensive material from offshore. 12 And that is how you're filling the gap. It's 13 adding. It is a cost component. 14 CHAIRMAN DUNLAP: Ms. Edgerton, then Mr. Lagarias. 15 MS. EDGERTON: If I understood you correctly, Mr. 16 Sims, when you said that the interruption would be temporary 17 and you expected the supply to stabilize, you were only 18 talking about the California reformulated gas component. 19 You were only talking about your production at 20 Martinez? 21 MR. SIMS: Right. 22 MS. EDGERTON: However, I just want to make it 23 clear that this is part of what the Chairman was asking. 24 As long as the crude market remains in fluctuation 25 and volatile, Californians should be prepared for this PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 148 1 situation to continue with the price tightness; is that your 2 opinion? 3 MR. SIMS: You know, I mean all the indications 4 are there. I think we see that, if you pay higher for raw 5 materials to stay in business, you're going to have to pay 6 more or get more for your products. And there is -- you 7 know, the volatility has nothing to do with California. 8 It's a worldwide issue on crude. 9 MS. EDGERTON: Well, I just -- I know it would be 10 difficult to be in your position if someone were to say, 11 "Well, now, none of the rest of us can tell what the future 12 is, but you can." 13 So, I understand what you mean. But I also want 14 to be clear that we don't lead people to think that when 15 we're -- from what I understood, when you're talking about a 16 temporary problem,, you're only totally referring to your 17 production -- 18 MR. SIMS: Right. I was only -- 19 MS. EDGERTON: -- at the Shell refinery. 20 MR. SIMS: -- talking about that we've got our 21 customer base covered. And I can't speak for the rest of 22 the industry, of course. 23 MS. EDGERTON: And all of the other components -- 24 MR. SIMS: (Interjecting) I think probably the 25 best judge of that are your own forces, your staff people PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 149 1 and CEC, because they're very tightly tied into us on a very 2 timely basis, us and every other refinery. 3 So, they get a lot more detailed information that 4 legally we can't talk about publicly. And that's why it's 5 confidential. And they can aggregate it, and then see what 6 the total balance is. 7 So, I think the far better view of the total of 8 the State of California is provided by your own staff than I 9 can as a company. 10 MS. EDGERTON: Thank you. 11 MR. LAGARIAS: I'd like to follow up on the 12 Chair's -- on marketing analysis. 13 When you deliver gasoline to a service station and 14 fill up its tanks, do you invoice them at the rack price at 15 that time? 16 MR. SIMS: You're getting beyond my knowledge 17 area. I'm a refiner. So, I'm not so sure what you said. 18 MR. LAGARIAS: Well, I assume if you deliver 19 something, you invoice it at that point. 20 MR. SIMS: I assume that -- that may be a good 21 assumption. I don't know. I've never worked in that area. 22 MR. LAGARIAS: All right. Then the service 23 station has this gasoline in its tanks, and the rack price 24 goes up 10 cents a gallon. 25 The service station's already paid for that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 150 1 gallon, that gasoline, and so it knows what it's going to 2 cost them. 3 But because the rack price has gone up for the 4 next load, I've seen he immediately raises his price to 5 correspond to the rack price coming up in the future. 6 Now, if that's the case, then when you have the 7 rack price and you see the cost of crude going up, you 8 immediately change your rack price, because the cost of 9 crude is going to come in, and all the stuff in the system 10 immediately has the benefit of that. 11 And that, of course, as soon as that rack price 12 goes up, the service station goes up again, because the cost 13 of the crude that's going to go into the rack is coming up. 14 Now, if you go one step further and you look at 15 what the future crude oil price is going to be, and you 16 estimate that to go up or you're buying it, then immediately 17 the value of the crude goes up. So, you raise the price of 18 the crude, you raise the price at the rack, and the service 19 station then raises the price not only to cover the cost of 20 the crude -- the gasoline he has, but to cover the increase 21 in the rack price, to cover the increase in the crude price, 22 and then possibly to cover the increase in the future crude 23 price. 24 Is this the way the system works? 25 MR. SIMS: Beats me. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 151 1 (Laughter.) 2 MR. LAGARIAS: You're telling us -- 3 MR. SIMS: I'm not familiar enough with it. But 4 you're dealing with independent businessmen who have to make 5 decisions about how they're going to stay in business -- 6 MR. LAGARIAS: All we're seeing is the prices 7 going -- 8 MR. SIMS: -- and how they're going to price -- 9 (Thereupon, both speakers spoke simultaneously.) 10 MR. SIMS: -- their product. 11 MR. LAGARIAS: -- up, up and up. And the gas in 12 the tank hasn't changed since he originally got it. And I 13 don't know how long it's last -- whether it's a week, or a 14 month for the service. Is this occurring? 15 CHAIRMAN DUNLAP: I think, Mr. Lagarias -- 16 MR. SIMS: I can't answer that question. 17 CHAIRMAN DUNLAP: -- there are others from that 18 end of that business, and we'll get them here. 19 We just assumed that you knew all of this stuff. 20 MR. SIMS: Yeah. 21 (Laughter) 22 MR. SIMS: If I were all knowing, I'd be in 23 another line of work. 24 CHAIRMAN DUNLAP: All right. Any other questions 25 for Mr. Sims?? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 152 1 Thank you for your time and, certainly, take the 2 message back to your team to get that refinery up and 3 running at full capacity as soon as you can, and we need you 4 in the marketplace. 5 MR. SIMS: Thank you very much. 6 CHAIRMAN DUNLAP: Okay. All right. That brings 7 us to Al Jessel from Chevron, followed by Dennis Lamb, Chuck 8 Walz, and is it Tom Eveland? 9 Good afternoon, Mr. Jessel. 10 MR. JESSEL: Thank you, Mr. Chairman. I 11 appreciate the opportunity to speak to the Board today. I 12 hope I'm going to be the first of a string of refiners that 13 are going to say we're one of the ones that have our pedal 14 to the metal right now. 15 I tell you, every morning I get out of bed -- I 16 live in the hills in the East Bay, and I have a perfect view 17 of the Richmond refinery spread out across the horizon, 18 right at the foothills of the area mountains that separate 19 that valley from the ocean. 20 And I get up every morning and I look at that 21 refinery, and I know more or less what it's got to look 22 like. And if there's water vapor rising here and some over 23 here -- 24 CHAIRMAN DUNLAP: How'd it look this morning? 25 MR. JESSEL: -- and those plumes had better be the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 153 1 same size every day and I'm going to call somebody. This 2 morning, it's in great operating shape. 3 (Laughter.) 4 MR. JESSEL: And I made sure, because I called the 5 operations manager to just be absolutely clear of that. I 6 can assure you that our Richmond refinery is running flat 7 out this morning. I can assure that our El Segundo 8 refinery's running flat out this morning. We are making 9 record quantities of gasoline of any kind of gasoline. 10 CHAIRMAN DUNLAP: Well, you're the third speaker, 11 and that's the best news we've heard today. 12 MR. JESSEL: And let me assure you, we intend to 13 keep operating that day. We're operating that way on all of 14 our products, not just gasoline, but also diesel and also 15 jet. We have responsibilities to our customers in all of 16 those three areas. 17 We have been making Cleaner Burning Gasoline since 18 January at our El Segundo refinery. We began making Cleaner 19 Burning Gasoline at our Richmond refinery much closer to the 20 March 1 date. But just recognize that that Cleaner Burning 21 Gasoline has been out in the system, and we've been 22 incurring all the costs associated with making it at our El 23 Segundo refinery since the beginning part of January. 24 I want to assure you that every Chevron customer 25 now, focusing on the end user, has gotten every drop of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 154 1 gasoline, diesel, and jet that they need, without 2 interruption. And if things keep going the way they are 3 right now, we fully expect to be able to supply all of those 4 end users in an uninterrupted way. 5 Now, Dean Simeroth, earlier in some of the 6 prefatory comments mentioned that there was a refinery in 7 Southern California that had a refinery problem in the first 8 part of March, postponed maintenance until the end of March 9 to cover another problem. That was us. We had a cracker 10 problem in our El Segundo refinery. 11 But we had planned ahead for that. Both of our 12 refineries had started up making Cleaner Burning Gasoline 13 prior to March 1, and we stored a contingency inventory to 14 plan ahead from just that kind of breakdown. And when that 15 breakdown occurred, we were ready. We had a contingency 16 inventory. We used it. So, the market never, never noticed 17 that particular downtime. 18 And we're very proud of the planning that we did 19 in advance to cover that particular problem. And we feel we 20 are covered if we have another problem of that sort. 21 And I'll also let you know that we are supplying 22 two other refiners on long-term contracts with Cleaner 23 Burning Gasoline, substantial quantities. So, we're doing 24 our part to not just serve our customers, but customers of 25 other refiners. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 155 1 Another thing we're very proud of is the way that 2 we have communicated to our customers. We've communicated 3 to our customers -- and we have about a million and a half 4 credit card customers and a fair amount more of cash 5 customers. We've communicated to all of them. We've 6 communicated them the benefits of Cleaner Burning Gasoline 7 and what it's going to contribute to air quality improvement 8 for the State of California. We're talking about the 15 9 percent reduction in ozone precursors, and we're talking 10 about that as being equivalent to 3.5 million cars being 11 taken off the road. 12 And that's the second thing that goes through my 13 mind when I get up in the morning and look at that refinery. 14 Not only is it operating well, but it's also contributing to 15 cleaning the air in that part of the country and throughout 16 all of Northern California. 17 We have told our customers that Cleaner Burning 18 Gasoline is an effective and cost-effective relative to a 19 lot of the other options that we have. You remember the 20 Federal FIP that we all had to deal with last year. Cleaner 21 Burning Gasoline is a very cost-effective option. 22 But after having said all that, the costs are 23 real. Our financiers in Chevron, really the corporation, 24 our Chairman advanced the products company, our refining and 25 marketing arm, a billion dollars to make the refinery PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 156 1 modifications we needed to make both in our El Segundo and 2 Richmond refineries in order to be able to make 100 percent 3 Cleaner Burning Gasoline. 4 The problem is the when, how, and if of recovery 5 of that investment was left to the vagaries of the market. 6 Simple supply and demand and competitive forces determine 7 prices. We must take the market as we find it, good or bad. 8 And I'm going to expand on that. 9 There's been a lot of discussion about what really 10 goes into pricing. I'm going to take some liberties and 11 describe some of the mechanisms. But I will not or I 12 cannot, because of antitrust reasons, talk about our 13 particular philosophy within that mechanism or what we plan 14 to do in the future. 15 So, I'll get as close to that line without 16 crossing it. 17 Retail price increases at the market allowed us 18 until April 16th have been barely enough to cover the rise 19 in cost of crude. You've heard all that. I'm not going to 20 go back through the list of items that Chairman Imbrecht put 21 up on the screen there. And I think they're all very valid 22 items. They're all part of trying to dissect the reasons 23 for price increases. 24 I'm also going to tell you that you cannot link 25 those price increases to those specific factors and be able PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 157 1 to add them up one for one like we're trying to do this 2 morning. And I'll explain why that doesn't work. 3 But we were lucky this time with those price 4 increases. There have been times when produce prices have 5 been lower than the replacement crude costs. We cycle, as 6 an industry, from good times to bad times to good times to 7 bad times. 8 Our refining and marketing arm in the first 9 quarter reported profits of 18 million, which is a tiny 10 fraction of the total amount that the corporation earned. 11 The corporation earned most of its money in the upstream 12 area from higher crude prices and higher natural gas prices. 13 The refining and marking arm, where I work, is an 14 autonomous section of the company. It takes in crude as a 15 cost and it puts out product, and that's where we have the 16 recovery process. That part of the company is not very 17 profitable right now. The 18 million first quarter this 18 year lost 102 the same quarter last year. 19 In any case, the increases that we saw until April 20 16th did not in any way cover the cost of Cleaner Burning 21 Gasoline, but we had been making it -- in one refinery at 22 least -- since the early part of January. 23 Now, let's talk about pricing as far as I can go 24 here. I think I can shed some light on this and maybe help 25 answer some of the questions that have been asked here PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 158 1 repeatedly. 2 Now, again, I can't tell you about future pricing 3 moves, and I can't talk about Chevron's philosophy, where we 4 want to position ourselves in the market. That's absolutely 5 prohibited. 6 But the rest of it is not rocket science. We look 7 at production. We look at inventories. We look at 8 production/inventory all the way back to the source of the 9 crude. If we're getting crude from Indonesia, we're looking 10 at what is being produced in Indonesia and what the prices 11 are in Indonesia. And that Indonesian crude is going to 12 take a long time before it gets to our refineries, and it's 13 going to take a long before it gets through our refineries 14 and out into retail. 15 What we're dealing with is a gigantic system. 16 It's a behemoth. When you think about either one of our 17 two California refineries, 250,000 barrel per day input -- 18 250,000 barrels per day is like 10 million gallons a day. 19 This is a gigantic quantity of fuel. 20 It's not a system which has a bunch of switches 21 that lets it turn on and turn off. It's more like an ocean 22 liner full of people, full of cargo trying to stop and go on 23 the high seas. It takes a long time to accelerate. It 24 takes a long time a decelerate. 25 Those 10 million gallons a day of crude that go PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 159 1 into our refinery are backed up by a train of ships, and 2 pipes, and whatever conveyance we have moving more crude to 3 the refinery so that the refinery can keep running at its 4 optimal point. 5 That crude, when it goes into the refinery, sees a 6 vast array of pipes, and process units, and tanks. And 7 then, outside the refinery, it will go into a system -- 8 another vast system -- of pipes, and trucks, and tanks, and 9 ships, which take all that material to the market. 10 I hope that gives you a feeling of why you just 11 don't turn it on and turn it off. The only short-term valve 12 we have on it is price. We can control at the outlet at 13 retail how much fuel is actually sold from the Chevron 14 system. 15 And in order to keep the system running and 16 balanced, we have to keep it within a certain fairly narrow 17 band, or else the system overflows because there's too much 18 in it, or it drains out and we cannot supply our customers. 19 And one of our prime duties in the State and duties to our 20 customers is to keep our customers fully supplied at all 21 times. 22 Well, that knob in the back is price. And we 23 adjust that price constantly. It's the only short-term 24 control we have. And over our entire product line, we make 25 over 400,000 adjustments to that price in one year. That PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 160 1 price is determined by what we have in the system, what's 2 coming, where we want to operate our refineries, and what 3 our competition is charging. 4 If we charge more than our competition, our system 5 overflows. They sell the product. If we charge less than 6 our competition, their system will overflow; we will sell 7 the product. It doesn't take a big twist of that knob to 8 change that dynamic a great deal and very, very quickly. 9 And that's why price changes happen so often and 10 on so many different products and so many different 11 geographical areas. It's the only knob we got. It can't 12 slow down the speed of a refinery overnight. It takes weeks 13 to really change a refinery operating point. In effect, 14 we're now making Cleaner Burning Gasoline, have almost 15 completely changed the gasoline processing sections of our 16 two refineries in California. 17 It wants to make Cleaner Burning Gasoline; it 18 doesn't want to make anything else. So, you know, changing 19 what we make is not that easy. It will mean driving the 20 refinery off of its optimal operating point. And, you know, 21 I don't know how the market is going to react to that. 22 Well, that's what we mean when I say we take the 23 market as we see it. We look at what the competitors are 24 charging. We look at what we have, and we move our product. 25 The only way to move it and keep the balance I'm PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 161 1 talking about is to adjust to that little knob. 2 Now, I've enjoyed very much working with the 3 California Energy Commission staff over the last few weeks 4 trying to keep track of refinery production and refinery 5 inventories. I think they've done a marvelous job, and I 6 really appreciate the presentation Chairman Imbrecht gave 7 this morning. 8 However, I think I need to point out a couple of 9 things that the staff may want to work on a little bit more. 10 First of all, I don't want to get into the numbers game. 11 Thing's aren't going to add up. I think the way I explained 12 pricing, you'll find that you wouldn't even expect them to 13 have -- we cannot just take a cost and pass it through. 14 Our pricing manager is not part of our refinery 15 system. He's part of our marketing system. He doesn't know 16 what refining costs are. He doesn't care what refining 17 costs are. All he knows is what we've got in our system, 18 what we plan to make, what our long-term goals are, and what 19 the competition is charging. He sets price. 20 He can't suddenly decide that tomorrow he's going 21 to charge for Cleaner Burning Gasoline. He's constrained by 22 competition. That's why we say we meet the market. At any 23 rate, back to the Energy Commission presentation. 24 There is another price which just hasn't been 25 talked about and will help explain why it appears dealer PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 162 1 margins have gone to zero. I can assure you Chevron dealers 2 have not had their margins driven to zero. It just doesn't 3 make sense. 4 And the reason and the flaw in the analysis is 5 that what Chairman Imbrecht presented was something that may 6 accrue to part of the gasoline marketing system, but doesn't 7 accrue to 85 percent of the gasoline that we make. Only 8 about 15 percent of the gasoline we make is really sold at 9 the rack and is subject to rack prices. 10 About 85 percent of the gasoline we make -- and we 11 make a lot of gasoline in California -- is sold at what we 12 call dealer tank weight. It's another price that we sell 13 directly to our dealers because we deliver to them, and we 14 offer services to that dealer. So, it's a different price 15 structure. 16 Those prices are publicly available. Lundberg 17 collects them. And I think if you look at the DTW prices, 18 those prices that we use with our retail customers, you'll 19 find that the numbers work out a little bit better, and 20 you'll find that the dealer margin doesn't go to zero at 21 all. 22 You also find that those prices are generally 23 lower than rack. I will step sort of dangerously into the 24 vagary of adding up numbers. Chevron's gasoline pump price 25 increase -- and this is now based on Lundberg data, which is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 163 1 public -- since February 1, has been about 27 cents per 2 gallon in San Francisco and about 30 cents per gallon in Los 3 Angeles. Those are our prices to our dealers. 4 Chevron increases early last week of 8 to 9 cents 5 that we heard mentioned earlier were a handful of those 6 400,000 adjustments we make every year and simply followed 7 the market. 8 We could not stay that low compared to what our 9 competition had done and expect to maintain our inventories 10 and keep our customers supplied. There's really no other 11 choice. We have to do that. 12 Now, the magnitude of the total increases 13 shouldn't be any surprise in light of the crude oil prices 14 that we have heard. And I need to mention something about 15 crude oil prices when we talk about current crude oil prices 16 and how they're changing in the spot market. 17 What we're talking about is a contract which is 18 still open for June delivery of crude. We are putting into 19 our refinery now April crude and May crude. The May crude 20 contract is locked up. That's what we have to pay for crude 21 in April and May, not June prices, so. . . 22 And I have a feeling that some of the crude costs 23 that were in the Energy Commission presentation were based 24 on future crude rather than current. 25 At any rate, if you look at the current cost -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 164 1 we're about now April and May crude costs, they're like 15 2 to 20 cents a gallon, and they affect the whole country. 3 And I'm just going to give you a little bit of your numbers 4 here. We're a national company. We market in a lot of 5 parts of the U.S. And I'm going to give you some of our 6 price increases. These are just deltas. Kind of keep in 7 the spirit of the way we're discussing these here. 8 From February 1 to April 15th, Atlanta saw a net 9 change -- now, these are our prices to our customers, 17.7 10 cents per gallon; Miami, 14.7; Houston, 16.5 -- and 11 remember, this is April 15th, before the price jump -- San 12 Francisco, 16.4; Los Angeles, 19.0. 13 In terms of the change, we saw no change here in 14 California based on our prices to our dealers representing 15 85 percent of what we move. 16 On the 22nd of April, well after the jump that we 17 are all aware took place, our Los Angeles price increase -- 18 now based on February 1 again -- was 27.3. Our San 19 Francisco increase was 23.8. 20 Now, if you want to play the numbers game -- and I 21 really hesitate to do that -- you can add 15 to 20 cent per 22 gallon crude, and you can add probably 15 cents per gallon 23 for California Cleaner Burning Gasoline here. 24 So, that's the way I play the numbers game, but I 25 want to caution everybody not to try to add those things up PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 165 1 and expect them to come out. Because, again, our pricing 2 people in San Francisco, in the marketing department, do not 3 have cost figures on the table. They know what we got. 4 They know what we want to move, and they know what the 5 competition is charging. That's all that matters in the 6 short term. 7 I guess I can't leave without talking a little bit 8 about diesel. I was present at the October 15th, 1993 9 hearing across town. Some of you were there. That's a date 10 that's burned into my memory, and it dealt with an issue not 11 unlike what we're dealing with today. 12 So, I can't diesel out of my mind. What's 13 happened with diesel simply illustrates that costs don't 14 equal price. You can't add up all the stuff and come up 15 with a diesel price right now. 16 What we have is basically a repeat of the October, 17 1993 situation, where there were refinery problems during 18 the heavy demand season and abnormally high liftings. That 19 is what we were experiencing as a company. But we are 20 meeting the demands of our customers, even though diesel 21 liftings are well above average right now from Chevron. 22 That's true, by the way, for gasoline as well. 23 The downstream distribution system is trying to 24 keep up, but we cannot move product out of our refineries 25 fast enough to keep up with what is being taken out of our PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 166 1 terminals as of yesterday. It may be different today. 2 Several of our terminal managers complained last week of 3 over 50 percent above normal and it was including the 4 seasonal demand liftings from those terminals, and that's 5 occurring all over the State -- more so at some, less so at 6 others. 7 However, our refineries are producing more than 8 planned. And if buying is at normal levels, we forecast our 9 customers will be able to get what they need for the 10 foreseeable future. 11 So, that gets to my bottom line. The bottom line 12 is you've got to let the market work. I'm kind of 13 frightened, because I went through the October 15th, 1993 14 hearing by the discussion of suspension and other changes to 15 the rule. 16 This is very disturbing to me. At that hearing in 17 October of 1993, we warned that taking a precipitous action 18 to alleviate the kind of pressures that you're getting from 19 the public would have long-term repercussions. You may very 20 well be reaping the benefit of that today. 21 I just can't help but feel as though CARB at that 22 hearing, when they actually took an action to relax a 23 portion of the rule, kind of signaled to the community that 24 CARB is a place to come to get relief from that sort of 25 problem. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 167 1 Now, we hear loud and clear that these are your 2 constituents and they are our customers. We have an 800 3 line, and we've gotten plenty of complaints from our 4 customers. I've dealt with a number of them myself. I know 5 that people are very unhappy about the price of gasoline and 6 the price of diesel. 7 And we sympathize and we understand. I'm a 8 consumer, too. I have to buy gas. My wife tells me about 9 the high cost of gas today, let me tell you. 10 But, you know, by the same token, I don't like the 11 price of tomatoes in the winter, or lettuce in the winter, 12 or the price of flowers on Valentine's Day. But that's the 13 market. The market will match supply and demand and it will 14 do it by altering price. 15 It's no different in the oil industry. But high 16 prices are a market force. They are a market mechanism. 17 They signal an opportunity for an entrepreneur to bring in 18 another supply at a lower cost at a lower price, undercut 19 everybody else, and make money. 20 And there's nothing like a mechanism like that 21 that will bring in the extra supplies if you really think 22 they are justified and needed, and it will solve the 23 problem, whatever it is, you know -- I'm trying to figure 24 out what the problem is -- but if there's a problem and 25 prices are too high, then that is going to be the solution. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 168 1 I don't know of anything that's going to do a 2 better job. Relaxing the rule is not going to do a better 3 job. The market is the best provider, and history's 4 confirmed that over and over again. I mean, the action 5 taken October 15th of 1993, from what I recall, all it did 6 was jump the price of high sulfur diesel as soon as it was 7 available to people in California. 8 And by that hearing, the price had already started 9 to tail off and was headed back down, because the primary 10 production was at record rates. 11 So, I'm afraid any short-term action you take 12 today will interfere with the long-term solution that you 13 really need. What we're dealing with now is a new gasoline, 14 a lot of new equipment in refineries, and you just have to 15 let the marketplace settle out and decide how it's going to 16 handle situations like this. 17 And I think you're seeing the marketplace work. 18 We heard the Shell representative say that cargoes of CARB 19 gasoline are headed to California. Well, six months ago, we 20 couldn't have figured that any California gasoline would 21 come from anywhere else. We were told that we were an 22 island; that no other refinery in the country would be able 23 to make CARB gasoline. Well, that's turned out to be 24 totally untrue. 25 If the price is right, somebody else will make PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 169 1 CARB gasoline, and it's on its way. That is the market 2 working. The market signaled and it's responding. 3 And I also heard a diesel cargo coming. I think 4 that's wonderful news. 5 Any short-term action you might take invites 6 pressure for short-term action in the future. I don't think 7 the ARB wants to become the manager of fuel prices here in 8 California. I seriously advise you not to get into that 9 business. It's a tough one. 10 The State, on the other hand, also has an 11 obligation to keep its word. We invested a billion dollars 12 in our refineries to make Cleaner Burning Gasoline with the 13 assumption that the State would hole the rule, and we would 14 have an opportunity -- not the guaranteed return that some 15 people think we get out of the market. We just need an 16 opportunity to go to the market and get our investment 17 return. 18 The State isn't guaranteeing us that investment. 19 We're not asking for guarantees for our investment. We're 20 only asking for guarantees that we have the opportunity and 21 the right to go to the market and attempt to get that 22 return. The attempt may fail. 23 So, the State needs to keep its word using your 24 power to regulate. You may be called upon, in effect, to 25 become the controller of fuel prices. I really don't think PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 170 1 you want to be in that business. 2 In addition, you could further erode the 3 confidence that we, a major regulated industry, have and the 4 ability of the ARB to enact regulations. And that's its 5 basic mission. If you can't regulate our industry and make 6 a level playing field to improve the environment, your 7 mission is really threatened as an organization. 8 We, of course, invested the billion dollars I 9 mentioned before with the full expectation the State, in 10 good faith, would stick to its rules. We had no 11 understanding that there was another contingency, such as an 12 adequate price level. We don't ask for a certain return, as 13 I said, just the opportunity to recover our investment from 14 the market. 15 If the State alters the market and undermines our 16 attempt to recover the cost, we are left holding the bag. 17 I'm echoing Chairman Imbrecht's original comments. 18 Would suspension work? I mean I've heard talk 19 about a suspension. Would it work? As I said before, the 20 gasoline processing section of both Chevron's refineries 21 have been completely rebuilt to make California Cleaner 22 Burning Gasoline. We can't just change that and suddenly go 23 back to what we were making before. All these processing 24 units are in the pipes between all the older processing 25 units. They've got to operate. So, it's not going to be PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 171 1 very easy for us to switch from one gasoline to another. 2 In addition, we have a fairly good size inventory 3 of Cleaner Burning Gasoline that's already made that's ready 4 to go to the market. And that's what's going to go out 5 first. We can't change that overnight. That stuff's 6 already made. 7 So, the thought would be, if you could rescind the 8 rule, or suspend the rule, or do something like that, maybe 9 you'd get extra supplies from elsewhere. Well, I'm not sure 10 you would. 11 First of all, the conventional gasoline that you 12 see going to the surrounding States couldn't be used, 13 because basically we're overlaid by Federal law here. And 14 in Southern California, we have to make Federal reformulated 15 gasoline. And as of June 1 of this year, we're effectively 16 going to have to make it for Northern California. 17 So, Federal law is a floor to what you do. So 18 that means increased supplies have to come from Federal RFG. 19 And right now, I don't know where you'd get it. 20 There is no Federal RFG, per se, available here in 21 the State. It would have to come from the Gulf Coast to 22 meet incremental demands. Gulf Coast takes a few weeks. 23 And for somebody on the Gulf Coast would have to be sure 24 he's going to get his money back, because he's going to have 25 to incur shipping costs. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 172 1 The first thing that would happen -- 2 CHAIRMAN DUNLAP: If I may? 3 MR. JESSEL: Yes. 4 CHAIRMAN DUNLAP: You've made some good points, I 5 think, illuminated some areas that hadn't been prior. If I 6 could get you to wrap up, we'd like to get to the other 43 7 witnesses we have here. 8 (Laughter.) 9 MR. JESSEL: Okay. 10 CHAIRMAN DUNLAP: Mr. Jessel, you're making some 11 sense here. I'm not suggesting otherwise. 12 MR. JESSEL: Well, I'm going to -- I'll shorten up 13 the sentences here. 14 CHAIRMAN DUNLAP: Okay. 15 MR. JESSEL: Okay. I don't think a suspension is 16 going to help the situation. Leave it at that. 17 But I need to comment about a couple of other 18 things. This is not an area I like to get into, but the 19 fact is, based on my experience of October the 15th, 1993, 20 you guys can make a change in the regulation today. I don't 21 want to see that happen. I really don't want to see that 22 happen. 23 And I want you all to understand that there are 24 some other legal issues involved here should you try to move 25 forward there. Things that affect you affect us as PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 173 1 refiners. You need to be careful of CEQA, because any 2 action you take might be determined to be a project under 3 CEQA, and you need to fulfill the requirements of CEQA. 4 And then, the last thing, the Federal laws that I 5 talked about a minute ago -- we have a Clean Air Act which 6 requires the State to do various things. Cleaner Burning 7 Gasoline and the low aromatics diesel rule are both part of 8 an approved State Implementation Plan, which is now 9 federally enforceable. You've got to be careful about the 10 interplay between the Federal enforcement and our own 11 enforcement of your laws. 12 CHAIRMAN DUNLAP: Good point. 13 MR. JESSEL: We do, too, as refiners. 14 CHAIRMAN DUNLAP: Good point. I'd just mention 15 there's a half a dozen or so attorneys sitting at those two 16 tables, and they would probably agree about those 17 considerations. 18 And we're very concerned about those implications. 19 CHAIRMAN DUNLAP: Okay. 20 MR. JESSEL: And we have to be concerned, too, 21 because there are some provisions of the Clean Air Act, and 22 any refiner who's perceived to be making something other 23 than Cleaner Burning Gasoline may be in trouble with the 24 EPA. 25 So, I just want to lay those out, make sure PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 174 1 they're thought through. 2 CHAIRMAN DUNLAP: Okay. 3 MR. JESSEL: So, I'll finish up. We've done the 4 best we can to take care of our customers. We still think 5 gasoline is a heck of a bargain. The San Jose Mercury News 6 on the 20th talked about inflation adjusted gasoline prices 7 with the taxes -- with taxes intact are about what they were 8 in 1973. 9 And if you take the taxes out, gasoline last year, 10 not this year, last year was about as cheap as it ever has 11 been in history. 12 The State with this rule gets cleaner air. Our 13 customers get a high quality product without interruption at 14 a fair price. We want you to let the market work. It's, 15 from our standpoint, really the only viable choice anyway. 16 And with that, I'll terminate, and that's it. 17 CHAIRMAN DUNLAP: Okay. Thank you. Mr. Imbrecht 18 had a comment. 19 CHAIRMAN IMBRECHT: Just very briefly, Mr. 20 Chairman. I say this with some humor, from a point of 21 personal privilege here ordinarily recognized. I just want 22 to make it abundantly clear that our crude price analysis 23 does not reflect futures prices at all. 24 I guarantee that was not reflected. My only 25 reference to the futures price was to put in context what PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 175 1 the futures market was doing in light of the Iranian -- 2 pardon me -- the Iraqi-U.N. negotiations. 3 And, secondly, I think that I also made the point 4 earlier that one of the explanations for the refiner margin 5 discrepancy was that it was being used as a demand reduction 6 tool -- in other words, an adjustment of price -- to 7 generate the kind of response Mr. Jessel was referencing. 8 I just wanted to clear the record on those points. 9 CHAIRMAN DUNLAP: Thank you for that. 10 MR. JESSEL: I don't want to debate this. I'd 11 suggest that we all keep working on this equation and decide 12 collectively whether it's worth pursuing, take into account 13 the different kind of price structure that we sell most of 14 our gasoline at. 15 And also, when we talk about this refining margin, 16 I didn't see -- maybe it was unclear, because I was watching 17 that screen over there. That big block was called "refining 18 margin." To me, that was refining costs. Margin implies 19 profit over costs. 20 And I think a large part of that margin really is 21 refining costs, what it costs us to run an operation. 22 CHAIRMAN DUNLAP: Okay. 23 MR. JESSEL: And that's about -- 24 CHAIRMAN DUNLAP: Mr. Lagarias, and then I'm 25 certain Mr. Roberts. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 176 1 MR. LAGARIAS: I'd like to defer to Mr. Silva, 2 who's been waiting anxiously. 3 CHAIRMAN DUNLAP: I'm sorry, Jim. 4 SUPERVISOR SILVA: Thank you, Mr. Chairman. Mr. 5 Jessel, I don't know a lot about the cost and the marketing 6 side of gasoline. But I do know that winter tomatoes come 7 down in price in the spring. 8 MR. JESSEL: Yeah. 9 SUPERVISOR SILVA: And I am a very strong 10 supporter of Adam Smith and his free market. But the oil 11 industry has always, I feel, acted as a nonperfect market, 12 such as an oligopoly -- 13 (Applause from the audience.) 14 SUPERVISOR SILVA: -- because there's only few 15 suppliers. And it's nice to stand up and say, well, we 16 really believe in a free market, but when you have a few 17 people that own a station and they can check each other's 18 prices out, it doesn't take long to figure out, you know, 19 where you get your best benefit. 20 I hate to see us go back to 1975 where your 21 gasoline trucks had to take their names off because people 22 were throwing rocks at them. I think that that's terrible, 23 and I don't want to see this happen again. 24 MR. JESSEL: We can easily agree with that. 25 SUPERVISOR SILVA: But when one door closes, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 177 1 another door opens, and this is where I feel that maybe the 2 market side might enter into the picture. And it's starting 3 to do so in Southern California right now. 4 Our light rail is picking up quite a bit. And I 5 think that you're going to see the technology in the 6 electric car perhaps speed up a little bit. So, I think 7 that we're all in this world together, and we have to live 8 together. 9 And if we have a horrible round of inflation that 10 really destroys the lives of a lot of elderly people, I hope 11 that the people that are creating this monstrosity, or 12 whatever we want to call it, will take these things into 13 consideration. 14 SUPERVISOR RIORDAN: Mr. Lagarias. 15 MR. LAGARIAS: I have four points. First of all, 16 Mr. Jessel, I want to thank you for your participation on 17 the advisory council on the Cleaner Burning Gasoline. Your 18 company was involved and it was very, very constructive, 19 even including the fleet test evaluation, even though your 20 cars didn't do as well as the rest of the country did. 21 (Laughter.) 22 MR. LAGARIAS: Now, you talked about controlling 23 prices, which sort of bothered me. You talked about it like 24 the refinery is a big pipe pouring out gasoline, and sort of 25 very ponderous, and not very flexible, and that the prices PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 178 1 are controlled later on where -- let's say to keep the flow 2 to your own stations going, you sell to independents. 3 MR. JESSEL: Some do, yes, sir. 4 MR. LAGARIAS: And that selling to independents is 5 sort of like a relief valve. You can sell as little or as 6 much, and you can price it as high or low as you want to 7 just to keep your own flow going. 8 Is that correct? 9 MR. JESSEL: That's correct. But you need to 10 understand that there are two different pricing mechanisms. 11 MR. LAGARIAS: Oh, of course. 12 MR. JESSEL: In fact, we do not sell to 13 independents gasoline. I need to say that first. We do 14 sell -- we do have a rack price. 15 MR. LAGARIAS: But that's the process. 16 MR. JESSEL: We have a rack price, and the rack 17 moves up and down just like our pricing to our dealers. If 18 you want to fine tune my discussion, we got two knobs. 19 Okay? 20 MR. LAGARIAS: All right. And then, so the other 21 valve can control the price. And if independents -- you can 22 sell all you can make, you go through your own system. And 23 that leaves the other valve closed or just a trickle going 24 in it. And if there's good profit on this one, then you 25 just don't have to keep that other trickle going. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 179 1 MR. JESSEL: Yeah, see, like my explanation is 2 oversimplistic. 3 MR. LAGARIAS: So is my discussion. 4 MR. JESSEL: Yeah. And one of the other 5 oversimplification is that we also have contracts with a lot 6 of people that buy fuel from us. 7 And so, they're allowed to take certain amounts of 8 fuel, and we wouldn't stop them unless there's a really good 9 reason. So, there's other things. There's contractual 10 relationships. 11 MR. LAGARIAS: Well, the contracts can be 12 similarly adjusted. 13 MR. JESSEL: Yeah, with time. 14 MR. LAGARIAS: Well, it's important to keep these 15 independent organizations going, too. 16 MR. JESSEL: I understand. And we think we're 17 doing our part by selling California Cleaner Burning 18 Gasoline to some of the other refiners. We have exchange 19 agreements with at least one refiner who does sell a great 20 deal to independents. 21 MR. JESSEL: Now, on another point, you mentioned 22 a billion dollars for your involvement with Cleaner Burning 23 Gasoline. 24 Did any of that cost go into plant modernizations 25 or refinery expansions? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 180 1 MR. JESSEL: Not expansions. You can say it goes 2 into modernizations. We had several plants which were 3 really very old in both of our California refineries. They 4 could have kept going, but needed to be rebuilt, and those 5 units expanded, not the overall refining capacity of the 6 whole refinery. 7 But those units had -- 8 MR. LAGARIAS: Were modernized. 9 MR. JESSEL: Modernized and expanded so that you 10 could make the components in order to make the Cleaner 11 Burning Gasoline. 12 MR. LAGARIAS: So, there was some modernization. 13 My final point, you keep bringing up the 14 suspension of the rule. That's your own straw man. This is 15 a fact-finding session. We're trying to get the facts at 16 this point. That's not an agenda item. 17 MR. JESSEL: Thank you very much. I'm glad to 18 hear that. 19 MR. LAGARIAS: That's it. 20 CHAIRMAN DUNLAP: Thank you. Supervisor Roberts? 21 SUPERVISOR ROBERTS: Well, I was actually enjoying 22 the presentation until we got to the end and kind of the 23 light threat on whether changing the rule is a problem under 24 CEQA. 25 We've got plenty of attorneys who advise us those PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 181 1 things, just as you have people advise you on your prices, 2 and we can take care of that. 3 MR. JESSEL: They also advise me somewhat on what 4 I need to say in a situation like this. 5 SUPERVISOR ROBERTS: Well, you did pretty good up 6 to that point. 7 CHAIRMAN DUNLAP: All right. Supervisor Vagim. 8 SUPERVISOR VAGIM: Thank you, Mr. Chairman. 9 Something struck my mind, and Supervisor Silva touched on 10 it. And you're comparing your prices to other commodities, 11 such as tomatoes. 12 I know when there is a demand for tomatoes, more 13 acreage is planted. I noticed over the years in the oil 14 industry, particularly in the downstream, I think there's 15 probably less service stations today than there was 20 years 16 ago. 17 MR. JESSEL: Probably true. 18 SUPERVISOR VAGIM: Thus, haven't we established 19 really a limiting of an outlet where people can be 20 competitive in your industry? I mean, we have really 21 defined an oligopoly. And isn't this a perfect kind of a 22 timing where really the demand may be there, the supply 23 maybe controlled because you don't have enough competitors 24 out there to go fire up these service stations to start 25 pumping new gas, because you have one place to outlet? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 182 1 MR. JESSEL: Well, I can't deny that there are 2 fewer service stations, but I don't think that is the pinch 3 point in the system. 4 SUPERVISOR VAGIM: Well, as long as the demand 5 stays steady, and the demand is continuous, and it will take 6 a long time before the demand starts spinning off into 7 either light rail or some other means of transportation. We 8 really don't have the infrastructure that we used to have 20 9 years ago, where some wildcat, so to speak, or just an 10 upstart can go fire up and start selling gas real cheap to 11 make some money. 12 And because of the environmental issues of tanks 13 and all of those other kind of things, and zoning, we 14 basically -- and you folks, as soon as someone gets out of 15 the service station business, I notice those tanks and that 16 stuff goes out in probably half a day. 17 MR. JESSEL: Another environmental requirement. 18 SUPERVISOR VAGIM: You don't want anybody else 19 moving in there and firing up an independent. I mean that 20 would have been obvious at those stations. 21 MR. JESSEL: Those things come out of the ground 22 to make sure that the ground is clean around them. 23 SUPERVISOR VAGIM: I've watched brand new service 24 stations that for some reason didn't pan out, had met all 25 the environmental, and when the main lines -- brand guy PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 183 1 leaves, so does everything that they put in the ground. 2 They don't want competitors. 3 And that's the nature of the industry. That's 4 fine. But the question is, we're here today to figure out 5 why the price is so high. And we're also here today to 6 hopefully give the public some idea that the price is going 7 to come down. 8 My question is: Have we really put ourselves in a 9 position that you guys really have more of a control on this 10 thing than anybody ever imagined. 11 MR. JESSEL: Gee, I was hoping -- 12 (Applause from the audience.) 13 MR. JESSEL: -- I could shed some light on that. 14 I worked pretty hard to try to give you a feeling for how 15 those prices are set, and I think my model would tend to 16 argue that point. 17 Maybe I just wasn't clear enough. 18 SUPERVISOR VAGIM: Well, back to Lagarias' point, 19 where you indicated your refinery has got like a car with no 20 gas pedal. It just goes full bore. You obviously have some 21 ability to back off on production of fuel. 22 MR. JESSEL: Long term, yes. And what I was 23 talking about was the short-term price adjustments. And 24 that's what we're talking about here with last week's price 25 increase. That was -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 184 1 SUPERVISOR VAGIM: Your inventory's started 2 filling up. Demand is steady, and you're supplying 3 inventory in a steady state, and the demand is still steady, 4 you can back out on those fuel supplies that are pouring out 5 of that refinery, can't you? 6 MR. JESSEL: Or we could drop the price. 7 SUPERVISOR VAGIM: And if there's no more demand 8 because I may go 10 more miles and hopefully everyone is 9 going, you know, whatever miles -- you would like them to go 10 more and buy more of your gas, but there really isn't that 11 much more out of the system. 12 Basically, you're in the situation where you're 13 going to have to find other markets for that fuel. 14 MR. JESSEL: Well, unless we drop the price. And 15 that's the market working. If there's too much fuel in our 16 system -- 17 SUPERVISOR VAGIM: So, where are you going to -- 18 MR. JESSEL: -- and we want to keep our refineries 19 operating, and we know we've got crude coming -- 20 SUPERVISOR VAGIM: So, where are you going to sell 21 California fuel outside of California? 22 MR. JESSEL: We don't need to. We can drop the 23 price in California and get rid of everything we make. We 24 don't need to. 25 SUPERVISOR VAGIM: So, how are you going to get PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 185 1 rid of everything you're going to make? By people like 2 myself, really driving a lot, getting on the road? How is 3 it going to be used up? 4 MR. JESSEL: I'm going to take -- I, I'm speaking 5 only of Chevron, Chevron operating in a competitive 6 environment, I can get rid of all of my production by 7 dropping my prices. 8 I'm going to take people who are going to fuel up 9 at my station away from somebody else's station. That's how 10 I'm going to move my inventory. 11 SUPERVISOR VAGIM: Okay. 12 MR. JESSEL: If everybody else is in the same 13 position I am, they're going to have to follow me. 14 SUPERVISOR VAGIM: Which you just defined the 15 inverse of what has just happened, because you have the 16 supply, which was in short; and so, basically, everyone 17 could drive their prices up because no one wanted to run out 18 of fuel. 19 I think that's what you're saying, right? 20 MR. JESSEL: Yes. 21 SUPERVISOR VAGIM: And windfall or not, that was 22 one of the reasons you guys wanted to keep your commitment 23 to those you said you have to bring fuel to. 24 MR. JESSEL: We think it's a lot more important to 25 keep our people supplied. I think it would be a lot more PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 186 1 damaging to the program to hear about true shortages and see 2 gas lines where people really can get product. 3 So, you know, that's our priority. 4 SUPERVISOR VAGIM: Do you have any knowledge of 5 what -- for every so many cents per gallon the industry has 6 on the rack price, or whatever prices that you folks 7 establish, do you have an inverse in use? Is there an 8 established criteria for that? If it goes up 10 cents, 9 there's going to be a five percent reduction in use. 10 MR. JESSEL: Our marketing people may know that. 11 I personally don't. 12 SUPERVISOR VAGIM: But part of the dilemma, of 13 course, is at what point will we know, when your refinery 14 has met its production needs and everyone else's metal to 15 the pedal (sic) -- pedal to the metal, whatever they want to 16 say -- is pumping out as much as they possibly can, the 17 market becomes glutted with California fuel. Inventories 18 are now whole. At what point will the refineries just back 19 off and say, okay, we got a nice fuel supply here. Let's 20 keep the price high for a while -- 21 MR. JESSEL: How can we do that? 22 SUPERVISOR VAGIM: Well, my question is, where 23 else am I going to buy gas right now? 24 MR. JESSEL: You as a California consumer? 25 SUPERVISOR VAGIM: Yes. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 187 1 MR. JESSEL: From the dealer across the street. 2 SUPERVISOR VAGIM: But if he's no longer there 3 and, as independents, he's depending on you to give him his 4 fuel through another source that you're selling it through 5 some circuitous route that you folks know how to market, and 6 you don't talk to each other -- 7 (Laughter from the audience.) 8 SUPERVISOR VAGIM: I'm just trying to figure out 9 how much control really that we've lost, or the independents 10 in the marketplace have we lost in the last 20 years? 11 MR. JESSEL: I'm sorry. I don't have an answer, 12 but I do know where I buy gasoline, there are several 13 competitors around the same corner. And they're all pricing 14 to their product. 15 And if the price at the Chevron station is too 16 high and somebody doesn't want to pay it, they have a choice 17 across the street. 18 And I don't think we're at the point where there's 19 no choice anymore. I think there's plenty of competition 20 still in retail. There definitely is plenty at the 21 wholesale level, which is really what we deal with. 22 SUPERVISOR VAGIM: Right. Okay. Thank you. 23 CHAIRMAN DUNLAP: All right. Any other questions 24 of Mr. Jessel? 25 All right. Thank you very much. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 188 1 MR. JESSEL: Thank you. 2 CHAIRMAN DUNLAP: Dennis Lamb, Unocal; Chuck Walz, 3 Texaco; Tom Eveland, Kern; Duane Bordvick, Tosco. 4 And I would just like to remind the witness, we 5 have a number of people that need to testify today. So, I 6 encourage the oil company reps in particular, since they're 7 invited guests so to speak today, please not be redundant. 8 And you've had the benefit of hearing some of the 9 questions from the members of the Board. If you'd, you 10 know, direct your presentation to those items, we'd 11 appreciate it. 12 Good afternoon. 13 MR. LAMB: Good afternoon. My name is Dennis 14 Lamb. I'm the general manager of Fuels Planning and 15 Technology at the 76 Products Company, which is a division 16 of Unocal. 17 I was going to start off by saying that I 18 appreciate the opportunity to comment on the issues before 19 you today. I'll reserve that until after the question and 20 answer period, I think. 21 (Laughter.) 22 MR. LAMB: But I do intend to give you some view 23 of what we think are the price drivers here. I concur with 24 Al Jessel that it's a very difficult task, but I think it's 25 one that we're all wrestling with, and I'll try to do it PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 189 1 very briefly. 2 I also want to tell you what we're doing in the 3 marketplace as Unocal. And then I want to comment in 4 support of Chairman Imbrecht's outlook and some comments on 5 the impact that any changes in the rule might have on us. 6 First of all, let's talk about the drivers in the 7 marketplace, and I'll do that briefly. We see the -- 8 CHAIRMAN DUNLAP: We got the Press release. 9 MR. LAMB: I'm sorry? 10 CHAIRMAN DUNLAP: I was just holding up the Press 11 release. We got this distributed a moment ago as well from 12 Mr. Higby, Unocal Press release. 13 MR. LAMB: Oh, okay. I don't have it. 14 CHAIRMAN DUNLAP: He's undercut everything you're 15 about to say. 16 (Laughter.) 17 CHAIRMAN DUNLAP: Dennis, I'll pass it around to 18 you. 19 SUPERVISOR RIORDAN: See if you're saying the same 20 thing. 21 (Laughter.) 22 MR. LAMB: Well, I'll find out if I'm speaking for 23 Unocal or myself here. 24 (Laughter.) 25 MR. LAMB: I think we're in sync. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 190 1 CHAIRMAN DUNLAP: All right. 2 MR. LAMB: We've seen the price go up in the 3 marketplace about 30 cents since the first of the year. 4 We've talked about a lot of those drivers. I think you can 5 really lump them together into three categories, and we can 6 use the numbers that have been used here today by the 7 recognized authorities that are most capable of gathering 8 those numbers. We'll use Chairman Imbrecht's number of 12 9 cents on the crude side. Let's use CARB's number of 10 10 cents. That's the number we've been dealing with all along. 11 And that leaves you roughly with 22 cents out of 12 the 30. So, if there's a black box, I think this is 13 probably the one that mystifies us. 14 Let's look at Unocal for a just a second. What 15 happens with that? Unocal buys crude, and we don't just 16 stuff it from one pocket to the other. We write checks for 17 crude. We're paying that increased 12 cents. 18 The cost of CARB gasoline we're paying for, and we 19 hope to be getting our investment back on that. 20 We're also -- and I'll explain this a little bit 21 later when we get into what Unocal is doing in the 22 marketplace -- we're out buying gasoline. And we're not 23 just buying gasoline where we're can, but we're buying 24 components for gasoline where we can. 25 We're paying a premium for those. We're PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 191 1 chartering ships to bring them here. And it's that other 2 increment, that black box that's so hard to explain that's 3 helping us buy at a premium price and transport to 4 California the supplies that help alleviate the situation. 5 What are we doing? What is Unocal doing? 6 Fortunately, we're running well. We haven't had any 7 refinery problems. We did have a planned turnaround early 8 in the session. We had covered that much as Chevron 9 explained they had covered theirs. 10 But since then, we've been running well. And, as 11 a matter of fact, we've been running over the plan that we 12 have submitted to CARB in the month of April. And with the 13 addition of these base stocks and added supplies that we'll 14 get out of the Gulf, we'll run significantly over our plan 15 for May. 16 So, that's the benefit that we see in being able 17 to hire ships, transport from the Gulf base stocks that will 18 allow us to increase our production over what we ever 19 thought we could. The incentive was there. 20 Just very quickly then, what would be the impact 21 on us or on the general market perhaps of any change in the 22 regulation at this point? 23 We're relieved to hear that that isn't 24 particularly on the agenda, but it has been suggested in 25 some quarters. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 192 1 Well, first of all, I think it was also pointed 2 out here that we're not entirely in control of what happens. 3 We still have to meet the Federal regulations in a very 4 significant part of the California market -- all of Southern 5 California and soon here in Sacramento. 6 So, we still have to deal with the Federal 7 regulation. That's a very expensive portion of the 8 California regulation. 9 But the biggest impact might be that the sellers 10 in the Gulf might lose interest in this market, and most 11 assuredly would if it has the desired effect of increasing 12 the supply and lowering the price. 13 The fact is that an impact on Unocal might be that 14 we would be unable to get those supplies that would allow us 15 to increase our production here in the State and help cover 16 the gap that we have until the refiners, such as Shell, are 17 back fully onstream. 18 There was a question a little bit earlier -- what 19 do we think the Board should do? 20 I think you're doing the right thing right now. I 21 think that we do have the opportunity to come before you. 22 We're all different companies. We're all affected 23 differently. So, you're going to hear slightly different 24 versions of how people are affected. 25 We're all in different situation with how our PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 193 1 refineries are running. We've got different opportunities. 2 We don't have a refinery on the West Coast other than in 3 California, so we can't bring in product such as ARCO 4 mentioned. So, we're all somewhat different. 5 But you're giving us air. You're looking for the 6 explanation. The public needs to know and they need to 7 understand. But more than that, they need to have patience. 8 I believe that the American public generally believes in the 9 free market system. They will allow it to work. But they 10 won't allow it to work without explanation. 11 So, I think your hearing today is a very important 12 part of that process, and I hope the media will take the 13 correct message out there. 14 But we agree with Chairman Imbrecht. Let the 15 market work. It is working. Ships are on the high seas. 16 We have one loading this weekend. 17 Thank you. 18 CHAIRMAN DUNLAP: Okay. Very good. Thank you, 19 Mr. Lamb. Any questions? 20 I appreciate that. Brevity is a virtue. 21 MR. LAMB: Thank you. 22 CHAIRMAN DUNLAP: Thank you. Mr. Walz from 23 Texaco, followed by Tom Eveland, Wee Yee from Mobil, and 24 Duane Bordvick of Tosco. 25 Good afternoon. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 194 1 MR. WALZ: Good afternoon. My name is Chuck Walz, 2 the Vice President of Planning of Texaco Refining & 3 Marketing. 4 Texaco Refining & Marketing refineries at 5 Bakersfield and Wilmington have complied with all aspects of 6 both the CARB low aromatics diesel regulation and the CARB 7 Phase 2 gasoline regulation. 8 Compliance with these regulations have cost the 9 Texaco shareholders millions of dollars and an obvious 10 considerable commitment of engineering resources. 11 However, regrettably, just as in 1993, when the 5 12 cent a gallon increase in Federal tax on diesel occurred at 13 the same time that the CARB low sulfur diesel was required 14 in the marketplace, we have several independent events 15 occurring simultaneously, which are causing the price of 16 diesel and gasoline to rise dramatically. And certainly, 17 they've been aired at length today. 18 We concur with the fact that the cost of crude oil 19 certainly has been the major element in that upward 20 pressure. 21 Another key factor to the rise in prices is that 22 knowledgeable customers who purchase our products recognize 23 that there is a link between crude and produce prices. 24 These customers, where possible, build their inventories 25 with less expensive product in anticipation of potential PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 195 1 price increases. 2 We think that this has happened in the recent 3 past. This added demand, along with the normal every day 4 demands of the motoring public, creates a perception that 5 the daily demand for products is increasing when, in 6 reality, the product is simply being shifted to customer 7 inventories and not accounted for in routine industry 8 statistics. 9 To address this problem within Texaco, we have 10 been pacing most of our Texaco racks in California since 11 late March to avoid customers taking excessive amounts of 12 product over short periods of time and thereby have avoided 13 run-outs throughout our system. 14 Obviously, layered on top of these events was the 15 requirement to begin producing CARB 2 gasoline on March 1st 16 at our two California refineries. With this came the 17 increased cost of manufacture which, according to CARB's own 18 numbers, were estimated at 5 to 15 cents a gallon. 19 However, as we've discussed today, just as 20 introduction seemed to be going smoothly and demand was 21 picking up as it normally does during the spring of each 22 year, refineries in California and West Texas experienced 23 unscheduled downtime which caused an imbalance in supply and 24 demand for both gasoline and diesel. 25 The supply imbalance has created further upward PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 196 1 pressure on prices. However, unlike the past, where imports 2 were readily provided from nearby, out-of-state refineries 3 in the Northwest or in the Gulf Coast, outside supply can 4 now be provided only from a limited number of refineries, 5 because of the more stringent specifications of CARB 6 gasoline. 7 Such refineries might have greater transportation 8 costs and longer leadtimes to get the required fuel to 9 California. Imports will eventually move into California as 10 the differential between the California market and other 11 markets widens. 12 Once refinery problems are resolved, the need for 13 these imports will be lessened or maybe even entirely 14 eliminated, which would be supported, I believe, by some of 15 the earlier numbers that CARB and the CEC have put out prior 16 to March 1st. 17 With regard to what Texaco is doing today, we are 18 operating both our refineries wide open, making maximum 19 production of both CARB gasoline and CARB low aromatics/low 20 sulfur diesel. 21 We feel that none of the data that we've seen or 22 that we've heard about here today supports the conclusion 23 that emergency -- excuse me -- a supply emergency exists at 24 this time. 25 If any of the current CARB specifications on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 197 1 gasoline and/or diesel are relaxed, it's our position that 2 we would not forecast any meaningful change in our 3 manufacturing capability. 4 As in late '93, we feel that the free market must 5 be allowed to work without any interference. We must stay 6 the course and allow complying imports to flow freely into 7 the State if dictated by economics. 8 Nothing is as efficient as the free market, 9 particularly when additional supplies are needed to meet the 10 demand. There is far too much surplus refining capacity in 11 the world today to let any market go unsupplied. 12 That concludes my formal statement. But I would 13 be glad to answer any questions that you may have. 14 SUPERVISOR RIORDAN: Thank you. Thank you, Mr. 15 Walz, and let me open it up now for questions from the Board 16 members. 17 Are there any? Mr. Calhoun. 18 MR. CALHOUN: Yes. I have one question, Mr. Walz. 19 MR. WALZ: Yes, sir. 20 MR. CALHOUN: I think you made the point that your 21 customers stockpile your product and use that to their 22 advantage? 23 MR. WALZ: Well -- 24 MR. CALHOUN: If that's true, to what extent does 25 it happen? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 198 1 MR. WALZ: It's difficult to say to what extent 2 it's happened, because there are no -- no numbers that are 3 available to measure that. However, we do know that we did 4 experience some rack runs, if you will, in late March. And 5 if you were in business and knew that the raw material cost 6 of a refiner was going up, you might be inclined to go out, 7 if you have your own inventory, to put as many barrels in 8 there as you possibly could. 9 And we think it's happened, but we have nothing 10 that we can reach out and point to in the way of numbers. 11 MR. CALHOUN: So, that's really speculation. I 12 agree with that. If I were in business, I certainly would 13 do that if I had the capacity to do it. I just wonder to 14 what extent that that customer has the ability to do that. 15 MR. WALZ: The only indication we have that we did 16 have some unusual levels of liftings prior to putting our 17 racks on the pacing. So, it would indicate that people were 18 putting it somewhere, because they were taking more than 19 what they customarily take. 20 MR. CALHOUN: Thank you. 21 CHAIRMAN DUNLAP: Ms. Edgerton. 22 MS. EDGERTON: Mr. Walz, what are you telling your 23 customers when they -- both your commercial and just the 24 individual customers that you are doing in order to bring 25 the prices down? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 199 1 I'm sure you're getting a lot of complaints, just 2 as we are, and how are you explaining the increase in the 3 price publicly to them, and whether they can expect to 4 continue paying that or not? 5 What are you -- what's your public position on 6 those issues that are in front of the consumer? 7 MR. WALZ: Well, with regard to why prices are 8 where they're at today, it relates to the issues that I 9 outlined in my comments -- crude, CARB 2 gasoline. Those 10 are -- and thirdly, the matter of an imbalance in the supply 11 and demand. 12 And if anyone monitors the PADD 5 gasoline 13 inventories, which are API statistics that are published on 14 a weekly basis, one would readily recognize that the 15 inventory for the industry -- and this is an industry 16 number-- has been driven down over recent weeks, which, 17 again, is another way of indicating that there is a supply 18 imbalance. 19 As that number drifts down because of operating 20 problems, it causes the market to become concerned over 21 where the supply will come from. And, as indicated in some 22 of the earlier discussions, prices start to move up. 23 As the prices move up, if they become high enough 24 compared to other markets -- such as, say, the Gulf Coast -- 25 and if there is enough of a differential to support buying PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 200 1 the product there, it can be found, you can buy with 2 California specifications, and if it will come in the cost 3 of the transportation to get it to the California market, 4 and if the individual buying that cargo is willing to take 5 the risk, then those barrels will flow. 6 And that's really what is now happening. The 7 differentials have gotten to that point. And, as we've 8 heard today, there are cargoes on their way. 9 And we've created enough of a differential between 10 here and the Gulf Coast to cause that to occur. 11 As inventories start to build, either through 12 imports or through returns to normal operation in the 13 refineries, then that reduces the upward pressure on the 14 prices. 15 It's the free market at work. 16 MS. EDGERTON: Again, just going over that. When 17 you are communicating Texaco's analysis, how much do you 18 think CARB fuel has contributed to the 32 cents average 19 increase? 20 MR. WALZ: Well, we believe that the CARB staff's 21 range of 5 to 15 cents is a very accurate one based on work 22 we've done in-house, and think that the 10 cent average 23 number that they've used from time to time is a reasonable 24 projection. 25 MS. EDGERTON: So, then, if I understand you PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 201 1 right, if you were saying that there were two -- I mean the 2 first two causes that you stated were the crude and the ARB, 3 you would say that, certainly, a substantial number -- the 4 most significant piece by far is the crude prices? 5 MR. WALZ: Most definitely. Most definitely. 6 MS. EDGERTON: And did I understand you to say 7 that if we did change -- if there were any suspension, it 8 wouldn't change anything in terms of the prices that you 9 would have to charge? 10 MR. WALZ: Well, we've got some costs in our 11 refining and that was well discussed earlier. And many of 12 those units would continue to operate, so you experience 13 that same operating expense. So, it's doubtful that you 14 would see a very significant reduction, if any, in the 15 operating expense. 16 But again, the prices are not necessarily a 17 reflection of the cost of manufacturing. It's the market 18 and the supply that's out there or not out there. 19 MS. EDGERTON: And would you hazard a guess as to 20 where the market, the global market's going? 21 MR. WALZ: No, I would not. As indicated earlier, 22 that's not in the vocabulary today. 23 MS. EDGERTON: Thank you. I wanted to give you 24 the chance. 25 MR. WALZ: Thank you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 202 1 CHAIRMAN DUNLAP: Any other questions for our 2 witness? 3 Thank you. 4 MR. WALZ: Thank you. 5 CHAIRMAN DUNLAP: Tom Eveland? Good afternoon. 6 MR. EVELAND: Good afternoon. Thank you. My name 7 is Tom Eveland. I'm Vice President of Government Affairs 8 for Kern Oil and Refining Company. 9 Kern is the only small refiner producing 10 California's Cleaner Burning Gasoline and the only small 11 refiner producing significant quantities of CARB diesel. 12 Kern's production volume of both gasoline and 13 diesel is limited by CARB regulations, which put annual 14 volume caps on our production of small refiner California 15 Cleaner Burning Gasoline and small refiner CARB diesel. 16 Since April 1st, we've been producing well in 17 excess of our annualized limit on both products. In fact, 18 we estimate now that for the month of April, we will be 19 about 75 percent over our annual cap on gasoline and about 20 30 percent over our annual cap on diesel. 21 This means that we will have to lower our 22 production at some point to get back within the limit by the 23 end of the year. 24 Kern has been able to supply its historic 25 customers their full normal demand during this period of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 203 1 concern and, to a limited extent, we have been able to make 2 temporary supply arrangements with a few new customers, some 3 of whom are those who have experienced severe supply 4 problems because of refinery disruptions. 5 I might add that Kern has not yet run out of 6 either product. 7 The current supply situation with regard to 8 California gasoline and diesel markets is that which exists 9 in all competitive free markets when the overall demand 10 temporarily exceeds the available supply. Prices adjust to 11 the point where additional supplies are attracted to the 12 market and/or demand is curtailed to bring the market back 13 into balance. This is the law of supply and demand at work. 14 Overall, the recent increases in crude oil costs 15 and a 5 to 15 cent estimated refining cost increment that 16 has been published, or the 5 to 8 cents -- as stated by 17 Chairman Dunlap and Chairman Imbrecht this morning -- are 18 factors. But what is also a very important factor is that, 19 in the last year or so, several refineries in California 20 have either shut down or stopped making gasoline and CARB 21 diesel. 22 For many years, there was a surplus refining 23 capacity on the West Coast, making refinery economics very 24 unattractive. At the same time, CARB and other agencies 25 adopted very tough and very expensive environmental PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 204 1 regulations. 2 This combination of poor underlying economics and 3 the increased capital and operating costs required to make 4 gasoline and diesel in compliance with the environmental 5 regulations has eliminated most of the overcapacity. 6 California has always experienced a somewhat sensitive 7 supply and demand balance with regard to gasoline and 8 diesel. 9 However, a much more delicate balance between 10 supply and demand has now been created. We have absolutely 11 no doubt that the market will soon sort itself out as its 12 capacity that is temporarily been out of service gets back 13 into operation, and as the gasoline cargoes start arriving 14 on the West Coast from other areas. 15 Moreover, during the current imbalance, Kern and 16 other refiners have taken business risks in acquiring and 17 bringing in nonhistorical feedstocks to maximize our 18 gasoline and diesel output. 19 Frankly, since the news release of April 18th that 20 CARB was scheduling a hearing on this issue, Kern has had to 21 be less aggressive in seeking feedstock acquisitions because 22 of the possibility of government interference in the market. 23 The best thing CARB can do now in response to this 24 situation in our belief is nothing. And the last thing the 25 current situation needs is the introduction of artificial PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 205 1 remedies and factors. This is not unique to the California 2 gasoline and diesel markets. 3 The market forces at work today are the same as 4 those that have always influenced petroleum and other 5 markets. And these forces will sort themselves out as they 6 have in the past. 7 It's Kern's strong opinion, in fact that the CARB 8 diesel situation back in October of 1993, was already in the 9 process of correcting itself when CARB temporarily suspended 10 the regulations for off-road diesel. 11 CARB's action then was unnecessary. We, in 12 California, must come to the realization that either we have 13 a set of CARB regulations that we're to abide by and comply 14 with or we don't. We cannot pick and choose when it suits 15 us. Let the market correct itself, as it surely will, as 16 soon as this shutdown capacity is back on line and gasoline 17 cargoes start arriving. 18 If CARB interferes with the market now by 19 suspending regulations or similar actions, Kern and probably 20 other California refiners will be less willing to take those 21 same business risks to increase their supply the next time 22 there's a shortfall. 23 Thank you. 24 CHAIRMAN DUNLAP: Thank you, Mr. Eveland. Any 25 questions of the witness? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 206 1 Very good. Thanks very much. 2 The Mobil representative, Wee Yee? Again, I'd 3 just like to remind the witnesses, particularly the invited 4 guests, I should say, from the oil industry, to please not 5 be redundant so we can move on. 6 MR. YEE: Good afternoon. I have a short 7 statement, but I will be glad to make it shorter. 8 I obviously, you know, have identified what we 9 thought were the market forces, but they've been talked over 10 quite a bit. So, I'll skip discussions regarding crude. 11 And I will skip discussions regarding the unplanned and 12 unscheduled outages of the various refineries on the West 13 Coast. 14 However, I do want to go over one paragraph, which 15 has to do with perceptions of how gasoline supply is 16 obtained. There's really three ways to obtain gas supplies 17 to satisfy gasoline demand. 18 First and most obvious, there's the refinery 19 production; second, there's the existing inventory on hand; 20 and, third, through imports from other regions. 21 Market prices will reflect a balancing of the 22 three supply methods. Inventories are carried to implement 23 smooth supply operations and also to act as buffers in the 24 event of unplanned refinery problems. 25 The initial impact of unplanned refinery problems PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 207 1 is to draw on inventory. During this phase, the impact on 2 prices tend to be small. However, if the industry sustains 3 concurrent or a series of unplanned refinery problems, the 4 safety element of refining stock is rapidly used up. 5 In this environment, the element of supply has 6 been curtailed by declining production and inventories. 7 For this third supply element -- imports -- to 8 occur, prices and timing become important. And the 9 economics to support the import of gasoline requires that 10 the price of the import location be higher than the export 11 location by some amount large enough to cover the cost of 12 transportation, the incremental production cost, and some 13 price risk differential. 14 In addition, it will take several weeks before 15 imports can actually be delivered due to production and 16 delivery time. 17 We understand that there are a number of import 18 cargoes on their way to the West Coast. Over time, such 19 imports and the recovery of refinery production will address 20 the current supply situation. I have some comments 21 regarding the CARB differential, but I think that's also 22 been talked about as well. So, I'll skip that. 23 CHAIRMAN DUNLAP: On that point, do you have a 24 contrary opinion? 25 MR. YEE: I don't have a contrary opinion. But I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 208 1 think one thing that's been discussed during the day has 2 been the notion of the relationship between cost versus 3 price. I think at the end of the day, the relationship may 4 be good or bad, depending on where you happen to be. 5 Price, to me, is a reflection of the work of the 6 product. As an example, I will be a new transplant to 7 California, moving here from the East Coast, and I'm looking 8 at houses. If I buy a house from someone that bought their 9 house initially 20 years ago, would I expect that person to 10 sell that house to me based on his cost? I don't believe 11 so. He'll sell it to me based on what he sees of the 12 current market. 13 By the same token, someone who bought his house 14 five years ago at a very high price and now sees the market 15 lower, will he expect to sell at his higher cost? I don't 16 believe so. It's a question of value. 17 In terms of the value of CARB versus conventional, 18 the market will also dictate what that is. For a period of 19 time, during about a month and a half or so ago, we actually 20 had a situation where CARB has no differential versus 21 conventional. Now, it's -- it's now worked out to the 8 to 22 10 cent range. 23 So, that also is a reflection of the supply and 24 demand for the two types of products in today's market. But 25 clearly, the 5 to 15 cent range that the Board has estimated PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 209 1 is well within the range of the value of CARB. 2 CHAIRMAN DUNLAP: Okay. 3 MR. YEE: Basically, those are the only points I 4 wanted to make for the sake of brevity. And I'll be open to 5 answer questions. 6 CHAIRMAN DUNLAP: Thank you. Any questions for 7 our witness from Mobile Oil? 8 Very good. Thank you. 9 MR. YEE: Okay. Thank you. 10 CHAIRMAN DUNLAP: All right. Duane Bordvick, Bill 11 Dermott from Exxon; Lynn Westfall, Ultramar; and Doug 12 Henderson, WSPA. 13 MR. BORDVICK: Good afternoon. It's so good to 14 see all of you. I've been here all day and I haven't seen 15 anyone. (Remarking on TV coverage blocking view of Board 16 and staff).) 17 (Laughter.) 18 CHAIRMAN DUNLAP: Yeah, I think it was Mr. Lamb 19 ran them all off. He was talking about the media getting 20 the message right, and they left when he said it. 21 (Laughter.) 22 MR. BORDVICK: Mr. Chairman, I am Duane Bordvick. 23 I'm Vice President of Environmental and External Affairs for 24 Tosco. 25 And I'm trying my darnedest to abbreviate PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 210 1 abbreviated comments. So, bear with me if it's a little 2 broken up. 3 I did want to focus on the forces in response to 4 your invitation, and talk about the current situation at 5 Tosco's refinery here in the Bay Area -- over in the Bay 6 Area. 7 First, a little background quickly on Tosco. We 8 are an independent refiner and marketer operating three 9 refineries, including 160,000 barrel per day refinery in 10 Martinez, about 30 miles east of San Francisco. 11 In California, we now market our output through a 12 network of about 350 BP branded retail outlets in Northern 13 California and through sales to a hundred or so independent 14 gasoline and diesel marketers located throughout the State. 15 Tosco has long been a significant supplier to the 16 independent marketer segment of the industry, and we have 17 maintained our presence despite our recent movement to 18 retail marketing. 19 As an independent refiner, Tosco has no crude, no 20 proprietary crude, so we must buy a hundred percent of our 21 raw material out on the open market. Most of that crude 22 here in California is Alaskan North Slope crude and San 23 Joaquin Valley crude. And, of course, we have been subject 24 to the increasing crude prices and have felt that dearly 25 recently. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 211 1 I wanted to just hit a couple key points. I think 2 they've been covered very well today, and I congratulate the 3 Energy Commission and their analysis and, thank you, the Air 4 Resources Board, for providing this forum for us today. I 5 agree. I see no evidence of a shortage of supply. 6 Tosco has met, is meeting, and expects to continue 7 to meet all our customers' product demands. I agree that 8 the recent and current prices are a result of market 9 conditions, a combination, a concurrent combination of 10 factors that have been generally described today, and that 11 the segment associated with Phase 2 gasoline is within the 12 expected range. 13 And, yes, as I have testified to this Board a 14 number of times before, Tosco would agree that the 5 to 15 15 cent range is within the range in our experience at the Avon 16 refinery. 17 Also, in anticipation of a question, we do not 18 agree that there is a need for any kind of manipulation with 19 the regulation. I think that would be a large mistake. The 20 confidence of the community, regulated community, could be 21 irreparably damaged, and the Air Resources Board's 22 credibility with the public could be severely shaken, and 23 major air quality ad health benefits -- probably most 24 importantly -- would be irretrievably lost. 25 The market is working. Let it work. Clean fuels PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 212 1 are here. Let them work. It's too bad we can't be 2 congratulating ourselves today -- Air Resources Board, 3 industry, the public -- for a job well done. We went 4 through some real tough regulatory moves to adopt the clean 5 fuel programs. We did it. We constructed what we needed to 6 do on time and produced the fuel. It's here, and it's 7 working, and it's providing major benefits. 8 I wanted to touch upon our own particular 9 situation. We have had an unplanned outage at the refinery 10 near the Bay Area. Our catalytic cracking unit at the Avon 11 refinery is temporarily shut down, which has reduced a small 12 amount output of our Phase 2 gasoline. 13 The shutdown had little effect, fortunately, on 14 our CARB diesel production. The problem is understood. 15 It's not a complex problem. And we're working swiftly as we 16 can to correct the problem. And we expect to return to full 17 capacity in early May, very early May. 18 And during this period, most importantly, we have 19 been successful in acquiring additional supplies through 20 purchase and exchange to allow us to continue to serve all 21 our customers' needs -- the independent market customers and 22 our branded customers. 23 So, that's about it. I conclusion, I think the 24 market is working. I understand there are a lot of people 25 that are suffering because of the current market conditions. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 213 1 I think it's important, however, that we allow it to 2 continue to where we have the inevitable changes that will 3 occur in the marketplace. 4 CHAIRMAN DUNLAP: Okay. Mr. Bordvick, relative to 5 the problem at your facility, how is that coming? 6 MR. BORDVICK: Very well. 7 CHAIRMAN DUNLAP: Okay. 8 MR. BORDVICK: Very well. As I mentioned, it's 9 not a complex problem. We project with very, very high 10 confidence that in early May it will be solved and the cat 11 cracker will be back in service. 12 CHAIRMAN DUNLAP: Okay. Very good. Any questions 13 of our witness? 14 Supervisor Vagim. 15 SUPERVISOR VAGIM: Thank you. You had a letter 16 here to us pretty much covering the ground that you just 17 covered. 18 What percentage of your crude do you have -- you 19 say you have no fields for yourself, so you're out in the 20 market for all at a hundred percent. 21 MR. BORDVICK: Yes. 22 SUPERVISOR VAGIM: Is some of that contracted 23 amount, or is it all spot market? 24 MR. BORDVICK: There are some contracted amounts 25 and some spot purchases, yes. And I don't know what the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 214 1 split is. But we have some contracted and some that's not 2 contracted. 3 SUPERVISOR VAGIM: What was your -- you don't know 4 what the split is, though, but obviously you are big player 5 in the spot market. What kind of prices did you see on the 6 spot market when you went out to get your fuel, your crude? 7 MR. BORDVICK: Crude? 8 SUPERVISOR VAGIM: Uh-huh. 9 MR. BORDVICK: Well, I think we experienced the 10 same thing everyone else did. Rising prices, rapidly rising 11 prices. We saw the domestic crude that we buy also on the 12 spot market was increasing faster than the rest of the 13 nation. It was not something we like to see. 14 We look all over the world, if we have to, and try 15 to bring in crude that will work in our refinery. Our 16 refinery is geared to run domestic crude. We run best when 17 running Alaskan North Slope and California crude. So, 18 that's our first choice. But, if economically it's just not 19 feasible, then we will go out on the open market. 20 It was just increased costs were the rule. 21 SUPERVISOR VAGIM: Well, you said California 22 available crude rose faster than the other crude available 23 in the rest of the nation. 24 Can you put a reason for that? 25 MR. BORDVICK: It's hard to say. We believe that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 215 1 part of the reason is the recent decision to allow the 2 export of ANS crude. I think that has created an upward 3 pressure on Alaskan crude. 4 SUPERVISOR VAGIM: But none of its moved out yet, 5 has it? 6 MR. BORDVICK: None of it has moved out yet to my 7 knowledge, but again, the market's a strange place. People 8 will anticipate what may happen, and that alone might cause 9 some market changes. 10 SUPERVISOR VAGIM: So, we saw a lot of 11 anticipatory action. 12 MR. BORDVICK: That's one explanation. 13 CHAIRMAN DUNLAP: Anything else, Supervisor Vagim? 14 SUPERVISOR VAGIM: Just one last question. When 15 you price your eventual product -- and you say you have BP 16 as one of your terminus points. Do you sell to 17 independents, also? 18 MR. BORDVICK: Yes, we sell to independents on a 19 wholesale level. 20 SUPERVISOR VAGIM: And is there a significant 21 shop-around by them? 22 MR. BORDVICK: Absolutely, yes. They have a 23 choice of where they can go. They can go to us. They can 24 go to the rack down the street. They can go where they can 25 find some. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 216 1 SUPERVISOR VAGIM: So, there is, you feel, 2 sufficient amount of that type of player in the marketplace 3 to create this competitive domino effect in the reverse 4 direction? 5 MR. BORDVICK: We feel it's a very competitive 6 field, yes. 7 SUPERVISOR VAGIM: Thank you. 8 CHAIRMAN DUNLAP: Very good. Thank you. Bill 9 Dermott, Exxon; Lynn Westfall, Ultramar; Doug Henderson, 10 WSPA. 11 Good afternoon. 12 MR. DERMOTT: Good afternoon, Mr. Chairman, 13 members of the Board. My name is Bill Dermott, and I am the 14 Legislative & Regulatory Affairs Manager for Exxon Company, 15 U.S.A. I'm here at your request to provide my Company's 16 views on the factors that influence the supply, demand, and 17 the price of gasoline and diesel fuel in California. 18 Let me say a few things, if I can at the outset, 19 first of all, there's some written testimony. I think it's 20 being circulated right ow. 21 Secondly, that I think it's a bit of interest to 22 the Board today and that is, we have the one refinery in the 23 State at Benicia; that we are operating at max capacity at 24 that refinery. 25 We have been doing so, we will continue to do so PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 217 1 as long as it's economical. We have invested in that 2 refinery about $200 million as far as making Cleaner Burning 3 Gasoline. 4 The second thing I think is of importance to the 5 Committee (sic), and that is that we are, in fact,meeting 6 all of our supply commitments to all of our customers in the 7 State. We have been doing that and we will continue to do 8 that. And I think that's important. 9 As to all the other factors impacting motor fuel 10 supply and price, I think that they received sufficient 11 attention here today. 12 And what I'd like to do is let you rely on my 13 written submission as our perspective on all those issues. 14 I think it's there in sufficient detail for you to compare 15 any of the other comments that have been made today. 16 I would like to say that we believe that the 17 marketplace is responding as you might expect in the current 18 situation. Swings in prices are not unusual, and I think 19 motorists' concerns are certainly understandable. We're 20 very concerned about that. 21 We think that public attention does get focused 22 more so on the upswings than it does on the downswings, and 23 that's what we're seeing. And again, I think it's been said 24 here, and we'd like to emphasize it. We believe that over 25 the years, history has shown that the marketplace has proven PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 218 1 to be the best fulcrum to determine the balance between 2 supply and demand. 3 And then, finally, and I think it's very 4 important, you have brought an awful lot of resources. We 5 have brought an awful lot of resources. Everybody here has. 6 We can't lose sight of the air emissions benefits that we're 7 achieving every day that we sell this gasoline. 8 I know it's been said that it's unprecedented. 9 It's extremely important to California. And we all have a 10 stake in that. We're committed to see that that works. 11 We do believe that any attempt to alter or delay 12 the introduction will only interfere with the market 13 response and reduce the environmental benefits that I just 14 mentioned. 15 And we think that, in the long term, it kind of 16 proves more harmful than it does beneficial to today. And 17 again, let the market work. We think it's the best 18 mechanism. My comments are brief, and I'll be glad to 19 answer any questions you may have. 20 CHAIRMAN DUNLAP: Thanks, Mr. Dermott. Any 21 questions? Ms. Edgerton. 22 MS. EDGERTON: Mr. Dermott, we've got you today, 23 because everyone else ran refineries. And I see you're a 24 legislative and regulatory affairs manager. So, they're 25 micro, and you're supposed to macro. You're supposed to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 219 1 know the big picture. 2 So, what's your view -- 3 MR. DERMOTT: So, you can't ask me any little 4 "teeny" questions. 5 (Laughter.) 6 MS. EDGERTON: So, I won't ask you any -- so, 7 you're not going to get any teeny question. I've been 8 saving up to ask a big question. 9 MR. DERMOTT: I'm not going to answer what's going 10 to happen in the future either. 11 (Laughter.) 12 MS. EDGERTON: Well, that's exactly what would 13 like to ask you. 14 Now, Exxon does have crude oil supplies. 15 MR. DERMOTT: Yes, we do. 16 MS. EDGERTON: Significant ones. And what I 17 would be interested in knowing is, do you -- were you here 18 when Chairman Imbrecht spoke? 19 MR. DERMOTT: I was, yes. 20 MS. EDGERTON: And he made some comments about the 21 United Nations negotiations. 22 MR. DERMOTT: U.N. and Iraqi negotiations. 23 MS. EDGERTON: Do you have -- is Exxon monitoring 24 those closely? 25 MR. DERMOTT: I'm sure that we have somebody PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 220 1 that's watching those, yes. 2 MS. EDGERTON: That wouldn't be -- is that in your 3 bailiwick? 4 MR. DERMOTT: No, it's not. 5 MS. EDGERTON: No, it's not. 6 MR. DERMOTT: No. 7 MS. EDGERTON: Do you have any insights you can 8 share with us about what effect you think it might have if 9 that continues to be sort of an on again/off again kind of 10 negotiation? 11 MR. DERMOTT: I know it's a factor. But I 12 wouldn't want you to take away that it's an overriding or 13 the most influential factor. I don't think that's the case. 14 Certainly, it's been a factor, and people have to take it 15 into consideration. 16 And I think you need to put it in perspective. 17 We're talking about a big global market for crude oil. 18 There's just a whole lot of things that happen in a lot of 19 regions in the world that impact crude prices. And I think 20 that may be one of them, but I certainly wouldn't advise you 21 to think of that as being the overriding influencing factor. 22 MS. EDGERTON: Well, if it did come in, what size 23 has the industry been bandying around? What size of the 24 crude market are they capable -- 25 MR. DERMOTT: (Interjecting) I'm not familiar PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 221 1 with what those figures are. I'm really not sure. 2 MS. EDGERTON: If that wasn't the -- if there were 3 a number of other factors, what would you say the No. 2, 4 besides the Iraqi negotiations? 5 MR. DERMOTT: I think what's been said to here, I 6 think, already, that the price of crude was influenced -- 7 well, it's growing demand around the world that's going to 8 have an impact on crude prices. I think it's interest of 9 people that are producers and what they want to do as far as 10 producing is going to have an impact for a while. 11 You know, I think the growing demand for products 12 will have an influence on crude, prices of crude. 13 I think we talked today, we're seeing some 14 increases in demand for product. Certainly, that's 15 influencing people that produce crude and its influence on 16 those prices. 17 You know, as someone said, that's the way the 18 world markets work and it's where all information is 19 transferred instantaneously around the world now. And when 20 people are communicating, and the futures markets, and a 21 whole lot of things that tend to give people a pretty good 22 bead on world markets for crude and product. 23 So, I think all of these just add to the overall 24 competitiveness. And that's what you're seeing out here and 25 nothing more. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 222 1 MS. EDGERTON: Thank you. 2 CHAIRMAN DUNLAP: Mr. Lagarias. 3 MR. LAGARIAS: You've indicated in your prepared 4 remarks that the increased demand, more vehicle miles 5 traveled, the high-performance engines, and the sports 6 utility have all resulted in increased demand and that's 7 just driving up prices. 8 Now, if we had higher efficiency cars, if we had 9 alternative fuels, and if we had less mileage driven, all 10 these reductions in demand would result in lower prices 11 because the demand would go down? 12 Is this what you're saying? 13 MR. DERMOTT: Well, I'm saying that there are a 14 lot of things that impact the price, and certainly those 15 demand factors are one of the things that influence. 16 Don't forget, we just talked today about crude 17 prices and how they impact produce prices. And we also 18 talked about regulations and how they impact prices, too. 19 So, I don't think you can single out that one variable and 20 make that observation, and then assume that prices will go 21 down. 22 MR. LAGARIAS: Well, the consistent message I seem 23 to be hearing is that the marketplace is the best place to 24 determine balance between supply and demand. So, you're 25 suggesting perhaps, "Let us go the way we are. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 223 1 "We're happy, fat, and sassy." 2 Do you have anything to say to that? 3 MR. DERMOTT: Keep rolling with it. 4 MR. LAGARIAS: Thank you. 5 CHAIRMAN DUNLAP: Thank you, Mr. Dermott. Lynn 6 Westfall from Ultramar, Doug Henderson, Jan Speelman, and 7 Dennis DeCota. 8 MR. WESTFALL: Good afternoon, everybody. My name 9 is Lynn Westfall. I work for Ultramar, Inc., and I, first 10 of all, want to thank you for asking us to participate this 11 afternoon. 12 I want to make a statement now that I'm going to 13 live to regret very quickly. I'm here from our company 14 because, within Ultramar, I'm charged with understanding, 15 explaining, and -- God help me -- forecasting for the West 16 Coast refinery industry. I make absolutely no claim to 17 being right. I do make claim, after 20 years in the 18 business, having an opinion based on a lot of experience in 19 all areas of refining and marketing. 20 I really intended to bore you with seven slides 21 that actually were not prepared for this meeting. I 22 actually prepared them for our board of directors, to whom I 23 presented yesterday. They are as interested in this 24 situation as you are. 25 I won't do that. I've spent the last half hour PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 224 1 try to readjust my testimony to save time. So, what I'd 2 like to do -- and save time for questions -- is to give you 3 the points I intended to make and that to briefly show you 4 the charts that contain the data to back up those points. 5 The first point I intended to make up here today 6 was that the West Coast entered 1996 with a set of basic 7 fundamentals that would have led to price increases 8 regardless of CARB gasoline and regardless of refinery 9 problems. 10 And let's the first slide, please. 11 It's data you've already seen. I won't spend a 12 lot of time on it. It's simply a chart of cost of ANS crude 13 oil since the beginning of the year to the middle of the 14 year. 15 The question has been asked, why did ANS go up 16 more than other crude, because it did. ANS has gone up 17 about 13 cents a gallon. WTI has gone up about 11 cents a 18 gallon, and Bren (phonetic), which is the major market crude 19 out of the North Sea has only gone up about 9 cents a 20 gallon. 21 The reason I think is on the next page. 22 The next slide. 23 That's because the fundamentals has really changed 24 on the West Coast for ANS crude. You don't have to go very 25 far back in history to remember the times when we were very PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 225 1 long in crude oil on the West Coast. 2 We were long to the point of 650,000 barrels a day 3 that had to be shipped out of the West Coast. And due to 4 legislation that did not allow it to be sold in the open 5 market, it had stay within the United States. 6 The price of that crude oil during that time was 7 less than the world price of crude. We enjoyed very cheap 8 crude oil on the West Coast. It has changed dramatically in 9 only the last two years. We've gone from being a net 10 exporter to being a net importer of light crude like ANS. 11 We know longer have a cost advantage. The 12 relative of ANS has gone up $1.50 a barrel in the last two 13 years. And I'll give you a number that you'll appreciate on 14 that. $1.50 a barrel on the cost of crude oil equates to a 15 billion dollars a year extra crude bill being paid by those 16 like Ultramar, who really have to pay the cost of crude oil, 17 but we own none of it. 18 This has been a fundamental shift. We no longer 19 have a cushion on crude oil that's low priced, abundant, and 20 a close source. We're now having to go out to the world 21 crude oil and compete for very specific types of crudes that 22 can be run in our refineries. 23 In addition, we've had some increased demand 24 that's not evident when you look at the overall data, and 25 that's on the next slide. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 226 1 I've got a graph here of both '94 and '95 2 gasoline demand by month. In the upper right-hand -- left- 3 hand corner, the actual data -- if you just look at with a 4 broad brush -- will tell you the demand went up 1.5 percent. 5 The effect that we refer to as the "oxygenate effect," which 6 is, when you add oxygenate to a gallon of gasoline, you end 7 up with a gallon that has less energy in it, because 8 oxygenates have less energy. 9 Therefore, you must buy more gallons to get the 10 same amount of energy. 11 We would have expected from the oxygenate effect 12 that demand would have gone up about 1.2 percent last year, 13 simply a gallon demand, leaving a pretty anemic real growth 14 of only three-tenths of a percent. 15 However, when you look behind the data, what you 16 find is that in two months of 1995 -- those are the months 17 of record rainfall, demand was down between 3 and 5 percent. 18 When you remove only two months from the data, you 19 find a completely different picture. You find that the real 20 demand growth, outside of the oxygenate effect in 21 California, was for demand in '95 to go up about 1.7 22 percent. 23 That's the first year in a number of years we've 24 seen over a 1 percent growth. So, again, my point being, we 25 have come into 1995 with lower crude inventories, higher PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 227 1 crude prices, less crude availability on the West Coast, 2 increased demand and then, finally, one more point on 3 inventories. 4 I have a chart on the inventory situation, also. 5 And when that comes up, what you'll see is we began this 6 year with about 2 million barrels less inventory than last 7 year. While we are down now to typical inventories, which 8 is represented by the dots there, I think you can see from 9 this picture that we are at the low point of inventories of 10 our industry. And we're at a point now that we have to live 11 on refinery production, because we're as low as we can go on 12 inventory from an historical sense. And if you factor in 13 the fact that we have more demand, historical inventory 14 levels are not sufficient to handle more demand. 15 So, again, my conclusion up to now is that we 16 should have had higher prices because of the fundamentals of 17 the business anyway. Now, I'll throw in one more 18 fundamental, and that is that we lost three refineries last 19 year that accounted for about 40,000 barrels a day of 20 production. 21 We've got 40,000 barrels a day less production. 22 We've got an additional 20,000 barrels a day of demand. You 23 have increased the supply and demand outlets, or decreased 24 it by 60,000 barrels a day. That's the size of our 25 refinery. In essence, you have shut down a refinery our PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 228 1 size between demand growth and small refiners that shut down 2 last year. 3 This next slide is simply for your information. 4 The question was asked, has conventional gasoline gone up at 5 the same pace as CARB? This is a graph of the spot price 6 for both of them. I think you can see they have both gone 7 up in tandem at about 25 to 30 cents a gallon. 8 The differential between the two grades of 9 gasoline, however, has varied widely, but is back to the 10 same level it started at early in the year. When CARB 11 gasoline began trading, it traded at a premium of about 9 12 cents a gallon over conventional. It went down to almost 13 nothing when the El Paso situation happened, causing an 14 increased demand for conventional gasoline, and is now back 15 up to about the 9 cent level where it was in February. 16 I'm not going to show the next chart. I don't 17 think it's going to give you too much more information than 18 you've had up to now. But I would like to take one minute 19 to give you some conclusions and maybe a perspective that 20 some of the other speakers didn't give you. 21 Everyone else has had the privilege of answering 22 the question, what would happen if we were to set the 23 regulations aside. I think that would be the worst possible 24 course of action for several reasons. 25 First of all, the West Coast is now, has been, and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 229 1 will continue to be dependent on imports to supply the 2 difference between supply and demand. Right now, every 3 sophisticated refinery in the United States is gearing up to 4 see how much CARB they can produce. If you stop their 5 experimenting now, then the next time we have a dislocation 6 of supply and demand, it'll be even worse. Then they'll 7 have to do their learning curve. 8 Lastly, I'd like to say that it is not important, 9 really, what the regulations are and how burdensome they are 10 in the industry. I say this because I think our company has 11 got more experience than anyone in selling stock to 12 investors. 13 Four years go, we had a billion dollar sale. And 14 last year, to the best of my knowledge, we had the only 15 successful sale of stock for a refinery or marketer when we 16 sold an additional $125 million worth of stock. 17 Let me tell you what investors ask. They don't 18 ask what the regulation is. They don't ask how much it's 19 going to cost. Obviously, we tell them what the regulation 20 is and how we intend to solve the problem. All they want to 21 know is, is there any risk that it will be a wasted 22 investment? 23 Will they change the regulation on it? Their only 24 concern is the volatility and risk, not with cost. And 25 setting aside the regulation will impinge the ability to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 230 1 raise capital, which is absolutely necessary, especially for 2 an independent refiners. 3 With that, I will be glad to take any questions 4 you might have. 5 CHAIRMAN DUNLAP: Mr. Westfall, thank you very 6 much. I thought it was impossible to improve upon your 7 other representatives' ability at the microphone, Marilyn 8 Green. I think, Marilyn, you've been replaced. 9 (Laughter.) 10 MR. WESTFALL: No, no. 11 CHAIRMAN DUNLAP: Mr. Westfall, thank you very 12 much. 13 Mr. Lagarias. 14 MR. LAGARIAS: As I understand it, what you're 15 telling us is that there's a 9 cent per gallon premium for 16 California gas on the world market. In fact, other 17 companies, as soon as they can get any demand for California 18 gas, that costs 9 cents more to buy over the gas they're 19 selling now; is that correct? 20 MR. WESTFALL: That's correct. 21 MR. LAGARIAS: That pretty much tell us what the 22 world market says about our gas requirement, and identifies 23 a cost that we can live with and what our part of the 24 problem or issue is. 25 MR. WESTFALL: Absolutely. In a free market, that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 231 1 9 cents is set by dozens, if not hundreds, of individual 2 buying and selling decisions. And that's the collective 3 wisdom, if you will, of all those market participants. 4 MR. LAGARIAS: How about the EPA gasoline; is that 5 about 2 cents a gallon less, roughly? 6 MR. WESTFALL: Roughly speaking, from our 7 experience last year, EPA gasoline is somewhere in the 8 neighborhood -- you've got the add-on cost of oxygenates to 9 conventional gasoline first of all. 10 MR. LAGARIAS: Well, we already have oxygenated 11 gasoline. 12 MR. WESTFALL: That's correct. But I'm starting 13 from a conventional base. 14 MR. LAGARIAS: Yes. 15 MR. WESTFALL: And building up rather than a 16 California base and building down. 17 MR. LAGARIAS: Uh-huh. 18 MR. WESTFALL: There's more similarity between 19 conventional gasoline and EPA than there are between CARB 20 gasoline. 21 Starting with conventional fuel first, you must 22 pass along the cost of oxygenate, about 2.5 cents. It was 23 our experience last year that, in addition to that, possibly 24 another penny for Federal gasoline. So now, you're talking 25 3.5 cents, depending on today's cost of oxygenate, which PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 232 1 does change I might add. 2 MR. LAGARIAS: All right. So, that's a 5.5 cent 3 difference -- 4 MR. WESTFALL: That's correct. 5 MR. LAGARIAS: -- between us and the EPA gas. 6 Thank you. 7 MR. WESTFALL: Which would put the CARB premium 8 around 4 cents. 9 CHAIRMAN DUNLAP: Ms. Edgerton, then Supervisor 10 Roberts. 11 MS. EDGERTON: Now I've been on the macro side, I 12 want to give you a chance to answer all those questions as 13 well. I've been on a learning curve. 14 It started out with the cost of crude rising being 15 attributed in large measure to uncertainty about the 16 negotiations with respect to Iraq being able to sell their 17 crude. 18 But in Mr. Dermott's testimony, I think I heard 19 him say that I might be putting too much weight on that; 20 that that was just a factor, and that world crude prices, of 21 course, are determined by many other things -- increased 22 demand for oil worldwide, which we know is going up 23 dramatically. 24 MR. WESTFALL: Right. 25 MS. EDGERTON: And not expected to slow. And PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 233 1 producer reaction to that and positioning. 2 Now, one thing that interested me very much about 3 your comments is that you are not a producer. 4 MR. WESTFALL: Absolutely not. 5 MS. EDGERTON: And so, I'd be particularly 6 interested in hearing any analysis you might have or 7 projections you might have with respect to what the world 8 crude market is going to keep looking like. 9 And I appreciate that you're laughing at it. I 10 appreciate that it's difficult. But, of course, we get 11 asked the same questions here on the Board, and, you know, 12 we're supposed to answer. 13 MR. WESTFALL: Absolutely. And let me first say, 14 please ask me any question. I've not heard a question here 15 today I won't answer. I may preface it by "it's my 16 opinion," and you'll take that and you'll remember the rule 17 of economics is that you pay for what you get, and you 18 haven't paid me a penny to be here. 19 (Laughter.) 20 MR. WESTFALL: But I'll answer any question that 21 you have. I think, in essence, you asked two questions. 22 The first of all being, what caused crude prices to be high; 23 and potentially, secondly, why haven't they come down? 24 Let me give you my opinion on both those. I think 25 the reason crude prices are high is the effects of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 234 1 bitter winter that we've had. We tend to forget in 2 California that there are actually four seasons, but there 3 are. 4 Another thing that we tend to forget is that, on a 5 worldwide basis, the majority of demand for crude oil is not 6 for gasoline in the summertime. It's for heating oil during 7 the wintertime. The highest prices for crude oil are 8 generally seen in the wintertime. That means that we enter 9 our peak demand season, which is for gasoline, at the time 10 the world has just come off of its peak demand season. 11 Therefore, inventories are normally much lower 12 this time of the year. They are incredibly low. They are 13 setting new low records this year. They're about 35 million 14 barrels below last year in the U.S. because of the bitter 15 winter. 16 And that is why I think crude oil prices started 17 out high. 18 The next question is why haven't they not come 19 down? And that gets into the direct situation, in my 20 opinion. What we're seeing right now is a market a month 21 from now that has crude costs about $3.00 a barrel lower 22 than this month's price. 23 That means, if I need to replenish my inventories, 24 which are very low, should I replenish them this month or 25 when I can buy crude $3.00 a barrel cheaper next month? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 235 1 That's the effect of the Iraq situation. It's the 2 perception that when they enter the market, they will flood 3 it with crude oil, and next month's prices will be lower. 4 Therefore, I'm not replenishing my inventory. I'd 5 be foolish to do so. So, I'm having to live on rock bottom 6 inventories. And when I do need crude, I need it right now, 7 because I have no inventory. And I have no inventory, 8 because it's going to be cheaper next month to buy it. 9 Did that answer you? I have a tendency to -- 10 MS. EDGERTON: No. 11 MR. WESTFALL: -- go on. 12 MS. EDGERTON: That was very good. I just have 13 one more question. What are the odds on the street for the 14 U.N. letting Iraq oil in the market. 15 MR. WESTFALL: This is one of those questions I'm 16 going to start off with, "in my opinion." 17 In my opinion, they will reach an agreement 18 sometime soon. You probably will not actually see the crude 19 on the market until mid to late summer. However, you have 20 to remember that, like every other commodity market, crude 21 oil trades on the perception of what's going to happen in 22 the future, not exactly what's happening today. 23 I think there's just too much pressure and the 24 Iraqis themselves have been depositive inside their own 25 country. They have set up their own country for an PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 236 1 agreement to be reached, which they have not done in the 2 other negotiations. 3 So, I think it's very likely they'll reach an 4 agreement soon. But, again, the crude won't start hitting 5 the market probably till late summer. 6 MS. EDGERTON: But you think it's pretty assured 7 that it will. 8 MR. WESTFALL: In my opinion, yes. 9 MS. EDGERTON: Short of another war. Thank you. 10 CHAIRMAN DUNLAP: Mr. Roberts. 11 MR. WESTFALL: I must have woke you guys up. 12 (Laughter.) 13 SUPERVISOR ROBERTS: Your presentation's 14 refreshing. Your willingness to even answer questions 15 singles you out from some of the presentations we've had. 16 If we could go beyond, you know, just what's 17 caused prices to go up, to try to help us understand why our 18 prices have gone up, which appears to be disproportionately 19 high in California. And you've kind of suggested that it's 20 a combination of where we went from a surplus to a shortage 21 with respect to the crude that we're largely dependent on. 22 MR. WESTFALL: Right. 23 SUPERVISOR ROBERTS: The cost that you gave of the 24 increase in the cost of that crude doesn't seem to be 25 disproportionately high, though, as compared to what others PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 237 1 are painting as the increased cost of crude. 2 MR. WESTFALL: The spread is 9 cents, for 3 instance, for North Sea crude and about 14 cents for ANS. 4 Percentage-wise, that's a big spread. Cents per gallon, 5 you're correct, it's not. 6 SUPERVISOR ROBERTS: That's what I was talking 7 about. Cents per gallon. It doesn't seem to be a -- 8 because I'm trying to figure out -- you know, I've got this 9 black box where there seems to be about 20 cents a gallon 10 unaccountable for, and it doesn't seem to be here. 11 MR. WESTFALL: Okay. Well, let me -- I will 12 answer your question. 13 SUPERVISOR ROBERTS: Okay. 14 MR. WESTFALL: But let me preface it with two 15 comments. Number one is, the data that you're asking me to 16 explain, which is the data we saw this morning -- was it 17 only this morning? Yes. 18 (Laughter.) 19 MR. WESTFALL: Please remember that is one day's 20 data. That is the data for April 22nd or April 19th. You 21 get a much different picture if you start looking at 22 averages for the month of April. 23 So, again, you have to realize that explaining one 24 day's data -- 25 SUPERVISOR ROBERTS: Okay. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 238 1 MR. WESTFALL: -- is not possible. 2 It's our opinion, and the economics that we're 3 faced with now pretty well show that today's pricing is an 4 anomaly. It cannot last. There's too much of a cost spread 5 between our price and the Gulf Coast. Other refiners would 6 be fools not to flood us with imports. 7 So, I guess, in answer to your question, I can 8 only say that today's economics are an anomaly. And by 9 definition, we cannot logically explain an anomaly. It is 10 based on -- and again, this is no rocket science -- based on 11 what a willing buyer will pay a willing seller on the spot 12 market. 13 Literally, in the oil business, that is one person 14 placing one phone call to another person and deciding to 15 either buy or sell between those two people. That's all 16 there is to it. So, again, please don't ask me to explain a 17 day's price. 18 I can explain trends to you. But there is no 19 explanation for a day's price, other than to say that's the 20 price at which a willing buyer and willing seller negotiated 21 a sale. 22 SUPERVISOR ROBERTS: Given that differential, 23 then, you would expect to see others producing California 24 reformulated gasoline and bringing that into the 25 marketplace? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 239 1 MR. WESTFALL: Every sophisticated refinery in the 2 United States will make some California spec gasoline, in my 3 opinion. I'm sorry. I forgot to start with that. 4 SUPERVISOR ROBERTS: Okay. 5 MR. WESTFALL: Yes, the economic force is there 6 for all of them to be doing it. And I might add, the 7 economic force is there for them to be shipping conventional 8 gasoline to California right now. 9 SUPERVISOR ROBERTS: You also said that the 10 reformulated gas versus nonreformulated gas on the spot 11 market was about 9 cents a gallon? 12 MR. WESTFALL: Yes, I believe so. 13 SUPERVISOR ROBERTS: So that really reflects what 14 we've been hearing consistently all day today that -- first 15 from the Energy Commission Chair, that somewhere between 6 16 or 7 cents, possibly 8 cents is what they were seeing. And 17 it seems like person after person has testified that 18 somewhere between 5 and 15 cents rackets the range. So, all 19 of this would -- 20 MR. WESTFALL: Having been the person in charge of 21 the forecast the last couple of years, for the last two 22 years, I think I've been very public -- unfortunately, some 23 of you had to sit through some of my fine presentations -- 24 in being consistent in saying that the ongoing steady State 25 differential should narrow in to a range of between 8 and 10 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 240 1 cents a gallon. 2 SUPERVISOR ROBERTS: Okay. One last question. 3 MR. WESTFALL: I changed my flight from five 4 o'clock to seven, so. . . 5 (Laughter.) 6 SUPERVISOR ROBERTS: I wish I had one that early. 7 Let me -- in the nature of prediction, if things were to 8 improve, at least based on what you're saying, I would guess 9 that your expectation is that they will -- if for no other 10 reason, because other people are going to ship production to 11 California, and they're in the position to bring the cost 12 down -- from a timing standpoint, what kind of time interval 13 can we expect? Are we going to see something in two weeks, 14 or four weeks, or six weeks, or what is it going to take 15 before we start seeing this thing turn in any meaningful 16 way? 17 MR. WESTFALL: In the absence of further crude 18 price increases -- we have to set a scene for you before I 19 answer your question, first of all. It takes in general 20 around three weeks for a ship between the time it loads in 21 the Gulf Coast, which are where most of these imports are 22 going to come from, till the time it lands out here. 23 And on the amount, we know, as an industry, how 24 many ships are being loaded. That's information you can get 25 your hands on, how many ships are being loaded in the Gulf PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 241 1 Coast. 2 As soon as that information is widely available, 3 there are six, ten, twelve cargoes being loaded on the Gulf 4 Coast, it'll start affecting the price. Again, like all 5 commodities, it trades on the perception of the future, not 6 what's going on today. And as soon as possible perceive and 7 have verified facts that those cargoes have indeed loaded, 8 absent any crude price increase, I think you'll start seeing 9 the price coming down. 10 SUPERVISOR ROBERTS: So, it works on the downside 11 as well -- we know it works on the upside, that things tend 12 to go up as perceptions change. 13 MR. WESTFALL: Absolutely. The Gulf Coast 14 refiners are no friends of ours. They would be more than 15 glad to make more money on their gasoline and lower our 16 prices. 17 SUPERVISOR ROBERTS: Okay. Very good. Excellent 18 testimony. Thank you. 19 MR. WESTFALL: Thank you. 20 MS. EDGERTON: I forgot to ask you one question. 21 Well, I want you to, if you could, refresh my memory, 22 because I just can't remember this -- as to why it's in the 23 United States of America's interest to lift the embargo on 24 Iran's oil? 25 CHAIRMAN DUNLAP: Iraq. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 242 1 MR. LAGARIAS: Iraq. 2 MS. EDGERTON: I mean Iraq's oil. 3 MR. WESTFALL: Now you're going to put me in the 4 political arena. 5 Let me narrow my answer down to simply the oil 6 part of the business. I won't get into the other part of 7 politics between the Iraqi government and our own. 8 Iraq has the potential or had the potential prior 9 to the embargo of producing in the neighborhood of 2.5 to 3 10 million barrels a day. They're producing a little bit of 11 oil now, but not much. 12 So, they could quite quickly, since there's been 13 no significant damage to their infrastructure like there was 14 to Kuwait, bring their production up to 3 million barrels a 15 day. 16 If the total embargo were lifted -- now, recall 17 what they're speaking about right now is simply for 18 humanitarian relief, which will only allow for about 700,000 19 barrels a day to get into the marketplace. 20 The rest of that is a much longer turnoff. They 21 haven't even begun discussions on lifting the entire 22 embargo. 23 MS. EDGERTON: This is about a fourth of their 24 capacity? 25 MR. WESTFALL: Roughly, yes. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 243 1 MS. EDGERTON: Thank you. 2 SUPERVISOR VAGIM: Just one question. Since, in 3 your opinion, give a crystal ball, do you think we'll ever 4 get back to the December of '95 pricing of gasoline? 5 MR. WESTFALL: At some point in time, yes. Do you 6 mean is that a sustainable level, no. 7 SUPERVISOR VAGIM: But when you say some point in 8 time, in this movement in three weeks or whatever, based on 9 the shipments and all that other kind of stuff, do you see 10 the price then, with a potential glut coming in, that it 11 would eventually bring the prices back down to the December 12 of '95, plus the California -- 13 MR. WESTFALL: Again, if you're talking absolute 14 prices and start off with what the crude costs, unless the 15 crude costs get down to that level, no. 16 At the same crude cost, I would not expect prices 17 to get as low as they were in December for two reasons. 18 Number one, we're getting into our driving season when the 19 spread between crude and gasoline is typically higher. 20 I think, number two, is the fact that, as every 21 day goes by, our demand seems to be growing, which I might 22 add is a result of the growth of the economy. And our 23 supply seems to be steady at best when there are no 24 refinery operations problems. 25 That's the situation that leads to higher prices. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 244 1 And, also, I'll reiterate what I said earlier. Crude's 2 costing much more on the West Coast than it ever did before. 3 I think the days of cheap, abundant crude and therefore low 4 prices, I think they're gone for good. 5 SUPERVISOR VAGIM: Was this the year the little 6 fella advertises on a lot of radio stations in California 7 that says, "This is your time to buy heating oil." 8 Was this the year to buy it? 9 MR. WESTFALL: Heating oil? No. Not in 10 California. 11 SUPERVISOR VAGIM: No. On the East Coast. 12 MR. WESTFALL: I haven't. 13 SUPERVISOR VAGIM: You haven't? 14 MR. WESTFALL: No. 15 CHAIRMAN DUNLAP: Supervisor Silva. 16 SUPERVISOR SILVA: Yes. Just a couple of 17 questions. This past weekend I was in Seattle. And I 18 noticed that most of their gas station prices were 19 comparable to ours. Now, will the price in California level 20 out with other States, or would you imagine they'll be 21 seeing some increases, also? 22 MR. WESTFALL: To the extent that crude costs 23 equalize the basis for everyone, the answer is, yes. You've 24 got to remember, every State has their own supply and demand 25 balance. Every State has, in this case, different PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 245 1 specifications and the ability to supply. Washington and 2 Oregon are both supplied out of Washington refineries that 3 run virtually nothing but ANS, and must ship it then from 4 Washington down to Oregon. 5 They've got a different set of economics than 6 California does. California and the California system, 7 where I'm including Arizona and Nevada, is short of 8 gasoline. We must import. And there's a different set of 9 economics when you must import and your short gasoline, and 10 when you are exporter and ship it. 11 But, for the same quality gasolines, any 12 differential between the markets that's above the cost of 13 transportation is not sustainable. 14 CHAIRMAN DUNLAP: Do you have another question, 15 Supervisor? 16 Any other questions for our witness? All right. 17 Thanks again. 18 MR. WESTFALL: Thank you, Mr. Chairman. And let 19 me just leave you with a potential challenge, since I've 20 made the point that I think this is an anomaly. You want to 21 hold meetings another month from now to see what the 22 situation is, I'll be glad to come back and take my licks if 23 I'm wrong. 24 CHAIRMAN DUNLAP: All right. Thank you very much. 25 What we're going to do is take a comfort break for PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 246 1 ten minutes. And we will then come back. Mr. Henderson, 2 you're first up, and we'll go from there. 3 (Thereupon, a recess was taken.) 4 CHAIRMAN DUNLAP: We'll begin. Doug Henderson, 5 Jan Speelman, Dennis DeCota, Barry Berkett, And Bonnie 6 Addario from CIOMA. 7 Please go in that order. 8 Again, I know people have been waiting a long time 9 to speak, and I appreciate your patience. It was important 10 for the Board to hear from those invited guests, the only 11 industry, of which Mr. Henderson is a part. But I would ask 12 the audience to use time judiciously. 13 Mr. Henderson. 14 MR. HENDERSON: Thank you, Mr. Chairman. My name 15 is Doug Henderson. I represent the Western States Petroleum 16 Association. And with all due respect, I hope to be back 17 here again next month. This is my second trip to your 18 podium in as many months to talk about the success of our 19 roll-out program for this new gasoline. 20 I will be brief, Mr. Chairman, but hope that you 21 recognize that the concerns expressed by you and the others 22 here today and in the last several days have been recognized 23 and addressed by our members and by the other companies that 24 have spoken today, and that we have done so responsibly and 25 constructively and in a way that's reassuring to you and to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 247 1 your colleagues. 2 Above all, we hope you'll stay the course and 3 maintain this program as it was originally envisioned for 4 all the good reasons that it was adopted in the first place. 5 I have to say, as you did at the beginning, that I 6 and WSPA cannot and do not know information about the price 7 and supply issues and, so, I'm afraid I can't answer 8 questions on that subject. 9 What I would like to discuss with you today is the 10 suggestion by some that the Cleaner Burning Gasoline 11 regulation be suspended. I would strongly oppose that move, 12 because I think it would -- we think it would create more 13 uncertainty in the marketplace; that it wouldn't resolve or 14 solve, and that, most importantly, it would undercut the 15 clean air benefits that this new regulation and this new 16 gasoline would bring to California. 17 As you know, it's a key element of all the State 18 Implementation Plan emissions reductions. 25 percent of 19 those reductions depend on this rule. And we think it's a 20 must to address the challenge we share with you in 21 fulfilling your commitment to met the targets in the 22 California and Federal Clean Air Acts. 23 You all know the specific benefits in emissions 24 reductions. I won't go through those. But I will repeat 25 again that without Cleaner Burning Gasoline, most of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 248 1 local air district plans will be in jeopardy, and we don't 2 see an alternative. 3 The benefits of this are happening as we speak as 4 you heard. And we would not want to see that diminished or 5 undercut in any way. 6 Most importantly, through the process of devising 7 your rule in the State Implementation Plan, a number of 8 alternatives were evaluated, and we don't see alternatives 9 to this rule that are anywhere near as successful, as 10 immediate, or as cost-effective, only the draconian ideas 11 from the Federal Implementation Plan that were considered 12 last year could be resurrected. And we give high credit to 13 the Air Resources Board for rejecting them earlier because 14 of their negative impacts on the affected industries, such 15 as agriculture, airlines, trucking, and maritime industries. 16 In conclusion, WSPA supports your commitment to 17 clean air and we would not want to see your credibility 18 eroded in your future plans or the credibility of future 19 commitments industries like ours might make in helping you 20 fulfill those plans. And we hope that you'll stay the 21 course and maintain the rule as it has been adopted. 22 That concludes my remarks, Mr. Chairman. 23 CHAIRMAN DUNLAP: Thank you, Mr. Henderson. I 24 appreciate your coming here today and I want to give you 25 some credit, certainly, and your organization for working PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 249 1 with us early in the process to getting the word out about 2 air quality benefits of this program. 3 It's meant a lot to acquaint the public with the 4 total package. And I appreciate that. 5 MR. HENDERSON: Thank you. 6 CHAIRMAN DUNLAP: Dr. Boston. 7 DR. BOSTON: Mr. Henderson, I just can't help but 8 be amused how the WSPA and all the other oil company 9 representatives have spoken here today about not wanting 10 CARB to lose its credibility by changing our rules at this 11 late stage. 12 And yet, just a short couple months ago, when we 13 were talking about our zero-emission vehicles -- 14 MR. HENDERSON: One month ago. I used that word 15 right here. 16 DR. BOSTON: WSPA and the auto companies were 17 asking to change those rules, and you weren't very concerned 18 about our credibility at that time. 19 MR. HENDERSON: I disagree respectfully, Mr. 20 Boston (sic). I had reminded you, I think, that your 21 credibility as an emissions reductions agency is important 22 to us, was then, and still is. And we hope to help you with 23 your commitment reaching clean air, your clean air targets 24 in a constructive and useful way. 25 We didn't think ZEVs was the way to do it, still PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 250 1 don't. 2 DR. BOSTON: I understand you spent about a 3 million and a half dollars to counter that rule. 4 MR. HENDERSON: Well, not right. 5 DR. BOSTON: Not right? 6 MR. HENDERSON: No. 7 DR. BOSTON: It was more. 8 CHAIRMAN DUNLAP: Any other questions for Mr. 9 Henderson? Yes, Ms. Edgerton. 10 MS. EDGERTON: First off, Mr. Henderson, you know 11 how happy it made me to hear you say good things about the 12 SIP, but not high marks. 13 MR. HENDERSON: Ms. Edgerton, can I interrupt? It 14 certainly was not lost on me that you were the only one who 15 spoke up last month about our mutual efforts, and I 16 appreciate that, too. 17 MS. EDGERTON: Oh, you're welcome. Well, I'm very 18 enthusiastic about RFG, too. And I appreciate your working 19 with us on it. 20 Speaking of credibility. Does WSPA -- do you have 21 a -- or do you personally have a view on -- this is far 22 afield a little bit. But we'd better talk about it I think, 23 on whether it's in WSPA's interest to have the embargo 24 lifted on Iraq? 25 MR. HENDERSON: I don't know the answer to that. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 251 1 As I said earlier, I cannot and do not know anything about 2 supply issues. 3 MS. EDGERTON: Uh-huh. Well, I don't know, that 4 issue of credibility and kind of associated with Saddam, the 5 head of Iraq. I just wanted. Thank you. 6 MR. HENDERSON: You're welcome. 7 CHAIRMAN DUNLAP: Any other questions of Mr. 8 Henderson? 9 Thank you, Doug. 10 MR. HENDERSON: Thank you, Mr. Chairman. 11 Appreciate it. 12 CHAIRMAN DUNLAP: All right. Jan Speelman, 13 Automotive Trade Organization of America, followed by Dennis 14 DeCota. 15 MS. SPEELMAN: Actually, that's Automotive Trade 16 Organizations of California. But -- 17 CHAIRMAN DUNLAP: I'm sorry. 18 MS. SPEELMAN: -- I'll take America. 19 CHAIRMAN DUNLAP: All right. 20 (Laughter.) 21 MS. SPEELMAN: Members of the Board, Chairman 22 Dunlap, my name is Jan Speelman. I'm with Automotive Trade 23 Organizations, and our acronym is AuTO-Cal. And I'm going 24 to use that a few times, so I thought I'd put that upfront. 25 CHAIRMAN DUNLAP: AuTO-Cal PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 252 1 MS. SPEELMAN: We're the largest statewide trade 2 association representing gasoline retailers, and these 3 people run convenience stores, regular service stations, car 4 washes with gasoline, well over 2,000 facilities throughout 5 the State. 6 It's on behalf of these members and California's 7 consumers that I'm before you today. 8 My testimony is in direct conflict with a great 9 deal of what you've already heard today; however, none of 10 what you've heard from CARB and the CEC. So, I was real 11 pleased to see that. 12 I do have accurate documentation and complete 13 documentation on anything that I'm going to be using today. 14 And I will make that available for you. 15 The first slide, please? 16 As you've been told repeatedly, gasoline prices in 17 California have escalated rapidly and excessively over the 18 last several weeks. Based on a number of sources, including 19 actual wholesale fuel invoices from our members throughout 20 the State, we've determined that the oil companies have 21 raised wholesale gas prices by about 38 cents, and we now 22 know, as of this morning, that that is well over 40 cents -- 23 I've received some new invoices this morning on my fax -- 24 per gallon since January 1st of this year. 25 And we've also been notified that some of our ARCO PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 253 1 gas retailers received an additional 7 to 8 cent per gallon 2 increase this last Tuesday. Three Unocal dealers in 3 Southern California just called yesterday to say that their 4 oil company representatives indicated that they will 5 probably see as much as 10 cents over the next several days. 6 If history repeats itself, we're also going to see 7 the other oil companies adjust their wholesale prices right 8 along with them. Although this testimony is less than 24 9 hours old, that 38 cent figure, as I mentioned, has already 10 been adjusted. And for the sake of simplicity, though, I'm 11 going to go ahead and use that 38 cent figure, because the 12 numbers still match up. They just grow. 13 Slide, please. 14 It's important to keep in mind through all of this 15 that a typical service station dealer has only a 7 to 10 16 cent average gross profit on each gallon of gas they sell. 17 This margin is barely sufficient to cover the cost of rent, 18 salaries, insurance, taxes, licenses, and fees. 19 During these price escalations, it's the dealer 20 and his or her employees that take the initial and most 21 frequent heat from consumers. 22 In the past, the public's been sold through the 23 media that dealers are price gouging and greedy. That's not 24 the case here. In fact, the price gouging and greed can be 25 traced directly to the oil companies. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 254 1 As the Board, public, and gas station dealers have 2 been told by oil company represents, the reasons for the 3 price increases over the last several weeks have been: one, 4 the increased cost of crude oil caused by low crude 5 inventory levels resulting from an extremely cold winter, 6 which has increased the demand for crude oil; two, the 7 increased cost of crude oil caused by concerns that Iraq 8 will soon be allowed to export crude oil, which would drive 9 down the value of the existing inventory; three, unexpected 10 operational disruptions and maintenance at West Coast 11 refineries increased costs, which drove up prices; and then, 12 four, the introduction of Cleaner Burning Gasoline in 13 California increased production costs by 5 to 15 cents per 14 gallon. 15 AuTO-Cal does not believe that the price increases 16 experienced since the beginning of this year can be 17 justified entirely by these excuses. 18 The oil consumed on the West Coast is primarily 19 from Alaska, 58 percent; California, 35 percent; and only 7 20 percent from imports, with a majority of that coming from 21 Canada and a very small amount from Asian sources. 22 That means 100 percent of California's crude oil 23 supply comes from non-OPEC sources, so the Iraq excuse for 24 decreasing crude oil production and therefore increasing 25 prices certainly is not completely founded. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 255 1 Since the majority of crude oil supplying West 2 Coast refineries comes from domestic fields controlled by 3 the refiners themselves, an increase in the OPEC price or 4 the spot market in New York does not necessarily increase 5 actual California refinery acquisition costs for crude. 6 Since it does not cost anymore to bring the crude 7 out of the ground, any increase in acquisition costs is 8 often accomplished by simple internal accounting, where the 9 crude production division of the company would raise crude 10 cost to the refinery division of the same company. They 11 simply move the money from one pocket to another, but it's 12 still in the big pair of pants. 13 (Laughter.) 14 MS. SPEELMAN: Regardless of whether -- 15 (Applause from the audience.) 16 MS. SPEELMAN: Regardless of whether or not the 17 company has its own oil fields, an increase in acquisition 18 costs, not an increase in the spot market or the world price 19 published in a newspaper determines any actual increased 20 cost to the refiner. 21 To just briefly address the gas that is now on its 22 way to California, we now know the incredibly high price 23 that oil companies can take it to before we bring in outside 24 supplies. So, we need to keep that in mind as we look at 25 this. It took 40 to 50 cents to get those cargoes loaded. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 256 1 Regarding the unexpected operations disruptions 2 and maintenance at West Coast refineries, historically, 3 mechanical difficulties, maintenance shutdowns, the 4 occasional fire or explosion have happened without resulting 5 in substantial, if any, price hikes. Why, then, is this 6 case different? 7 We believe it's different this time because 8 refinery production, like crude oil production -- and 9 controlled by many of the same companies -- had already been 10 reduced in order to decrease supply, inflate demand, and 11 increase profits for the oil companies. 12 This raises a frightening possibility. If the 13 oil companies are allowed to profit from these occasional 14 operational disruptions, they'll have a significant long- 15 term financial incentive to continue reduced production 16 volumes and fail to maintain adequate inventories of CARB 17 fuel. Nearly every single glitch in a refinery would then 18 result in huge price spikes and soaring profits for the 19 companies, with a disastrous effect on consumers and the 20 economy of California. 21 Finally, refiners have indicated that the costs 22 associated with retooling their refineries to produce 23 California's Cleaner Burning Gasoline are between $3 and $5 24 billion. If we accept the $5 billion figure -- and we all 25 agree that the oil companies should recover the cost to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 257 1 retool and operate -- and we determine that recouping their 2 capital investments over five years is reasonable, then the 3 gas price increase associated with Cleaner Burning Gasoline 4 should be no more than 5 cents per gallon. 5 The math is simple. 5 cents a gallon for 5 years 6 is about $5 billion. That's a return of their full 7 expenditures. And we haven't even calculated any tax 8 advantages the companies are going to enjoy. 9 That brings me to the increases that may be 10 justified if you and California consumers buy the oil 11 companies' rationale for increased crude oil prices and 12 AuTO-Cal's rationale for the cost of Cleaner Burning 13 Gasoline. 14 The five or so dollars per barrel increase for 15 crude oil translates to an increased gas price of maybe 12 16 cents per gallon. Add that to the 5 cents per gallon for 17 oil companies to recoup their Cleaner Burning Gas 18 expenditures, and we have a total of about 17 cents a 19 gallon, certainly not the 40 cents plus that we're looking 20 at right now. 21 Consumers in this State are paying as much 38 22 cents -- and, of course, we now know it's considerably more 23 than that -- and at least 25 cents per gallon more for their 24 fuel. The big question is, where's the other 20 25 plus-or-minus cents of the price increases going? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 258 1 As you can see on the pie chart, we believe it's 2 lining the pockets of the major oil companies, the same oil 3 companies that have shown dramatically increased profits for 4 the first quarter of 1996. And I believe that we will see 5 even greater increased profits in the next quarter of 1996. 6 AuTO-Cal does not believe the citizens and the 7 economy of California should be punished and the oil 8 companies rewarded for the failure of those same oil 9 companies to produce adequate supplies of CARB gasoline and 10 diesel. Nor should those companies be rewarded for their 11 incorrect speculation on the world crude oil supply. 12 Based on the increases in fuel prices since 13 January 1st, we calculated the impact of those increases on 14 California's consumers and ultimately the State's economy. 15 The 17 cents per gallon, which includes both the Cleaner 16 Burning Gasoline increase and the crude oil price increase, 17 means about $3 billion spent on increased gas prices instead 18 of other products or services. 19 And the other 21 cents per gallon, which we 20 believe is going directly to oil company profits, comes to 21 another $3.8 billion taken out of California's economy each 22 year, and it certainly won't be spent on products and 23 services in this State, at least not most of it. 24 California's economy cannot afford this kind of 25 setback when we're just now recovering from the worst PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 259 1 recession since the Great Depression. AuTO-Cal then 2 proposes that California must take action to ensure that the 3 oil companies produce adequate supplies of fuel to meet the 4 State's demands and at a fair and reasonable price or the 5 State must remove the financial incentive for oil companies 6 to withhold production of fuel with the goal of capturing 7 excessive profits. 8 To accomplish either of these remedies, we must 9 start with accurate information about the actual costs of 10 acquiring crude oil and producing conventional and 11 reformulated fuels. 12 We don't believe the oil companies have been 13 forthright and completely honest in working with the Board 14 and the Energy Commission on the development and 15 introduction of Cleaner Burning Gasoline. Also, we don't 16 believe that this Board has the power to subpoena and compel 17 the oil companies' disclosure of necessary information and 18 relevant documents. 19 Therefore, AuTO-Cal has asked the Attorney General 20 to investigate the pricing mechanisms used by the oil 21 companies at each level of the motor fuel production system, 22 including crude oil, transportation, refining, wholesale and 23 retail sales. 24 Other avenues, such as legislative and/or 25 regulatory remedies may also need to be explored. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 260 1 Almost two years ago, I attended my first meeting 2 of the California Reformulated Gasoline Advisory Committee. 3 Near the end of that meeting, I asked a question that some 4 of the people in this room I'm sure remember. And it was 5 addressed specifically to the Energy Commission and Air 6 Resources Board individuals that were represented at the 7 meeting that day. 8 The question was: Do you realize that you've 9 given the oil companies a blank check with this new fuel 10 mandate? 11 At that time, I was told by the Committee and have 12 continued to be sold that they would be monitoring, 13 surveying, and working with the oil companies to ensure that 14 California's consumers were protected and that supplies were 15 adequate. 16 I've been told that over and over again, and I 17 believe that the people in charge were attempting to do that 18 at all times. 19 However, the oil companies have cashed that blank 20 check, folks, using Cleaner Burning Gasoline and this Board 21 as one of the justifications for cashing it. We do not 22 believe that this Board, the State Attorney General, the 23 California Legislature, or the State's consumers should 24 accept these inflated fuel prices. And, as always, we'll be 25 glad to cooperate with any and all of these entities to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 261 1 solve this problem. 2 Thank you for your time and considering my 3 testimony. And I'd be glad to take questions. 4 CHAIRMAN DUNLAP: Thank you, Ms. Speelman. I 5 appreciate that perspective. 6 MS. SPEELMAN: Certainly. 7 CHAIRMAN DUNLAP: The data, the information you 8 provided certainly was compelling and much different than we 9 heard earlier. 10 MS. SPEELMAN: I thought that it might be. 11 CHAIRMAN DUNLAP: What would you have us do? 12 MS. SPEELMAN: Actually, in this particular vein, 13 I agree completely with the oil companies. I don't think 14 you should remove the requirements and the mandates. I 15 believe that we are headed in the right direction with 16 Cleaner Burning Gasoline. I like that it's been introduced, 17 and I hope that it goes on schedule. 18 What I'm looking at is I don't think you all, 19 beyond not doing anything, can do anything from this point. 20 I think we do need to go to the Attorney General and maybe 21 look at those other legislative and regulatory avenues. I 22 do believe it goes back to costs. And I know that the oil 23 companies on any given day will tell you that it is a world 24 market. 25 But I'll tell you, we're buying gas here in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 262 1 California. And in this world market, I have consumers who 2 come to me and say, "Why is California paying all these high 3 prices? We don't get any oil from the Middle East, none 4 whatsoever." 5 Now, yes, it's a world market. But the same 6 people who refine to a huge extent in this State also have 7 the crude supplies. And if we need more crude, for Pete's 8 sake, take it out of the ground. If we need more gas, then 9 for God's sake, refine it. 10 And if there's a shortage of crude, that's 11 something that I believe can be controlled by them. And 12 maybe we need to have those mechanisms in place. 13 CHAIRMAN DUNLAP: Okay. Thank you for your 14 presentation. Mr. Lagarias. 15 MR. LAGARIAS: Thank you, Ms. Speelman, especially 16 for your efforts on the Advisory Committee. 17 MS. SPEELMAN: Glad to do it. 18 MR. LAGARIAS: We recognize the limits of our 19 responsibility. We're principally trying to determine where 20 the Cleaner Burning Gasoline requirement fits into this 21 picture. And to the extent that the information we've heard 22 today helps or confuses, we're not certain. But our 23 principal responsibility still remains in improving the air 24 quality of the State. Well, I hope we can look into this 25 issue and -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 263 1 MS. SPEELMAN: (Interjecting) And I agree. As a 2 matter of fact, I think the hearing today I think is 3 beneficial. However, at this point in time, I think you've 4 done your job and I think you've done it very well. And I 5 don't think the blame for 50 cent increases in gasoline 6 belong here, when the cost of the cleaner burning fuel is 7 about 5 cents. 8 And if it's 5 to 15 cents, 5 cents means they 9 recoup it in five years, and 15 cents means they get it back 10 in a year and a half. 11 And to be honest with you, an investment like 12 that, I think five years is fair. And we haven't 13 calculated, as I said, those tax advantages that they're 14 probably going to take to offset some of the windfall 15 profits. 16 MR. LAGARIAS: Thank you. 17 MS. SPEELMAN: You're welcome. 18 CHAIRMAN DUNLAP: Ron? 19 SUPERVISOR ROBERTS: A couple questions. First of 20 all, for your staff. Five cents for five years, are you 21 guys in agreement with that? 22 MR. SIMEROTH: Her calculations were based upon a 23 ten-year return, 10 percent return on the investment after 24 tax. About 40 percent of that was capital recovery and the 25 remainder was operating -- operating costs. And it's the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 264 1 two together is where we came up with the 10 cents. 2 SUPERVISOR ROBERTS: You had 10 cents -- 3 MR. SIMEROTH: On average, we came up with the 10 4 cent number. 5 SUPERVISOR ROBERTS: For how many years? 6 MR. SIMEROTH: I'm sorry? 7 SUPERVISOR ROBERTS: Over what time? 8 MR. SIMEROTH: Over a 10-year time period. 9 SUPERVISOR ROBERTS: 10 cents for 10 years versus 10 5 cents for 5 years? 11 MR. SIMEROTH: About 60 percent of our cost was 12 operating cost. So, of the 10 cents -- 13 SUPERVISOR ROBERTS: Well, you know, even -- 14 MR. SIMEROTH: -- there's an ongoing cost. 15 SUPERVISOR ROBERTS: Even if you were looking at 16 10 cents -- all morning long, I've been looking for 18 cents 17 that I thought was missing. Your number was 21 cents, I 18 think, on your chart. 19 It's just amazing to me, no matter how you look at 20 it, you keep coming back to the same range of missing pieces 21 here that somehow don't seem to have been adequately 22 explained in any step in this. 23 And I'm sort of reluctant to come to the 24 conclusion that perhaps we can't -- it's counterproductive 25 to talk about a suspension in the rules. And I think you're PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 265 1 in agreement with that. 2 Your comments about an investigation by the 3 Attorney General, I don't know if that's something that we 4 can join in requesting, but it seems too me there's still a 5 big chunk of money that hasn't adequately explained. And, 6 at the very least, I think the public ought to know where 7 it's going. 8 MS. SPEELMAN: And I believe that that's -- that's 9 what I tried to explain; that we believe that we know where 10 it's going. And I think we'll see that in the future income 11 streams of the oil companies. 12 However, as far as some of the differences in our 13 computations, also, I -- in my calculations of the fuel 14 prices, it's very important to note that I did not use a lot 15 of the typical information that's available through sources 16 such as Lundberg, OPIS, CPC -- gosh, who else? API, and so 17 on that's available. 18 Since last December, we have been getting actual 19 wholesale fuel invoices from our members throughout the 20 State everytime they got an increase. 21 So, we've been tracking these increases on an 22 ongoing basis. And they did start at January 1; they just 23 didn't start like they did after March 15th. They were very 24 gradual and gentle inclines, which is what I truly expected. 25 I was also surprised by the spike that we saw, but -- then, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 266 1 again, it's -- you know, there could be motives. There 2 could be reasons for that. 3 CHAIRMAN DUNLAP: Supervisor Vagim. 4 SUPERVISOR VAGIM: Thank you, Mr. Chairman. 5 So, you don't buy the fact that market forces, 6 inventory control to keep it from going to some 7 uncontrollable amounts -- you don't buy that. 8 MS. SPEELMAN: Not really. I will buy it as soon 9 as they open their books and show it to me. 10 SUPERVISOR VAGIM: We heard testimony by the 11 Chairman of the Energy Commission that stationary fuel 12 sources in California have taken a broad spectrum of 13 feedstocks, including the various different components of 14 creating energy. 15 But in the transportation, we pretty much rely on 16 crude oil. Would your industry support broadening the 17 energy sources to alternative fuels across the spectrum of 18 the automobile industry? 19 MS. SPEELMAN: You like that one, don't you? To a 20 certain extent, yes. We have never objected to, for 21 example, the electric vehicle mandate. We -- obviously, 22 we're gas stations. I don't know that I would go to the 23 level that we would support an electric vehicle mandate. I 24 do see the necessity to have controls within the oil 25 industry environment, from the crude level all the way PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 267 1 through the retail. 2 We have an environment here where the oil 3 companies are involved at every level along the chain, from 4 the time they find it to the time they take it out of the 5 ground, to transport it, to refine it, to sell it. And they 6 sell it at the wholesale level, and they sell it at the 7 retail level. 8 So, it's an environment that is at least very 9 close to unique. I don't think you will find very many 10 environments in business that are that controlled. And, in 11 reality, there are very few of them that control this very 12 large marketplace. 13 SUPERVISOR VAGIM: So, your industry, then, would 14 be ready to handle a whole myriad of different types of 15 vehicles that would be methanol driven, M85 -- 16 MS. SPEELMAN: (Interjecting) Certainly. 17 SUPERVISOR VAGIM: -- natural gas, the whole 18 spectrum. 19 MS. SPEELMAN: And keeping in mind we're working 20 on, you know, 7 to 10 cent margins, which I don't believe 21 are adequate, given today's cost of doing business for these 22 guys. 23 You know, what we would like to see is fair and 24 reasonable profits within that environment. And we would 25 not object to that, as long as it was realistic for our guys PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 268 1 to be involved in the, you know, servicing end of it. 2 SUPERVISOR VAGIM: So, it wouldn't be a problem 3 then to have five or six different fuel sources at the 4 dealership? 5 MS. SPEELMAN: It would -- now, there again, if 6 you have a small independent guy who owns his own site, it's 7 going to be awfully expensive for that guy to put in seven 8 tanks and therefore be competitive. 9 And, there again, you've got the oil companies who 10 are looking at, "Do I want to do that," in 950 sites in 11 California. 12 So, I think we have a real broad number of 13 problems with those kinds of remedies. But I think over a 14 period of years, we're going to have to look at anything 15 that's realistic, anything that's logical. And those of us 16 in this industry have got to step back a little bit from our 17 special interest standpoint and say, "I might be able to 18 take this here if you can make sure that I am not hurt over 19 here." 20 I think there is room to be logical, and I don't 21 always see a lot of that. So, I would hope that this Board 22 would certainly support any of those kinds of things that 23 come forward. 24 SUPERVISOR VAGIM: Thank you. 25 CHAIRMAN DUNLAP: Okay. Very well, thank you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 269 1 MS. SPEELMAN: Thank you very much. 2 CHAIRMAN DUNLAP: Mr. DeCota, Barry Berkett, 3 Thrifty Oil; Bonnie Addario, CIOMA; Mary Morgan, Santa Fe 4 Pipelines; Joel Anderson; Stephanie Williams; and Rich 5 Leimbach from California Trucking Association. 6 Good afternoon. 7 MR. DeCOTA: Chairman Dunlap, members, thank you 8 for the opportunity to speak. 9 My name is Dennis DeCota. I'm the Executive 10 Director of the California Service Station Automotive Repair 11 Association. 12 We have approximately 600 members who own 13 approximately 1200 to 1400 service stations. 14 I'm not qualified to stand up here today and speak 15 to you about factors that cause -- that are causing the 16 spiral of high prices on gasoline. But what I am qualified 17 to do is to speak to you regarding gasoline margins for the 18 petroleum retailers. 19 It is a problem right now that we are victims. 20 Petroleum retailers are basically broken up into six 21 different categories. We have the company operated stores. 22 We have what they call fee-operated stores, which the 23 company controls the pricing of gasoline and the profits on 24 the gasoline. 25 We have jobber supply owned and operated retail PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 270 1 facilities. We have the franchise dealer. We have the 2 branded independent who buys from a jobber, and then we have 3 the unbranded independents. 4 The percentage of the marketplace between the fee 5 ops, company ops, and branded jobbers that own and operate 6 their facilities is approximately 25 percent of the existing 7 10,000 retail service stations in our State. 8 Fifty percent are made up of branded franchisees. 9 You've heard that term today referred to as "dealer" many 10 times. But, actually, the State says we're franchisees. 11 And, of course, the other 10 percent is branded 12 independents, and those are mostly folks that are in the 13 outlying areas, out of metro areas that are buying branded 14 product through a jobber, a third party. 15 And then, of course, we have the unbranded 16 independents, which there are truly very little independent 17 supply of product. And, unfortunately, those are the folks 18 that are being hardest hit because of this current 19 situation. 20 We have members up towards the upper end of the 21 State that right now have had price increases above 50 cents 22 per gallon. They actually have become the moral conscience 23 of what's happened between the regulation and the problems 24 that have been created due to the different marketing 25 conditions on crude. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 271 1 We are the folks that stand up and explain to the 2 public what has happened, why it's happened. We're the 3 folks that get spit on. We're the folks that get sweared 4 at. We're the folks that equipment gets broken, because 5 people hate paying the prices. 6 But we stand there on the front lines and defend 7 things like Cleaner Burning Gasoline, and we are in full 8 support of Cleaner Burning Gasoline. 9 Those folks that have paid 50 cents more per 10 gallon have -- were the price leaders in a market that used 11 to take oversupply of unbranded product and move it through 12 the rack system into their facilities at very competitive 13 prices. 14 Today, their margins have shrunk to a minus 15 situation that you saw earlier by the oil company and by 16 Chairman Imbrecht's review. 17 Those are the folks that have been hardest hit. 18 And you must understand how the chain works. You've got the 19 company ops. You've got the fee ops. You've got the 20 jobbers. You've got the branded dealers. Those folks do 21 have some type of contractual or an agreement with the major 22 oil companies for supply. 23 But as you get down into the branded independents 24 that buy from jobbers, they do not always have that luxury, 25 nor the true independent brand that's flying his own flag. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 272 1 Thus, the public looks at those independents, who 2 were the price leaders, as now the gougers, as the rip-off 3 artists. Because all of a sudden these folks can't even buy 4 the gas for what it's being sold on the street. 5 I had a member call me and absolutely almost in 6 disarray (sic), because he was going to have to go to a 7 $2.00 area per gallon in order to continue to keep his 8 employees and his overhead in a community that is very 9 seasonal, that is -- we've all been there. It's beautiful. 10 But he feels that his customers are going to leave 11 him for good because of these situations. These are hard, 12 hard problems that are the reality of what's happening. 13 I do believe that this is a short-term situation. 14 If there is an 18,000 barrel a day shortage in our State, it 15 is a true shortage. I believe that the shortage in supply, 16 no matter how we try to coat it, comes back down to the 17 small business people that are charged with the 18 responsibility of supplying the public with motor fuel. 19 We must understand how the system works, and we 20 must react to their problem. And right now, as you know, I 21 have stood up and spoke on many times of our association's 22 commitment to Cleaner Burning Gasoline. But we have written 23 to Governor Wilson and the Administration and asked for 24 basically three emergency actions to take place. 25 We strongly recommend that we immediately put into PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 273 1 effect all contingency plans that will result in more fuel 2 supply -- CARB complying or noncomplying being made 3 available. 4 To permit the temporary sale on a short term of 5 non-CARB complying gasoline and diesel until supply meets 6 current levels of demand, and to develop a future 7 contingency plan that would allow for the sale of non-CARB 8 complying motor fuel to be sold when certain trigger points 9 for fuel supplies and pricing are exceeded. 10 We hope that you will take these recommendations 11 under consideration and act on them as swiftly as possible. 12 I would make myself available to any questions 13 that you may have. 14 CHAIRMAN DUNLAP: Thank you, Mr. DeCota. I have a 15 question. 16 MR. DeCOTA: Yes. 17 CHAIRMAN DUNLAP: On your second point, were you 18 here for Mr. Imbrecht's presentation? 19 MR. DeCOTA: Yes, I was. 20 CHAIRMAN DUNLAP: Were you -- his team is still 21 with us. Were you satisfied with his assessment of the 22 supply situation in the State of California? He basically 23 says we're in good shape now and will be shortly, any day, 24 perhaps have -- I don't want to say an abundant situation, 25 but certainly will cover the supply in all areas. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 274 1 Are you comfortable with that? Do you disagree? 2 What's -- 3 MR. DeCOTA: It's not that I disagree with what 4 he's saying. I believe that the reality of the marketplace 5 is depicting a situation where I have members that cannot 6 pay their rent, that cannot pay their fuel loads, that 7 customers are basically going to other suppliers that are 8 more advantageous with supply. 9 This is where I have a great deal of concern that, 10 if -- if what he's saying is true, why isn't it reflecting 11 right now? We have to deal with right now, today. I don't 12 want to lose another member. 13 In 1972, I had 22,000 retail service stations in 14 this State. Today, I have less 10,000. I mean, it's come 15 to a point to where we're getting into a dire situation. We 16 can't lose any more retailers and serve the public properly. 17 Those margins on the independents -- I did forget 18 this one point. You know, we've heard a lot of the numbers. 19 I must say you've done an excellent job. Your numbers, as 20 far as what I see, are right on the button. 21 But the independent sector, that 15 percent, those 22 price increases are 45 cents and more. 23 CHAIRMAN DUNLAP: I certainly appreciate your 24 perspective and wish you good luck with your members. And 25 we'll definitely keep communicating, and we'll certainly PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 275 1 consider your three suggestions. 2 Supervisor Vagim, do you have a question? 3 SUPERVISOR VAGIM: Yes. When you talk about the 4 competitive environment, your independents, your members, 5 what have you, there must be a process, because the oil 6 industry folks have said there was, in which, if there's 7 someone out there who offers lesser cost gasoline, the 8 market's going to rush to it. 9 I felt what you just said, and I even articulated 10 it earlier, there has been a significant downsizing of the 11 number of outlets in the State. Every community has less. 12 It seems to me that the ones with the cheaper gas are 13 generally where the people don't want to go, the less 14 advantageous areas have cheaper gas sometimes than the 15 people that have these fancy stations or what have you. 16 Do you see the market forces working that way in 17 your industry? 18 MR. DeCOTA: No. There's no independent supply. 19 You're buying through a jobber who's buying from a major. 20 If the rack price is forced to increase, it 21 becomes a disadvantage to be an independent or a small 22 branded dealer like you've just mentioned here. 23 He only lives in the realm of a supply system that 24 has abundance, okay, or that has product that they want to 25 move. In a short market like we are today, or a spot market PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 276 1 like we are today, he does pay higher costs than a branded 2 dealer. There's no doubt about it. 3 And I think that, you know, in itself is that -- 4 you know, we can't back up here. Okay? We don't have it -- 5 in '72, we had 25 to 30 percent of the retailers were 6 independent with independent refineries. 7 You know, the one thing about our product is, you 8 know, you can't import from out of State non-CARB gas. And 9 that is whatever it is. It has driven those costs to those 10 segment, either that jobber supplied segment in the outlying 11 areas especially, or to that independent segment of the 12 industry, has driven those costs out of sight right now. 13 And those folks are in jeopardy of losing their business. 14 I mean they have not made money in the last couple 15 weeks. And that, you know, is the absolute truth. They 16 have sat there on those margins for a long time now. And I 17 tell you, you know, unfortunate, but -- you know. And it is 18 the caveat emptor situation right now, because our guys have 19 to pass on those increases. And I tell them everytime they 20 call -- believe me, they call 15 and 25 times a day right 21 now, "Dennis, what do I do?" 22 And my advice is, "You pass the price increases on 23 to the public. You have no other choice or you can't pay 24 your bills." 25 And that's how I advise my folks. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 277 1 SUPERVISOR VAGIM: When they're looking for fuel, 2 they have their normal place where they've been doing; they 3 have a relationship. If they get to the point where the 4 price is kind of out of sight, do they get on the phone and 5 call around? 6 MR. DeCOTA: They definitely get in -- as most of 7 the local news media is printing the most price effective 8 places to purchase, thanks to our brothers in AAA, who blame 9 it on the retailer. They don't realize that margin right 10 now has become very tight. 11 I mean, if you've looked, there are some previous 12 price leaders that are now above the branded supply. 13 SUPERVISOR VAGIM: But when you get your supply 14 for your tanks, do you folks call around to find the best 15 price? 16 MR. DeCOTA: Yes, they do. 17 SUPERVISOR VAGIM: Is there a significant number-- 18 MR. DeCOTA: (Interjecting) Especially my folks 19 on fixed incomes. 20 SUPERVISOR VAGIM: Right. 21 MR. DeCOTA: Our older people. 22 SUPERVISOR VAGIM: Okay. But I'm talking about 23 not the people -- 24 MR. DeCOTA: (Interjecting) I'm a retailer, too, 25 so I misunderstood your question. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 278 1 Okay. I'm talking about when you buy your supply 2 for your retail outlet, do you get on the phone and call 3 around at various jobbers and stockers of fuel to find the 4 best price? 5 MR. DeCOTA: My members do that are jobber 6 supplied. 7 SUPERVISOR VAGIM: Right. 8 MR. DeCOTA: I'm what they call a franchise 9 dealer. I have a contract that I must purchase my product 10 from my parent company. 11 SUPERVISOR VAGIM: What percentage of your 12 industry has that? 13 MR. DeCOTA: Basically, 80 percent of the industry 14 is supplied by -- 15 SUPERVISOR VAGIM: Contract. 16 MR. DeCOTA: -- is either franchised or a fee op, 17 company op, that type of thing. 18 SUPERVISOR VAGIM: So, these prices -- 19 MR. DeCOTA: Only 15 percent of the folks -- 20 SUPERVISOR VAGIM: 15 percent have the ability to 21 pick up the phone and shop around. 22 MR. DeCOTA: And shop around. And that's very 23 hard to do, because there's just -- you know, they're buying 24 from a branded jobber usually day. There's not very many 25 independents out there. That's, you know, there's not PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 279 1 really a true independent source of supply. 2 SUPERVISOR VAGIM: So, you're at the whim of 3 whatever your upstream folks decide to charge you. 4 MR. DeCOTA: You get it. Yes, sir. 5 SUPERVISOR VAGIM: Thank you. 6 CHAIRMAN DUNLAP: Any other questions of Mr. 7 DeCota? 8 Thank you. 9 MR. DeCOTA: Thank you, Mr. Dunlap. 10 CHAIRMAN DUNLAP: Barry Berkett, Thrifty Oil 11 Company; followed by Bonnie Addario, CIOMA; Mary Morgan, and 12 Joel Anderson. 13 MR. BERKETT: My name is Barry Berkett. I'm with 14 Thrifty Oil Company, Executive Vice President. 15 Thrifty is one of the largest independent 16 retailers of gasoline in the State California. In business 17 for over 30 years with nearly 2,000 employees, we operate at 18 every segment of the supply distribution network, except we 19 no longer operate a refinery. 20 We have branded units. We have unbranded units. 21 We buy in pipeline on contracts and in the spot markets. I 22 bring a different perspective than most of the people who 23 spoke earlier and, in fact, I came with wide trepidation as 24 to whether or not we should speak. 25 All the refiners spoke highly in terms of how the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 280 1 market works, with good reason. This is a market that 2 obviously works to the benefit of suppliers at this point in 3 time. Traditionally, the independent retailers had a 4 stabilizing effect on the street price increases. Our 5 customers are very price sensitive and can lease afford the 6 price increases we've seen most recently. 7 While the number of independent retailers may have 8 dwindled, there are still many of us that attempt to offer 9 no frills, low street prices of gasoline. While we 10 acknowledge that a number of market forces have caused large 11 increases in gasoline, we are alarmed for the future of 12 independents in the State. 13 While I agree with most of the information that 14 was presented earlier, I must point out that at the end of 15 January, the spot Los Angeles pipeline average cost of 16 gasoline at some points was under 53 cents a gallon. 17 On Tuesday, the pipeline spot price was $1.06. 18 While crude increases, refinery problems, start-up problems 19 with the implementation of CARB Phase 2 gasoline would each 20 individually be expected to increase the cost of gasoline, 21 their timing together could not have been worse. 22 After adding terminaling fees, State and Federal 23 sales taxes, and the cost of delivering gasoline to 24 stations, this doubling of the cost of gasoline before taxes 25 translates to delivered cost, before any cost of operations, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 281 1 of running a service station to over $1.55 in Los Angeles. 2 In some areas, it's even higher. 3 Gasoline prices have risen nationwide, but 4 wholesale prices are now, as stated earlier, 30 to 35 cents 5 higher in California than elsewhere. Compare Tuesday's 6 $1.06 spot price to the Gulf Coast RFG of 70 to 74 cents at 7 the same time frame. 8 CARB Phase 2 gasoline undoubtedly benefits air 9 quality and costs more. But 30 to 35 cents is too high a 10 cost. CARB must balance air quality's long-term goals with 11 the impact on the consumers. 12 These short-term price spikes can very well lead 13 to the demise of the independent retailer. The loss of the 14 independent operators will have a serious negative impact on 15 California -- killing the small businessman, the business, 16 and long-term higher prices to the consumer. 17 Because of the uniqueness of CARB's spec gasoline, 18 we clearly are cleaning up the air. However, while the 19 long-term specifications will bring cleaner air, the short- 20 term specifications are strangling the independent business 21 operator. 22 We believe that emergency measures clearly are 23 needed immediately; in the short term, allowing limited 24 amounts of Federal Reformulated Gasoline to be sold will 25 temper the wholesale shortages now grinding the State. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 282 1 Although the major oil companies and other 2 refiners have indicated that they have gone to the spot 3 market to buy their gasoline, no new gasoline is created. 4 IN fact, although some refiners throughout the country can 5 produce some small amounts of CARB gasoline and very few 6 large amounts -- in general, it's very small amounts. 7 Supporting that large increase and allowing in 8 emergency shortages -- suppliers to come in and buy the spot 9 gasoline has the 50 cent price hike we have all seen. We at 10 Thrifty are known throughout California for providing 11 competitive prices for quality gasoline at first-class 12 facilities. 13 We are here to fight for two constituencies, the 14 very survival of independent retailers and consumers who 15 deserve the long-term competitive benefits of having 16 independent retailers that have historically offered major 17 quality gasoline at Thrifty prices. 18 The impact on our company and other independent 19 retailers cannot be overemphasized. The situation is urgent 20 and critical. To comply with government regulations, our 21 company and many others have spent huge sums to install 22 underground storage tanks. True, this will ensure that 23 their present and future operations are compatible with 24 legitimate environmental goals of the people of California. 25 But the magnitude of the necessary capital expenditures, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 283 1 particularly for small independent retailers, should not be 2 understated. 3 Without immediate -- and I do stress the word 4 "immediate" -- relief, independent retailers will be driven 5 out of business. The result will be a retail market 6 controlled by a handful of major corporations, major oil 7 companies in two multibillion dollar refining and marketing 8 companies. 9 I say that and you'll obviously understand, 10 fortunately, many of my suppliers have now left the room. 11 Although the Air Resources Board's regulations 12 allow for variances, as has been noticed earlier, there are 13 no variances for California CARB 2 gasoline. 14 The issue is, why would all these refiners who are 15 running flat out -- they don't have the refinery problems -- 16 bring new quantities of gasoline into this marketplace? To 17 the extent that a variance is available to bring Federal 18 Reformulated Gasoline into this marketplace, that would have 19 a tempering effect to keep the huge disparity between the 20 Gulf Coast gasoline prices and the California gasoline 21 prices that we now see from continuing. 22 If we have another hearing next month to see how 23 long this has continued, there may be a lot fewer people 24 here. This has gone on not for days or weeks. I've been 25 asked by a few members of the Board in the past that I've PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 284 1 spoken with to give information to staff. 2 We have hesitated, because traditionally the 3 market should take care of itself. But what we have, as has 4 been noted, is very few players supplying gasoline. When 5 there's a shortage of gasoline, they go buy it. I don't go 6 look to another supplier and therefore get a better deal, 7 because the person that was charging me more money to begin 8 with is there first. When he buys the gasoline at a price 9 at or, as you heard, sometimes prices more than he's selling 10 it, my cost goes up. And it's gone up dramatically. 11 The Board must act now. Allowing Federal 12 Reformulated Gasoline to be marketed now, while the problems 13 work their way throughout system is desperately needed. 14 That will put real market forces to work. 15 The question has been asked earlier as to where 16 the missing piece of the profit is. I told you where it 17 isn't. The numbers that were indicated before were dealing 18 with wholesale prices. They talked about the negative 19 margins of the retail dealer. Above and beyond that, they 20 have their operating profits. 21 As was indicated earlier, our stations and the 22 stations of many people like us are bearing the brunt of the 23 angry public. We need help so that this Board and the State 24 regulations don't hand, as indicated earlier, a blank check 25 to the refiners to use the Board to take advantage of what PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 285 1 is clearly an aberration. 2 Don't let the oil companies, the major oil 3 companies I might, use CARB to support their goal. I'm 4 happy to answer any questions or would give information to 5 staff if we can be of help. 6 SUPERVISOR RIORDAN: Board members, are there any 7 questions for our speaker? 8 Supervisor Roberts. 9 SUPERVISOR ROBERTS: Well, I want to -- while 10 you're at the microphone -- ask the staff. You said that 11 other refineries, out-of-state refineries can't produce 12 reformulated gas in significant quantities. I wonder if our 13 staff could speak to that, because I had the impression that 14 wasn't the case. 15 MR. BERKETT: Could I correct, because there are 16 some refineries that can. 17 In fact, a number of months ago, at some hearings, 18 a member -- a person that works for one of our affiliated 19 companies is part of the advisory board, and there's been a 20 long thought process by many that, in fact, other refineries 21 outside of the State could not produce CARB gasoline. That 22 is not correct. 23 In fact, I'm aware of cargoes of CARB gasoline 24 that are going to be imported into the State on a consistent 25 basis. Those numbers are not included in CARB staff's PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 286 1 numbers. 2 There are some refineries that, as some of the 3 refiners have testified, can and do produce some significant 4 quantities of gasoline. There are not that many. 5 In fact, many of the Gulf Coast refineries can 6 produce reformulated gasoline. And what we have is a unique 7 specification of gasoline in California. What that does is 8 it allows an aberration to be exacerbated. Yes, there's a 9 long time frame to bring a cargo around. 10 But if your refinery can only produce 5,000 11 barrels a day, 10,000 barrels a day of CARB gasoline, it may 12 take you a month or more simply to store up that volume and 13 then have a three-week wait time. 14 The California refiners clearly invested huge sums 15 of money in order to make very large quantities of CARB 16 gasoline. We're not at all suggesting that they shouldn't 17 be able to recoup some investment. 18 What we're suggesting is that there should be some 19 mechanism -- and I've suggested one, and some others have 20 been suggested -- to make sure that when those aberrations 21 happen, that they don't take excessive profit from that at 22 the expense of who have been the price stop, the competitive 23 marketer throughout the State of California. 24 SUPERVISOR ROBERTS: By allowing for the Federal 25 RFG, you get a much more immediate response. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 287 1 MR. BERKETT: In limited quantities. We're not at 2 all suggesting that this Board should totally eliminate CARB 3 gasoline. 4 Again, the differential between the production and 5 the demand is not that gigantic. But, in fact, the actions 6 that have been taken by the refiners in order to come in for 7 a variance, they must show what have they done. The first 8 option is to go to the marketplace. Go buy gasoline. 9 If you're only short a small portion of your 10 production, you'll pay more than the market to cover that 11 small amount, but who gets hurt? The independents who are 12 traditionally buying in that marketplace. 13 And so, what you've done is you've created a 14 runaway market; that is precisely what is happening. You 15 know, people can look to annually increases and decreases in 16 the cost of gasoline and the cost of diesel. 17 I've spoken about gasoline. Our company sells 18 significant quantities of diesel, but nowhere near the 19 quantities that we sell gasoline. We're much more familiar 20 with all the different mechanisms for buying and selling 21 gasoline than we are diesel. But the issue is the same. 22 What we're talking about is, when there is a 23 problem, how do we keep the major oil companies and the 24 other large refiners from taking an overadvantage to the 25 detriment of the California consumer, and what we believe is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 288 1 destroying the independent retailers who have traditionally 2 been a thorn in the side of the majors. 3 SUPERVISOR ROBERTS: Okay. Was theare something 4 beyond allowing the Federal RFG that you were also 5 suggesting? 6 MR. BERKETT: That's our recommendation. We think 7 that by the very threat -- 8 SUPERVISOR ROBERTS: What I was asking, was there 9 anything in addition to that? 10 MR. BERKETT: No. We think that the very threat 11 of that ability will temper the increases and what we have 12 seen happen, which is, you know, 10, 15 cent price increases 13 in a week. 14 Much has been made of one oil company's increase 15 on one particular day. But to the extent that one looks at 16 statistics, in fact, there have been a lot of increases from 17 a lot of different players truly in response to the 18 marketplace. 19 I can't blame them as a marketer. But, in fact, 20 what we've done is we've created the problem. We have 21 created an artificial shortage. We are not producing more 22 gasoline. We are not bringing in significant quantities of 23 more gasoline. 24 By allowing some small increase, we think that 25 will temper -- temper the marketplace. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 289 1 SUPERVISOR ROBERTS: Thank you. 2 CHAIRMAN DUNLAP: Very well. Thank you. 3 MR. BERKETT: Thank you very much. 4 CHAIRMAN DUNLAP: Is the CIOMA representative 5 here? 6 Hello Bonnie. I don't think we've met before. 7 MS. ADDARIO: No, we haven't, but I think we were 8 on a phone call a while back. 9 CHAIRMAN DUNLAP: That's right. It lasted much 10 too long as I recall. 11 MS. ADDARIO: Much too long. I agree. I agree. 12 CHAIRMAN DUNLAP: Well, welcome. Good afternoon. 13 MS. ADDARIO: Thank you. For those of you who 14 don't know me, my name is Bonnie Addario, and I represent 15 the California Independent Oil Marketers Association. 16 But I'm also an oil marketer, an independent oil 17 marketer. And if any of you have any questions at the end 18 about what exactly we are -- I've heard us referred to many 19 times today -- I'd be happy to clear that up. 20 What independent oil marketers do -- some of us 21 have terminals, some of us have stations, some of us ship on 22 the pipeline, some of us have cardlocks. But primarily, 23 we're the downstream distribution system for the commercial 24 sector. 25 We deliver product to trucking companies, to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 290 1 farmers, to State and local agencies -- some of you in this 2 room are our customers -- schools, anybody that needs 3 gasoline or diesel, whether they need it in a 55-gallon drum 4 delivered on a flatbed truck or they need a full truck and 5 trailer of whatever. That's pretty much what we all. 6 We have some big players, medium players, small 7 players, all different sizes. There's been a great deal of 8 information discussed here today, and I had a written 9 statement. I'm going to save you all from having to listen 10 to it, because it's either already been said or it's going 11 to be said. 12 So, I'll just try to hit some things that I don't 13 know will be said. 14 I heard a great deal about pedaling today. Pedal 15 to the metal, forward pedaling, backward pedaling, and some 16 plain old peddling. A lot of that went on this morning. 17 It's too bad the Press isn't here, the majors aren't here, 18 there's nobody here anymore. But, I don't know, maybe we 19 can call a newspaper after this. 20 California is a trend setter and a progressive 21 State, one of the most progressive States in the Union. I'm 22 proud to be a Californian, and I'm sure everyone in here is, 23 too. 24 CARB fuel is an example of that, wanting to be a 25 leader in the nation of environmentally correct fuel, if PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 291 1 that's what you want to call it. 2 I think the purpose of this meeting today was to 3 discover just what the price is for being a leader. We've 4 seen all kinds of diagrams today, and we've seen that it's 5 somewhere around 42 cents. 6 They talked about, well, you know, they have pies, 7 and charts, and all kinds of things and said, well, this is 8 because of crude. And I don't know anybody that's paid $24 9 for crude yet. I don't know anybody that's going to, 10 because it actually went down yesterday, and diesel is 11 actually, hopefully, going down tonight. 12 There was a lot of hype going on here. And I 13 think we all are on the same page about what's happening. I 14 think a door was opened, and an entity walked in and took 15 advantage of it. That's my opinion. 16 A lot of refiners said today there was no supply 17 problem, absolutely no problem. Terminals were full, 18 refineries were full, no problem. Well, can you explain to 19 me -- and I have -- these (holding up sheaf of papers) all 20 came in today through our association office. 21 These are from Chevron, Exxon, Texaco. I'm going 22 to read you this. 23 (Reading) Dear "Chevron Customer." The names are 24 blacked out, because these people are afraid to have you see 25 their names. They're afraid to stand up here in front of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 292 1 their suppliers and tell you what's really going on, because 2 they're afraid their supplier's going to cut them off 3 tomorrow. 4 Okay? This is the truth. So, the names are 5 blacked out. But this says: (Reading) Listed below is 6 your daily allocation share of gasoline from the Fresno 7 terminal until further notice. 5,494 gallons. 8 This independent oil marketer, whoever it is, has 9 5,494 gallons to last them until further notice. So, 10 there's going to be some farmers out there, and some police 11 departments, and all those people I spoke about that this 12 particular entity isn't going to be able to get them any 13 fuel. 14 So, what I want to know, and I really wish we 15 could have turned this whole meeting around and let us speak 16 first and let them speak last, because I have some great 17 questions for them. You know, I'm serious. 18 How is this supposed to go around? And if the 19 terminals are full and there's no supply problems, why is 20 the cost of fuel up 40 cents and why can't we get any? 21 I don't have the answer. That's why I'm here. I 22 thought that's why we were all here today. And, 23 unfortunately, they're all gone somewhere. I don't know 24 where. 25 And I'm on a tangent. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 293 1 CHAIRMAN DUNLAP: No, you're not. 2 MS. ADDARIO: I have more. 3 CHAIRMAN DUNLAP: How many more? From what 4 companies has your membership received those -- 5 MS. ADDARIO: All of them. And, on top of this -- 6 CHAIRMAN DUNLAP: No. I mean what companies have 7 provided -- I'm over here. You're looking in the opposite 8 direction. 9 MS. ADDARIO: Oh, Chairman Dunlap. 10 CHAIRMAN DUNLAP: I'm still the Chairman. 11 (Laughter.) 12 CHAIRMAN DUNLAP: Give me the names of the oil 13 companies that have put forward allocation limits? 14 MS. ADDARIO: Ultramar, Chevron, Exxon, Tosco -- 15 excuse me, not Tosco -- Texaco. 16 CHAIRMAN DUNLAP: Now, this is today? 17 MS. ADDARIO: Today. 18 CHAIRMAN DUNLAP: Okay. Have they given -- 19 MS. ADDARIO: And not just -- 20 CHAIRMAN DUNLAP: -- reasons for this? 21 MS. ADDARIO: -- today. This has been going on 22 all week. 23 CHAIRMAN DUNLAP: The ones that you received 24 today. 25 MS. ADDARIO: Today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 294 1 CHAIRMAN DUNLAP: Okay. And they usually have a 2 line or two on a reason. What's the reason they cited? 3 MS. ADDARIO: Oh, the reason is, (reading) Below 4 are the pager numbers of our pricing group to be used in 5 case of emergency. 6 (Laughter.) 7 MS. ADDARIO: No reason. 8 CHAIRMAN DUNLAP: And that means -- what does that 9 mean? 10 MS. ADDARIO: I don't know. 11 CHAIRMAN DUNLAP: Do you have any from Unocal 12 there? 13 MS. ADDARIO: No, nothing from Unocal. But I have 14 something verbal from Unocal. 15 CHAIRMAN DUNLAP: And what -- 16 MS. ADDARIO: (Interjecting) Unocal has put their 17 distributors on allocation. And one distributor said the 18 other day -- that buys all their product from Unocal, their 19 stations are branded Unocal, but they also deliver to their 20 commercial customers, Unocal. 21 CHAIRMAN DUNLAP: All right. Let me stop you 22 there, if I may. 23 Energy Commission, from what you know about 24 supply, does there seem to be any compelling reason for this 25 to be going on? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 295 1 Also, is Mr. Henderson or one of his 2 representatives here? Perhaps he can help from an industry 3 perspective. 4 MR. BROWN: Mr. Addario, are the names of the 5 customers that you're referencing, are they customers with 6 long-term supply contracts that have been cut back -- 7 MS. ADDARIO: Yes, ma'am. 8 MS. BROWN: -- below their historical volumes? 9 MS. ADDARIO: Yes. 10 MS. BROWN: Is that what's going on? 11 MS. ADDARIO: Yes. And they're all different. 12 And I can go to the Association tomorrow, blank names out, 13 and get them to you. No problem. 14 They're all different. Some say you can't have 15 any more than you had same time last year at this time. 16 MS. BROWN: And isn't the issue that the major oil 17 companies typically supply their branded stations first and 18 their -- and when they, in their judgment, don't have enough 19 fuel at terminals to meet their contracted volumes, they cut 20 back to say 80 percent, 90 percent, or some lower percentage 21 of the contracted volume? Is that what's going on here? 22 MS. ADDARIO: Well, I can't speak for the majors. 23 You'd have to ask -- 24 MS. BROWN: I mean, I'm just trying to understand 25 what is going on with the communications that you just PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 296 1 cited. 2 MS. ADDARIO: The communications that I've just 3 cited are all very different. 4 MS. BROWN: I mean, "until further notice" is 5 certainly alarming. 6 MS. ADDARIO: Very alarming. Very alarming. You 7 know, I don't know what I can tell you about that. 8 Like I said, I wish they were here. I wish this 9 meeting was reversed. I really do. 10 There's lots of -- there's also a 10 cent per 11 gallon penalty. If this -- well, this isn't Chevron, but 12 Exxon and Texaco have a 10 cent a gallon penalty if you 13 overlift one gallon over your allocation. 14 MS. BROWN: See, what is not clear is, for 15 example, you gave one communication that had a volume of 16 about 6,000 gallons. 17 What's the normal delivery to that same customer? 18 Is 6,000 gallons half of what they're normally receiving? 19 And, you know, it seems to me it's -- there's more to the 20 story than we're deducing from what you've told us so far. 21 What I understand is happening is that some of 22 your wholesale distributors are not getting any fuel at all, 23 or are they getting a limited amount of fuel, but just don't 24 now how much more they're going to get by when? 25 MS. ADDARIO: There's -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 297 1 MS. BROWN: And it's hard to run a business with 2 that kind of uncertainty. 3 MS. ADDARIO: Okay. Like I said, I will fax these 4 all to you tomorrow after we erase the appropriate names, 5 okay? Because these people don't want to e -- 6 MS. BROWN: But just faxing the letters to me is 7 not enough information for us to really get a picture of 8 what's going on. 9 MS. ADDARIO: Well, you could ask the majors 10 tomorrow to ask them what their allocation programs are and 11 how they're coming up with the numbers. 12 MS. BROWN: I guess -- 13 MS. ADDARIO: They can better answer that than I 14 can. 15 MS. BROWN: Is Mary Morgan here from Santa Fe? I 16 guess I would hope that she would also be testifying, 17 because she could give us an indication of what the terminal 18 volumes are showing at locations in the areas that you're 19 citing. 20 CHAIRMAN DUNLAP: Yes. 21 MS. ADDARIO: Well Mary Morgan's from Santa Fe. 22 And what I'm talking about here are two different things 23 entirely. 24 MS. BROWN: Yes, you're talking about -- 25 MS. ADDARIO: I'm saying the product's in the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 298 1 terminals; they're not letting it out. 2 MS. BROWN: They're not letting it out. 3 MS. ADDARIO: And I want to know why. I want to 4 know why. 5 SUPERVISOR VAGIM: How much of that is diesel? 6 MS. ADDARIO: It's about 50-50. It's 50 diesel, 7 50 gas. 8 SUPERVISOR VAGIM: And you had those come today -- 9 MS. ADDARIO: These have been going on for a week. 10 SUPERVISOR VAGIM: -- from the Fresno terminal; 11 that is diesel. 12 MS. ADDARIO: Yes. Yes. 13 SUPERVISOR VAGIM: Because we've heard that Fresno 14 terminal is overflowing with diesel. 15 MS. ADDARIO: Which is -- 16 (Laughter from the audience.) 17 SUPERVISOR VAGIM: Is that true? 18 MS. BROWN: We've heard that terminals in Fresno 19 have surplus volumes of diesel. But I think what we're 20 hearing is that it's not getting to the customers that 21 you're citing. 22 SUPERVISOR VAGIM: But you have -- you have 23 notices from -- 24 MS. BROWN: An allocation of volumes -- 25 SUPERVISOR VAGIM: -- producers -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 299 1 MS. BROWN: -- to specific distributors and 2 wholesalers. 3 SUPERVISOR VAGIM: From that terminal. 4 MS. ADDARIO: Yes. 5 MS. EDGERTON: Can I ask a question? 6 CHAIRMAN DUNLAP: Sure. 7 MS. EDGERTON: Ms. Addario, I appreciate the 8 sincerity of your concern. I would ask that you appreciate 9 that it's very hard for -- I can speak for myself -- for me 10 to evaluate, with the limited amount of information that you 11 have there, the meaningfulness of what that is. 12 I appreciate that you say the people are 13 frightened. But this is a -- we have to go by the rule of 14 laws. So, we have to know what are the other factors 15 involved in that. What have they been used to getting? 16 What kind of fuel is it? 17 Maybe you don't want to give us the names today. 18 I can't see how the Energy -- the Commission could make 19 heads or tails of a letter that didn't have names on it. 20 So, there's no way to verify anything and find out even what 21 the problem is. 22 So, I would suggest that maybe your organization 23 has done some analysis of what these letters that you want 24 to present to us in some sort of form that we can digest it, 25 so that we can be responsive. Because we certainly want to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 300 1 be responsive. 2 But maybe you can explain. 3 MS. ADDARIO: I think what I'm doing here -- these 4 just came in this afternoon. We did not have time to 5 analyze them, put them on a graph, put them on a chart, or-- 6 MS. EDGERTON: There doesn't have to be a chart, 7 just has to be so we know who they are. 8 MS. ADDARIO: There was no time. These just were 9 hand-delivered to me. I have a -- 10 CHAIRMAN DUNLAP: You're raising some issues here 11 that are important for us to try to understand and influence 12 positively, if we can -- 13 MS. ADDARIO: Exactly. 14 CHAIRMAN DUNLAP: -- just so I understand, these 15 are letters to your membership -- 16 MS. ADDARIO: Correct. 17 CHAIRMAN DUNLAP: -- from the majors as you call 18 them. 19 MS. ADDARIO: Correct. 20 CHAIRMAN DUNLAP: Saying that they used to get 21 10,000 gallons, now they're going to get 5496, or whatever 22 the number was. 23 MS. ADDARIO: Correct. 24 CHAIRMAN DUNLAP: They don't cite a reason that 25 you can -- you or your membership can understand. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 301 1 MS. ADDARIO: Correct. 2 CHAIRMAN DUNLAP: The Energy Commission has said, 3 their chairman and their staff have said there's adequate 4 supply. There's been some supply problems. We've covered 5 that. But shortly, that will be covered as in any day, or 6 it is already covered. 7 And so, simultaneous with getting that message, 8 you get this message. 9 MS. ADDARIO: Correct. 10 CHAIRMAN DUNLAP: That there is some constraints 11 and that you cannot get the product that you were counting 12 on being able to get. 13 And you're telling me that these -- that the 14 relationship that your membership has is ongoing, so they 15 know they regularly ask for this. This isn't spot buys, 16 small spot buys or anything, right? 17 MS. ADDARIO: Correct. 18 CHAIRMAN DUNLAP: Okay. 19 MS. ADDARIO: Chevron said this morning -- 20 CHAIRMAN DUNLAP: So, I don't -- 21 MS. ADDARIO: -- they're supplying all their 22 customers. 23 CHAIRMAN DUNLAP: All right. I know there are 24 some oil company representatives here. So, what I would 25 suggest is we move on to the next point. I'll ask them or PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 302 1 their representatives to come back whenever they get their 2 heads together and give us some kind of indication about 3 what's going on. 4 The Energy Commission is saying they don't have 5 enough information to determine, but get them the complete 6 information and they'll look into it. 7 There's a will on our part to do the same thing. 8 MS. ADDARIO: Absolutely. No problem. 9 CHAIRMAN DUNLAP: Okay. I cut you off. Can you 10 continue with -- 11 MS. ADDARIO: Sure. Certainly. 12 CHAIRMAN DUNLAP: -- the other points you had? 13 MS. ADDARIO: The only other issue we wanted to 14 address today, which I'm sure California Trucking 15 Association is going to also address is the effect that this 16 has had on the commercial sector. 17 We've heard a lot today about gas stations and, 18 you know, people that go to gas stations and buy 17 gallons 19 or what have you. 20 In the commercial sector, we're talking about 21 folks that buy thousands and thousands of gallons every day. 22 And they've recognized a 30 percent increase in their cost 23 of doing business. 24 I'll give you an example of a soda company, 25 well-known soda company. It costs 17 cents for them to make PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 303 1 a liter of soda. About 60 percent of that liter is 2 transportation, fuel and transportation. 3 So, a 30 percent increase to a commercial entity 4 like that in the cost of fuel over a three week or four week 5 time frame is monumental, absolutely monumental. 6 I enclosed letters from commercial customers in my 7 written statement. 8 Nobody has mentioned them. We're just talking 9 about John Q, Public in a car driving to work, or to school, 10 or wherever. We have a business climate here that is 11 devastating, absolutely devastating to the California 12 economy, and no one's really mentioned it. And I wanted you 13 to be aware of that. 14 CHAIRMAN DUNLAP: Okay. 15 SUPERVISOR ROBERTS: I don't think -- that was 16 really part of that $5.2 million a day loss and the other 17 estimate of 6.8 billion, or whatever that number was. 18 CHAIRMAN DUNLAP: Chairman Imbrecht covered that. 19 SUPERVISOR ROBERTS: A huge number. And I think 20 that's what they were really taking into account, the 21 secondary effects of this thing. 22 MS. ADDARIO: Okay. 23 CHAIRMAN DUNLAP: Yeah. Does that do it? 24 MS. ADDARIO: The only other thing we would 25 suggest and urge is that you do two things -- not suspend PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 304 1 the regulations, but ease them up to get our supply 2 situation to where it needs to be: at parity with our 3 border States. 4 As the California Trucking Association will tell 5 you, truckers are fueling across the borders, and they're 6 coming into California burning off-spec fuel. And there's 7 two impacts. One, they're dirtying up our State, which 8 could be cleaner today; and, number two, the economic impact 9 on California sales. Two tremendous impacts. 10 So, if you ease the regulations, not suspend them, 11 because we're all in support of them -- we're all in support 12 of clean air -- just ease them. 13 If the industry is behind 18,000 barrels a day, 14 then bring 18,000 barrels of off-spec fuel in. 18,000 15 barrels a day is only 700,000 gallons, This is nothing. 16 And if we were to believe the major oil companies this 17 morning, and that's all it's going to take to get 700,000 18 gallons of gas and diesel into this system on a daily basis, 19 that doesn't seem very difficult to do. 20 We've got to be bringing -- driving more of that 21 in across the borders. 22 CHAIRMAN DUNLAP: Thank you. 23 MS. ADDARIO: You're welcome. 24 CHAIRMAN DUNLAP: Supervisor Silva. 25 SUPERVISOR SILVA: Just a couple comments. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 305 1 Bonnie, I really appreciate your spirit. You're going after 2 the bottom line, and that's what we're here for. At least 3 that's what I'm here for. 4 And, too, have talked to dealers. When I go out 5 and I get gasoline for my car and I know the owner, I'll 6 talk to them. And they brought up exactly the same -- made 7 the same comments that you did. They have no control. 8 They're stuck. 9 And I think you're talking about a Stage 2, which 10 would be the cost to the consumers and the drivers. But I 11 think what we have to be really concerned with, and that's 12 terrible, but I think even greater damage to our economy 13 would be -- 14 MS. ADDARIO: Thank you very much. 15 (Thereupon, there was a pause in the 16 proceedings to allow the reporter to 17 check why the stage monitor, which enables 18 her to hear the parties, was not operating.) 19 CHAIRMAN DUNLAP: I would like for you to meet 20 with the WSPA representative and the oil companies that are 21 here. Actually keep your paper private. I'm not suggesting 22 you show them that. But I would like you to round out the 23 discussion, and I'm going to ask them to come back up and 24 explain to us what exactly the circumstances are surrounding 25 those communications. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 306 1 MS. ADDARIO: Okay. 2 CHAIRMAN DUNLAP: Thank you. 3 MS. ADDARIO: You're welcome. 4 CHAIRMAN DUNLAP: Mary Morgan, Santa Fe Pipelines. 5 Is Ms. Morgan here? 6 Okay. Joel Anderson, California Trucking 7 Association, followed by Stephanie Williams, also from CTA, 8 and Rich Leimbach. And you're welcome all to come forward 9 if you wish. You can tag team or however you'd like to do 10 it, Joel. The time is yours. 11 MR. ANDERSON: Thank you, John. 12 Mr. Chairman, thank you for the opportunity. 13 Members of the Board, Mr. Boyd, good to see you back now. 14 We appreciate the long day. It has been a long day. 15 It reminds me of a hearing two and a half years 16 ago at another meeting facility that also was a very long 17 day that brought us to this again today. 18 And I guess my first comment is, it's terrible to 19 be a prophet when your prophecy comes true and it's not good 20 news. And certainly, we're going to talk about the bad news 21 that Stephanie will describe in her presentation today. 22 That will be followed up by in person, direct 23 business stories from several of our members. 24 So, our presentation will be twofold. Stephanie 25 will deal with the technical side. She'll have the prices PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 307 1 for you. She'll be able to map out what's occurred, how the 2 California trucker's been disadvantaged. 3 I appreciate Supervisor Silva's comment on the 4 inflationary impact. 90 percent of everything in California 5 moves by truck. We're a trading nation State. Diesel fuel 6 moves it. When diesel fuel goes up 40 percent in a matter 7 of eight weeks, we have an inflationary spiral in our 8 economy. 9 Just extrapolating Board of Equalization figures 10 on diesel sold in California, and adding a little bit for 11 overhead and the impact of margins between wholesale and 12 retail, you're into a billion dollar annualized impact on 13 the economy, which I saw was not too different than some of 14 the figures the Energy Commission's come up with. So, my 15 rough and crude math I'm pleased squared with theirs. 16 Commissioner -- I should say Chairman, members, 17 it's serious. We're going to hear some real serious stuff. 18 But we're not here to whine. We're here to give you a 19 solution that we think will work. The previous spokesperson 20 from CIOMA hinted at it. We support CARB diesel. We 21 thought it was a mistake back then, but we learn to live 22 with mistakes and move on. 23 But certainly, this State has made a commitment to 24 it in the SIP. It's State policy. But what it has not 25 allowed is a safety net when the supply becomes so PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 308 1 constrained that the natural mechanism of the market is 2 going to drive the price through the roof. 3 We have not given ourselves a safety valve. The 4 oil companies understand it. I mean nothing untowards them, 5 but they understand the State's created a cartel and cartel 6 pricings follow from a cartel. 7 We would suggest that you use your variance powers 8 and anytime the rack price between our State and the 9 neighboring States is more than six cents a gallon, you open 10 variance fuel and allow it into California, so we have a 11 steady stream of EPA-approved fuel as a reservoir to burn in 12 California in those instances when there's an obvious 13 pricing problem. 14 The other part we're going to introduce to you in 15 our agenda, Mr. Chairman and members, is an aggressive 16 alternative fuels agenda. We've heard spoken that we can't 17 be held hostage to one fuel. We understand that. 18 The State Implementation Plan calls for heavy-duty 19 engines developing an alternative fuel strategy. We've 20 introduced three bills into the Legislature to advance and 21 accelerate the movement of the heavy-duty diesel engine into 22 a competitively priced alternative fuels use. 23 We haven't seen ARB's visible support at those 24 hearings today. Today, we'll ask for your formal support of 25 those bills as they move through the Legislature. We PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 309 1 understand WSPA is in opposition to one of them. We're not 2 surprised. We think it's part of their strategy. 3 That completes my introductory remarks. I'd now 4 like Stephanie to give the presentation. Thank you. 5 CHAIRMAN DUNLAP: Ms. Williams, do you have some 6 slides? 7 MS. WILLIAMS: Yes, I do. 8 CHAIRMAN DUNLAP: Okay. Are they cued up? 9 MS. WILLIAMS: I'll have to cue him with my 10 finger. 11 CHAIRMAN DUNLAP: All right. 12 MS. WILLIAMS: My name is Stephanie Williams. I'm 13 representing the California Trucking Association. I manage 14 the environmental policy and research at CTA. 15 And on to my first slide. 16 A look back at October, 1993. The only thing 17 missing today are the trucks and our picket signs. We left 18 them home. 19 CTA petitioned the California Air Resources Board 20 to suspend CARB fuel on October 12th, 1993, the reasons 21 being CARB diesel increased 40 cents per gallon in a short 22 period. The supply of diesel was erratic and uncertain. 23 Cost increases, spot shortages, and disruptions in the 24 distribution jeopardized the California economy. 25 Interstate price disparity caused out-of-state PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 310 1 trucks to fuel up outside the State, reducing projected air 2 quality gains, and the tons of emission reductions that were 3 once calculated were no longer valid. 4 Our message in 1993 -- the next slide, please. 5 Okay. The message in 1993 was create -- a single 6 State fuel creates problems for the trucking industry. It's 7 an artificial market, subjects the State to wild price 8 fluctuations or vulnerable to shortage. We're at a 9 competitive disadvantage in California as carriers trying to 10 operate and feeding our families in this State, and emission 11 reductions are no longer cost-effective. 12 Now, we're at the 1996 fuel crisis. This is deja 13 vu for our industry. California diesel and now gasoline 14 prices have skyrocketed. When California is treated 15 differently than the rest of the nation, California citizens 16 pay the price. 17 The Federal Clean Air Act amendments impose 18 standards and time limits on California that are 19 economically ruinous. Cost per ton of emission reduction is 20 not cost-effective at California's artificially inflated 21 fuel prices. 22 I have a graph here that shows you by week fuel 23 prices in 1993 versus the fuel prices in 1996. The top line 24 is the 1993 fuel prices. If you look at the line that 25 spikes higher with the wide dots, you can see that this is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 311 1 much more severe and disastrous to our economy and to the 2 California trucking industry. 3 We're in week eight of this crisis. 4 The crude prices of diesel have leveled off. Why 5 is the price still rising? Yesterday, we had a six cent 6 increase between nine o'clock and two o'clock on the rack 7 price of diesel fuel. This is not acceptable to our 8 industry. 9 The average retail price of fuel in the Western 10 States looked at an average -- if you look at Oregon, 11 Nevada, Arizona, California is your top line. Why would any 12 interstate carrier, 500,000 out of 900,000 carriers 13 operating in California purchase fuel in California? 14 Look at the rack prices before taxes. What is 15 wrong with this picture? Ergo in Nevada and Oregon at the 16 bottom. Los Angeles, San Francisco, Sacramento. This is 17 where the fuel's being made. What happens when it gets into 18 the pipeline? It makes it cheaper at the end of the 19 pipeline. 20 Even if you look at the low rack prices, we're no 21 better. Yesterday, our staff called every truckstop in the 22 State to find out what the fuels were. This graph is hard 23 to see, but fuels ranged at retail level -- many of the 24 purchasers of diesel fuel are owner/operators. They go to a 25 service station just like we do. They purchase fuel. $1.79 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 312 1 a gallon for diesel fuel. It's unthinkable. 2 This makes us relook at the SIP, a reality check 3 on what we're really doing. We know that this air quality 4 modeling is flawed. We know that the air quality standards 5 are not realistic. In the Federal Implementation Plan, they 6 said, even if we shut down every single engine, car, 7 stationary source, we could not meet the Federal attainment 8 standards at the time -- 2010. 9 On the horizon for the trucking industry. This is 10 what we're looking at right now, what we're dealing with as 11 an industry. State Implementation Plans for both ozone, now 12 particulate matter. Fleet rules proposed in the South 13 Coast, proposed in Sacramento. Inspection and maintenance 14 for diesel and gasoline. 15 Diesel toxicity. Prop 65. Rideshare. Storm 16 water. Underground storage tanks. We're being hit from 17 every angle. 18 The SIP for ozone specifically stated, the plan 19 puts high priority on heavy-duty engine control on every 20 mobile source category when such engines are utilized. 21 CTA has proposed to respond to this vigorous clean 22 air -- the vigorous clean air goals. We, too, want clean 23 air. We represent five percent of the gross domestic 24 product. We have thousands, and thousands, and thousands of 25 people -- just in Sacramento -- that represent our industry. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 313 1 We want clean air, also. 2 CTA sponsored -- we have a low-emission vehicle 3 bill that we're pushing this year that would give us tax 4 credits for alternative fuels. We want to run freight. We 5 don't care what fuel we're using. We want to make a profit. 6 We want our families to have the same benefits that everyone 7 else's families do. 8 We also have an early retirement bill. AB 3162, 9 the Burton-Leonard bill, it's a nonpartisan bill that would 10 allow early introduction of low NOx vehicles. This is fuel 11 neutral. Anything registered by the Air Resources Board or 12 certified would get a tax credit if it certifies at at least 13 25 percent below the standard. 14 The tax credit ranges from 25 percent to now 90 15 percent. We just amended it. And the criteria for the tax 16 credit is 10,000 pounds gross vehicle weight or above. 17 Engine certification by the California Air Resources Board. 18 And the vehicle must be domiciled in California. 19 AB 1675 is our accelerated retirement bill. In 20 the year 2004, close to the attainment date for most areas 21 other than South Coast, we'd require all vehicles operating 22 in California to have at least an '87 engine standard. This 23 is the most cost-effective way of doing this. It's not an 24 actual retrofit. It's an upfit. You would purchase a 25 turbocharger for a 1988 engine instead of a 1984 engine, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 314 1 which would bring your emissions from 10.7 grams per brake 2 horsepower hour NOx to 6 grams. 3 It's one of the most cost-effective measures 4 introduced. 5 Next page, please. 6 The SIP economic impact itself, the Federal 7 Implementation Plan estimated -- was estimated at $10 8 billion annually to the State, 3 billion annually to 9 California truckers. 10 The State Implementation Plan that took over this 11 onerous FIP was estimated at 5.5 billion annually to the 12 State and 1 billion to California truckers. 13 The CTA proposal will cost 5.5 million annually to 14 the State and 1.5 million annually to California truckers. 15 Today, we're here calling for action. We need 16 action from our legislators; we need action from this Board. 17 We believe, if you suspend the prohibition against sale or 18 use of EPA diesel and gasoline fuel in California, when the 19 average rack price of CARB diesel or gasoline is more than 6 20 cents above the average rack price of EPA diesel in the 21 bordering States, that this will keep problems like these 22 spike hikes from happening. 23 Another alternative would be to suspend the 24 prohibition against the sale of EPA diesel and gasoline 25 fuels in California while the State petitions EPA to conform PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 315 1 EPA fuel and until EPA conforms to CARB standards. We need 2 a national fuel. 3 California cannot get clean air by itself. 4 Do you have any questions? 5 (Applause from the audience.) 6 MS. WILLIAMS: First we have Rich, and then we 7 have Mark Anders, also. 8 CHAIRMAN DUNLAP: Okay. 9 MR. LEIMBACH: Mr. Chairman, members of the Board, 10 thank you for letting me talk today. 11 My name is Richard Leimbach, and I represent Think 12 Fresh Transport. We are a produce hauler for the 11 Western 13 States. We have 26 power units of our own, and we represent 14 approximately 200 owner/operators. 15 During the peak season, we haul approximately 40 16 to 50 loads of produce, fresh produce, a day into the State 17 of California from the States of Washington and the other 11 18 Western States. 19 Presently, with our owner/operators in California, 20 our LTO (phonetic) owner/operators, they cannot compete 21 with out-of-state owner/operators. I talked to one just 22 yesterday, and I talked to several in the last few days 23 where they're simply saying, "Rich, I can't run until you 24 advance me some money. I don't have enough money to buy 25 fuel." PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 316 1 A sad case was one that called me yesterday and 2 said, "Rich, if we can't get this changed or do something 3 about it, do I tell my son, 'You can't go to college next 4 year'? He'll be a senior at SC to be a lawyer." 5 So, you know, we told him we would help him and do 6 what we had to do to get that done. 7 My question is, I guess, and I can't understand, 8 as an owner of a trucking business, how we can refine the 9 product here in the State of California and ship it to our 10 neighbors, and still have them pump it at anywhere from 35 11 to 20 cents less per gallon as we're doing today. 12 I have issued instructions to my own trucks to 13 purchase all their fuel outside of the State of California 14 simply because of that reason. 15 Just yesterday, we purchased fuel in Yuma, Arizona 16 for $1.24. And another one of my trucks, who didn't get the 17 message, purchased fuel just across the line at $1.65. The 18 discrepancy is unbelievable, I believe. 19 We, or my business, what figure do -- what depends 20 on my future? Right now, either we lower the price of 21 diesel fuel, I got out of business, or I move to another 22 State. That's all I can do to keep my business going. And 23 that's a fact. 24 And also, as an aside, I want to mention about the 25 problem this has created with some of the companies who haul PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 317 1 nothing but construction goods. They've bid on goods 2 months, and months, and months in advance. And they have to 3 get it from Point A to Point B -- such as gravel, sand, and 4 rocks for things. 5 They can't pass that cost on in any surcharge or 6 anything else. It's the same thing with us in the produce 7 industry. The hits that we've taken over the last few years 8 on bad weather and other different things, we just can't 9 afford another hit. And this is going to hurt us in the 10 trucking industry that hauls that produce. 11 I appreciate your time. I'd appreciate any 12 efforts that you could make to bring this in line so we can 13 be competitive with our neighboring trucking companies. 14 Thank you. 15 CHAIRMAN DUNLAP: Thank you. Yes, Ms. Edgerton. 16 Don't stray, Mr. Leimbach. 17 MS. EDGERTON: Yes. I was very interested in your 18 comment about -- you said you have trouble understanding why 19 it's $1.24 in Arizona and $1.65 just over the border in 20 California. 21 That's not the first time that's occurred to you. 22 What have your investigations into that turned up, if 23 anything? 24 MR. LEIMBACH: I don't know. I have not been able 25 to find anything, other than that the price went up so PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 318 1 rapidly here. My records indicate that approximately a 2 month ago, in the State of Arizona, I was paying $1.17 a 3 gallon. It has gone up, but not as drastically as it has in 4 the State of California. 5 My records indicate that it's been $1.12 in the 6 State of Oregon. Now it's $1.18 -- 7 UNIDENTIFIED SPEAKER IN AUDIENCE: $1.09. 8 MR. LEIMBACH: $1.09? Okay. $1.09. I saw one 9 for $1.18. 10 MS. EDGERTON: Thank you. Let me ask the CEC 11 people. Do you have any explanation to this man's question? 12 Why is it 1.24 right over there in Arizona and $1.69 (sic) 13 cross the border in California? 14 Were you all listening to the comment back and 15 forth? 16 MS. BROWN: I know there's a slight tax 17 differential, but that's not going to account for a full 40 18 cent difference. 19 Again, individual market conditions in the area 20 where fuel's purchased is going to explain some of the 21 changes. Without further information again about the 22 specifics of where exactly the fuel was purchased, who the 23 historical supplier was, what kind of volumes, you know, 24 what -- 25 MR. LEIMBACH: I'd be more than happy -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 319 1 MS. BROWN: -- what kind of prices you've been 2 paying. I mean, a single point is not a trend. 3 MS. EDGERTON: Right. 4 MS. BROWN: Again, we'd be happy to work with you 5 to better understand the fundamentals that are affecting 6 this. This seems to be a very disparate price differential. 7 MS. EDGERTON: Yes, because what Mr. Imbrecht said 8 was that -- of course, Arizona does not have any refineries. 9 So, they -- 10 MS. BROWN: We supply much of Arizona's fuel. 11 About 10 percent of the gasoline made in California is 12 exported as conventional to markets in neighboring States 13 like Arizona and Nevada. 14 But they're also getting fuel from West Coast 15 Gulf, which typically is cheaper. 16 So, again, we have to look more into the specifics 17 of the situation that you're describing. 18 MS. EDGERTON: What's West Coast Gulf? 19 MS. BROWN: I'm sorry. West Texas crude. It's 20 shipped by pipeline from the Gulf Coast States to markets in 21 the West. 22 MS. EDGERTON: That's helpful. Do you have a -- 23 is that an aggregate? How many trucks do you have? 24 MR. LEIMBACH: I have 26 power units myself. 25 /// PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 320 1 MS. EDGERTON: 26. So, do you have a -- 2 MR. LEIMBACH: I only run 12 of those out of 3 State, you see, so. . . 4 MS. EDGERTON: Oh, I see. The point was well 5 taken that, you know, one purchase does not a trend make. 6 MR. LEIMBACH: I can file -- I'm sorry I can't 7 provide it to you today, because it's the only report that I 8 have. But I'd be happy to -- 9 (Thereupon, the speakers spoke simultaneously.) 10 MS. BROWN: Maybe we can get your business card 11 and speak with you after the meeting. 12 MR. LEIMBACH: I'd be glad to. Okay. And I can 13 show you some of my historical records I have here for every 14 gas purchase I've made in the last three months. 15 CHAIRMAN DUNLAP: May I ask this? Do you 16 purchase-- do you have a credit card your trucks have to 17 purchase from one company? 18 MR. LEIMBACH: Yes. 19 CHAIRMAN DUNLAP: Do you care to mention who that 20 is? 21 MR. LEIMBACH: EDS Food Services. 22 CHAIRMAN DUNLAP: No, the fuel. 23 MR. LEIMBACH: No. I purchase from any -- it's a 24 regular, just like a BankAmericard, or Visa, or anything 25 else. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 321 1 CHAIRMAN DUNLAP: Oh, I see. 2 MR. LEIMBACH: It goes from one station to 3 another. So, we can go to any station if they want to 4 accept it. 5 CHAIRMAN DUNLAP: All right. Very good. Thank 6 you. 7 MR. LEIMBACH: Thank you. 8 CHAIRMAN DUNLAP: You are Mr. Lindsey? 9 MR. ANDERS: He isn't in here. I'm Mark Anders. 10 CHAIRMAN DUNLAP: Okay. Are you on my list? 11 MR. ANDERS: Yeah. I'm next on the list. 12 CHAIRMAN DUNLAP: Okay. Yes, I found you. 13 Welcome, Mr. Anders. 14 MR. ANDERS: I basically have the same story. I'm 15 in the trucking business for 52 years. We started in 1944. 16 Five years ago, we bought a company that does intrastate or 17 interstate. We run the I-5 corridor from Seattle to Fresno 18 basically. 19 And my same question is: I can buy fuel -- I give 20 my trucks like a ComCheck card, which is what you call a 21 cash card, so it's basically like pulling into a truckstop 22 and buying fuel for cash, because the cash price is cheaper 23 than the credit card fuel price. 24 And I can buy fuel in Oregon for $1.09 today. And 25 if you try to do it in California, it's $1.60. I can't PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 322 1 compete with my competitors. And I'm going to be out of 2 business, and I mean now. It's -- you can't operate in an 3 environment like that. 4 And I know there's a difference in -- you know, I 5 assume that there's a difference in the price of -- Oregon 6 has no sales tax. So, naturally -- normally, I buy -- I've 7 got 20,000 gallons of fuel at my yard. And I purchase about 8 10,000 gallons of fuel a week. 9 So, I get a pretty good price on fuel from, you 10 know. People testified here today that deliver fuel to 11 people like myself, farmers, or what have you. 12 And normally, my fuel is about competitive with 13 Oregon, because we're running that all the time. So, it 14 didn't really matter whether my trucks bought fuel in 15 Oregon, or Washington, or Nevada, or Arizona, because I 16 could turn around and bring my trucks home, and buy the fuel 17 within pennies, sometimes a little bit cheaper, sometimes a 18 little bit more -- fluctuates a little bit, has for years. 19 All of a sudden, I can buy fuel at a truckstop 20 cheaper than I can buy fuel bulk at my yard by 40 cents a 21 gallon. That's 8 cents a mile to my trucks. And when 22 you're running from Seattle to Fresno every single day, and 23 you're competing with competitors in Oregon that are trying 24 to put you out of business, and they can run for 40 cents a 25 gallon or 8 cents a mile cheaper than you can, you cannot PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 323 1 compete. 2 And you're going to lose -- I've got to do what he 3 said. I've got to move out of this State, or I'm going to 4 do like J. B. Hunt, Swift, and any of the major carriers. 5 These trucks carry 400 gallons of fuel. They can run this 6 State from one end to the other and never fuel here. And if 7 you think I'm going to buy this fuel here, you've got 8 another think coming. 9 It ain't gonna happen. And every trucking company 10 here is going to do the same thing. 11 (Applause from audience.) 12 MR. ANDERS: And what's going on with the 13 railroads. Do the railroads get to burn this fuel, or do 14 they get to burn fuel from somewhere else? 15 And I have to compete with these people. I'm 16 saying, help. I don't care what you do. Give me relief. 17 You know, do like the farmers. When they have (not 18 understood) grain in Russia, they pay 'em not to grow their 19 rice? Well, pay me not to ship it. 20 (Laughter from the audience.) 21 MR. ANDERS: There's a joke. We've been here 51 22 years, and I'm looking at shutting the doors, and I just 23 bought a whole new -- I mean, I had an opportunity here in 24 the last six months, had customers to do PG&E poles, Pac 25 Bell poles,. We deliver utility poles all over the State. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 324 1 And we were just offered like several million 2 dollars worth of freight. And now my competitors have been 3 beating me up over it, because I can't compete with them. 4 51 years we've been here. You know, and I'm 5 saying I'm all for clean fuel. I'm all for the CARB thing. 6 But I'm saying, make it nationwide or don't do it at all. 7 Keep us on a level playing field or you're going to kill us. 8 And remember that everything that we bring you 9 guys, if you go to the store to buy sunglasses or Cheerios-- 10 CHAIRMAN DUNLAP: It's a truck that brought them 11 to us. 12 MR. ANDERS: I can't pass along my problem. I'm 13 in a unique situation. I can't pass it on, because my 14 competitors are telling my customers that, "I'll bring it to 15 you at the lowest price anyway. 16 SUPERVISOR RIORDAN: Mr. Chairman, could I ask a 17 question, because I'm not familiar with how much fuel your 18 trucks can carry. 19 Let's say you fuel -- 20 MR. ANDERS: 300 gallons. 21 SUPERVISOR RIORDAN: All right. You fuel -- 22 MR. ANDERS: We get 7 miles to the gallon. 23 SUPERVISOR RIORDAN: 7 miles. 24 MR. ANDERS: Well, five and a half. They're 25 capable of doing 7 when they're empty. But when they're PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 325 1 pulling a load, they're getting about five and a half. 2 And at 40 cents, it's 6.5 cents a mile, 7 cents. 3 No, it's over 7. At 40 cents, it's 8. 4 SUPERVISOR RIORDAN: So, you fuel in Oregon. 5 Let's say you fuel right near the border. 6 MR. ANDERS: I can go 1500 miles before I have to 7 fuel again. I could drive to Fresno and back out of this 8 State and fuel my truck without ever stopping here. And so 9 does my competitors. There isn't a trucking company here 10 that doesn't -- that isn't run -- that's running ICC that 11 buys your fuel. 12 They buy it Oregon. They buy it Arizona, and they 13 drive right through this State. And they burn their nasty 14 fuel. 15 And how can we ship fuel from here to Arizona and 16 have their price be less than ours? By 40 cents! $1.09 in 17 Oregon today, and it's $1.49 in my tank. And that's -- 18 that's wholesale fuel. It's $1.60 at the truckstops in 19 North Sacramento. It's not 20 cents, it's 40 to me. 20 MS. EDGERTON: What's you're saying is of great 21 concern. But just as you said that you can't explain it or 22 you can't affect it, there are certain things that -- as I 23 reflect on your situation and your comments -- that I have 24 to remember. And that is that this Air Board doesn't set 25 the prices. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 326 1 MR. ANDERS: I know. 2 MS. EDGERTON: The only part we directly affect is 3 the emissions reductions that are achieved from California 4 reformulated gas 2. 5 MR. ANDERS: I think somehow these refiners are 6 taking advantage of the situation. 7 MS. EDGERTON: Well, that may be. I don't know. 8 However, have you been here the whole time? 9 MR. ANDERS: I've been here all morning. 10 MS. EDGERTON: Well, I guess you've heard the same 11 testimony. And I'm trying to focus in on -- 12 MR. ANDERS: But I had a lot more to say, but I 13 didn't. 14 MS. EDGERTON: You have asked -- 15 MR. ANDERS: You heard it wrong. 16 MS. EDGERTON: Well, let's see. If I understood 17 correctly what the situation is with respect to proposals to 18 suspend or change our rule, to the extent that we did that, 19 it would not -- it is not expected to influence the price 20 of-- 21 MR. ANDERS: You wouldn't expect it. 22 MS. EDGERTON: -- gas, because -- 23 MR. ANDERS: This is diesel. 24 MS. EDGERTON: -- well, of diesel. 25 MR. ANDERS: See, and I was told by -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 327 1 MS. EDGERTON: And it is not, to the extent that 2 it is -- the reformulated gas, it's only somewhere between-- 3 I don't know, 3 and 6 cents attributable to that. And that 4 would be the capital cost of having altered the 5 manufacturing plants, the refineries. 6 And that's already been done. So, that's already 7 built into their cost. So, they wouldn't -- 8 MR. ANDERS: Lynn Westfall explained it. Almost 9 every refinery can create some gas, your CARB gas. But 10 diesel's a whole different ball game. And there's very few 11 depots can do that. And they have a supply and demand deal 12 here that -- well, explain to me why I can buy fuel in 13 Oregon for $1.09 today and it costs me $1.60 here. 14 MS. EDGERTON: Well, Mr. Scheible -- 15 MR. ANDERS: And California is my -- 16 MS. EDGERTON: I would like to ask a question 17 about what's been brought up here. It's been my assumption 18 from the information that's been presented to me, and from 19 my understanding of things, that -- is that, in the first 20 place, the amount of the increase attributable to the Air 21 Board cleaner fuel is much less significant than other -- is 22 much less significant a factor than other factors, and it is 23 10 cents according to the Air Board. 24 It may be closer to 5 if you take off the 25 oxygenate. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 328 1 MR. LAGARIAS: Lynne, I think you're referring to 2 diesel, aren't you? 3 MR. ANDERS: Yes. 4 MR. LAGARIAS: It's not the clean burning gas. 5 MS. EDGERTON: Well, that's -- well, the next 6 question I was going to ask him was how does it relate to 7 the diesel fuel issue. I mean I don't know. This is what 8 this hearing is, on CARB -- 9 MR. LAGARIAS: It's on both. 10 MS. EDGERTON: Right. And I'm asking him to 11 answer the diesel issue. That's what I was moving toward. 12 MR. LAGARIAS: Susan, can you answer why the price 13 of diesel is so different between the neighboring States and 14 California? 15 MS. BROWN: Well, I was looking at the charts that 16 I received from the Air Resources Board staff and the 17 Lundberg data. And there is clearly about a 9 or 10 cent 18 spread between California and say diesel from Phoenix on the 19 retail price. 20 MR. LAGARIAS: Well, he's saying it's 40. 21 MR. ANDERS: Where are your figures? 22 MS. BROWN: Are you comparing retail to retail? 23 MR. ANDERS: I'm comparing retail out there and -- 24 MS. BROWN: You just cited, I think, a $1.09 in 25 Oregon with -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 329 1 MR. ANDERS: $1.09 at a truckstop that any trucker 2 has to pay. Just a couple days ago, it was $1.19. It's 3 gone down in Oregon. I mean, I just talked to a gentleman. 4 I didn't know this until about an hour ago. But one of my 5 friendly competitors was saying that his people just bought 6 fuel in Oregon coming into California for $1.09. 7 My wholesale price that I buy -- and I buy about 8 10,000 gallons a week in Griffith in California. My 9 wholesale price is $1.49. I mean, that's what my cost is, 10 is $1.49. And I can buy it up there. There's 30 cents 11 difference (sic). But if you go to a truckstop, somebody's 12 testified here today, it was $1.67. In Oregon, it's $1.09. 13 That's quite a bit of difference. 14 CHAIRMAN DUNLAP: I appreciate very much your 15 testimony and your perspective. It's important, and I 16 applaud, Joel, you and your team for bringing real people 17 here that are dealing with it out in the real world. I 18 appreciate that. 19 What I wanted to do -- 20 MR. ANDERSON: Mr. Chairman, thank you very much 21 for that. And I just wanted -- one comment you made, Ms. 22 Edgerton -- I think I pronounced it right; if I messed it 23 up, I apologize. 24 We've heard on the supply side, and we haven't 25 heard on the demand side. The reason we press this solution PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 330 1 using variance fuels as a safety valve is it induces 2 competition onto the supply side. 3 We know that price is a function of supply and 4 demand, not just cost. We know we have 50-State fuel, which 5 49-State fuel can be bought and pumped and competitive in 6 Arizona. Their prices are moderated by competition. 7 California's moderated by "cartelization." That's our 8 answer. 9 Thank you very much, Mr. Dunlap. 10 CHAIRMAN DUNLAP: Joel, don't leave yet. I've 11 asked Mr. Ogelsby, who's in our Lege Unit, to pull the files 12 and come on in and say a word or two about the bills you 13 suggested earlier that we support? 14 MR. ANDERSON: Yes, sir. 15 CHAIRMAN DUNLAP: And I wanted him to just take a 16 minute and tell him -- tell you where we are relative to our 17 analysis, and at what juncture you should -- 18 MR. ANDERSON: Thank you, Mr. Dunlap. 19 CHAIRMAN DUNLAP: Bob? 20 MR. OGELSBY: We looked at all three bills that 21 were referred to. We've made recommendations, analyzed two 22 on the -- and current recommendations on two of the bills. 23 The third bill was recently amended, and we're looking at 24 the amendments as well. So, we're working with your staff 25 and communicating with your staff on all three bills. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 331 1 MR. ANDERSON: Yeah. I think we have a good 2 chance, Mr. Ogelsby. I'm concerned about WSPA's opposition. 3 This isn't the legislative hearing to take 'em on, but 4 we'll welcome your support there. Thank you. 5 SUPERVISOR VAGIM: Which bill was amended? 6 MR. OGELSBY: AB 3162, Burton, was amended on 7 April 16th, and we're still looking at that one. 8 SUPERVISOR VAGIM: Mr. Chairman, I just wanted to, 9 for the record, that Ag does have some problems with 10 Goldsmith on the limited threshold mileage. 5,000 is not 11 enough. And I think they've expressed that. 12 CHAIRMAN DUNLAP: Okay. 13 SUPERVISOR VAGIM: So, this is not as clean a 14 slate as it may look. 15 MR. ANDERSON: We're aware of that, Mr. 16 Supervisor. We understand that. And that's again that 17 tradeoff between getting the SIP reductions versus the 18 agricultural needs. 19 Mr. Goldsmith has offered to exempt ag out of the 20 bill. Ag doesn't want out of the bill. They want another 21 answer. We can't find another answer, sir. 22 Thank you. 23 SUPERVISOR VAGIM: There's more discussion to be 24 done on that. 25 CHAIRMAN DUNLAP: Yes. I appreciate that. Mr. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 332 1 Anderson, we'll follow up and make sure our Lege people are 2 known to you on these issues. 3 Also, again, I want to say thank you for bringing 4 your membership. And tell them, too, that I come from a 5 trucking family. My father's in the business. I'm well 6 aware. I've heard from him recently as well. I can assure 7 you. 8 (Laughter.) 9 CHAIRMAN DUNLAP: And I do know the challenges you 10 face. And certainly, you have a friend in me. And we will 11 do what we can. And I would say this in conclusion, Mr. 12 Anderson, that we -- you know, that we want to be helpful. 13 And the primary reason for today for really changing the 14 format of this briefing today was to try to get to the 15 bottom line, to try to get some facts so that we then can 16 prepare ourselves to deal with these thorny issues. 17 But we're very sympathetic to your plight, and we 18 wish you good luck. 19 MR. ANDERSON: Thank you very much. 20 (Applause from the audience.) 21 CHAIRMAN DUNLAP: At this juncture, I'd like to 22 call on Janet Hathaway, followed by Max Mendoza, followed by 23 Tim Carmichael from the Coalition for Clean Air. 24 MS. HATHAWAY: Thank you, Mr. Chairman and members 25 of the Board. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 333 1 I'm representing the National Resources Defense 2 Council. My name is Janet Hathaway. And, of course, we, 3 too, are really concerned about seeing temporary fuel price 4 increases. We are very pleased to hear that supply appears 5 to be coming around and improving, and that the price 6 increases should level out. 7 I do want to urge you not to make modifications of 8 this important air quality regulation based on just a few 9 weeks of changes in prices. We do understand that crude 10 prices are very volatile right now. But that doesn't take 11 away our air quality problem, and it does not provide a real 12 solution to make any changes in our Cleaner Burning Gasoline 13 program or in our California diesel. 14 And I think it's important just to keep in mind 15 that, though we have seen some temporary, very surprising, 16 prices at the gas station, we've had a number of years from 17 the early introduction of California diesel that did show 18 level prices. It does show us that California diesel is not 19 a major contributor to the price increases that people are 20 experiencing right now, and it does also appear that with 21 the current supply limitations that have gone on because of 22 a couple of malfunctions at facilities, that the gasoline 23 prices that we're seeing now are not something that will be 24 sustained over time. 25 So, in both cases, we should look to some PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 334 1 reasonable price decreases again. I don't -- I don't want 2 to belabor with you the importance of these measures for the 3 SIP, because I know you all are keenly aware of how much 4 we're counting on reformulating our gasoline and having a 5 cleaner gasoline in order to get SIP emission reductions. 6 But I do want to remind the public that this a key 7 and very inexpensive way of making improvements in our air 8 quality. We will not recoup those advantages that we get 9 from air quality simply by suspending a regulation or saying 10 that we can sell Federal Reformulated Gasoline in 11 California. 12 The air benefits will still go down. The costs 13 will not go down perceptually because of that. So, I just 14 urge you all to stay the course. I know it's a very tough 15 time for you and for everybody who's buying gasoline. But 16 what you've done is the right thing. And unfortunately, 17 gasoline is almost a hundred percent of our transportation 18 market. Until we get electric vehicles and other 19 alternative fuel vehicles, we're going to have a hard time 20 weathering various kinds of perturbations in gasoline 21 prices. 22 And so, I think that just points to the future 23 needing to be much more diversified in the transportation 24 sector. 25 And I look forward to working with you all on that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 335 1 as well as on implementing the Cleaner Burning Gasoline. 2 Thanks so much. 3 CHAIRMAN DUNLAP: Thank you, Ms. Hathaway. Any 4 questions? 5 Very good. 6 Mr. Mendoza. I've got Mr. Carmichael. Tim, you 7 know the drill. You're supposed to be lining up over there. 8 MR. CARMICHAEL: Sorry. 9 CHAIRMAN DUNLAP: Following Mr. Carmichael, I'd 10 like to ask CIOMA's representative back, Bonnie Addario, and 11 her colleagues from the oil industry to come forward, take 12 the mike as a group, and maybe explain to us what's going 13 on. 14 Mr. Carmichael, I know the hour's late and you're 15 tired. Is there anything you can add to the debate here 16 today? 17 MR. CARMICHAEL: A couple of quick comments. I 18 hope you all have a copy of my written testimony. 19 My name is Tim Carmichael. I'm the Policy 20 Director for the Coalition for Clean Air. Good to see you 21 all again. 22 The Coalition for Clean Air strongly supports 23 California's Cleaner Burning Gasoline program. It is a 24 critical component of California's efforts to reduce air 25 pollution and ultimately meet the health-based standards PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 336 1 that are set for 2010. 2 Cleaner Burning Gasoline is only one component of 3 a plan. But in the near term, it will result in the single 4 biggest reduction in emissions statewide. 5 I'm not going to begin to attempt to explain oil 6 company pricing schemes. I think many of us were confused 7 by the testimony this morning. There was some light, but 8 then we were confused once again by the testimony of the 9 people that are buying gasoline across the State line. 10 I hope Mr. Westfall from Ultramar is correct in 11 suggesting that it's an anomaly and, in the short term, 12 we're going to see the price of gasoline come down -- and 13 diesel we hope. 14 One thing that was consistent throughout today's 15 testimony, though, is RFG is not the culprit. Cleaner 16 Burning Gasoline is not the reason for the price hikes that 17 we've seen. That is of great comfort to the Coalition for 18 Clean Air and should be for every Californian. 19 It is a very important program. And, assuming 20 that the price comes down for whatever other reasons it has 21 been hiked, we are going to see some premium over time for 22 Cleaner Burning Gasoline. However, we cannot look at that 23 cost without considering the benefits of Cleaner Burning 24 Gasoline. 25 And real quickly, I'll just mention some of those, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 337 1 because I'm not sure that they've been highlighted today. 2 They are significant. An almost immediate 15 3 percent reduction in hydrocarbons and oxides of nitrogen, a 4 reduction in benzene, which is a known carcinogen, by almost 5 50 percent, and an estimated reduction in cancer risk of 30 6 to 40 percent. 7 Over the past two decades, there have been 8 significant progress made in reducing air pollution 9 throughout California. We have made that progress through a 10 combination of strong regulations and advances in 11 technology. 12 But as the representatives here, and the Coalition 13 for Clean Air well know, in Southern California, we're still 14 breathing unhealthy air one out of three days. The problem 15 has not gone away. And Cleaner Burning Gasoline is only one 16 of several steps that we are going to need to take in the 17 future to solve that problem. 18 The costs of air pollution also cannot be ignored. 19 We heard the California Trucking Association highlight the 20 estimated cost of the FIP and the estimated cost of the SIP. 21 You know, I may be the only person in the room that believes 22 this, but even at 10 billion or 5 billion, those programs 23 are bargains when you compare them to the cost of air 24 pollution, the lost tourism, the hospitalization, the lost 25 productivity, the increases in asthma. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 338 1 Air pollution is affecting us every day throughout 2 this State. We can't quantify it as easily as we can by 3 looking at the price at the gasoline station. But it is 4 pervasive, and it is a problem that is going to plague this 5 State until we get cleaner fuels throughout our 6 transportation system. 7 It is key that we stay behind this program; that 8 Governor Wilson and this Board stays behind Cleaner Burning 9 Gasoline. In the near term, there is no equivalent. There 10 is no other program that will give the same benefit to the 11 State of California and to the people breathing throughout 12 this State. 13 Some of you have the opportunity to go and speak 14 to schools in your life away from this. When I go to speak 15 to classrooms and I ask the kids, "How many of you have 16 asthma?" 17 And consistently, more than 50 percent of the kids 18 raise their hands. They reach for their backpacks and pull 19 out the little breathalizers -- 20 CHAIRMAN DUNLAP: Respirators. 21 MR. CARMICHAEL: -- respirators. You know, it's 22 profound. And that cannot be ignored. The Coalition for 23 Clean Air urges this Board to stand behind the Cleaner 24 Burning Gasoline. It is a critical component of our clean 25 air plan and hopefully, in the near term, the rest of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 339 1 factors affecting gasoline will fade into memory. 2 CHAIRMAN DUNLAP: Thank you, Mr. Carmichael. You 3 forgot to mention that it's the equivalent of removing cars 4 from the road. How many? Remember the statistic? 5 MR. CARMICHAEL: Approximately 3.5 million. 6 CHAIRMAN DUNLAP: Very good. You got to round out 7 the story here. 8 (Laughter.) 9 CHAIRMAN DUNLAP: Any other questions or comments? 10 Ms. Edgerton. 11 MS. EDGERTON: I'd like to say that I know that 12 you're not the only person in the room that believes it. 13 You have very good company. 14 Thank you. 15 CHAIRMAN DUNLAP: Thanks for your time and 16 patience. 17 MR. CARMICHAEL: Thank you. 18 CHAIRMAN DUNLAP: Okay. Bonnie Addario here, 19 CIOMA? 20 MS. ADDARIO: Yes. 21 CHAIRMAN DUNLAP: Come forward, please. 22 CHAIRMAN DUNLAP: Casey Bishop, Denny Lamb, Gina 23 Gray. 24 Thank you for rejoining us. 25 MS. ADDARIO: Okay. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 340 1 CHAIRMAN DUNLAP: Have you learned anything? 2 MS. ADDARIO: I've learned -- 3 MR. LAMB: I'd just -- with all due respect, Mr. 4 Chairman, we're in one of those areas that we cannot, as 5 competitors, speak together about. 6 I think most of us had an opportunity to speak 7 individually. 8 CHAIRMAN DUNLAP: Okay. 9 MR. LAMB: But we can share information with the 10 Energy Commission, with CARB. But I don't want to -- 11 CHAIRMAN DUNLAP: I just wanted -- 12 MR. LAMB: -- be less than forthcoming when I do 13 make my remarks. 14 CHAIRMAN DUNLAP: Certainly. I just want you to 15 be able to say you've learned something, questions are being 16 answered; that the outlook is bleak, or good, or something 17 in between. So, what can you tell us? 18 MS. ADDARIO: Many different explanations for 19 allocation process. Exxon is giving 110 percent of previous 20 monthly volume, which really means they get 10 percent over 21 what they bought the month before. 22 If they do go over 110 percent, there is a 10 23 cents penalty per gallon. 24 CHAIRMAN DUNLAP: So, that's good. 25 MS. ADDARIO: That's good. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 341 1 CHAIRMAN DUNLAP: Okay. 2 MS. ADDARIO: Chevron said the words "daily 3 allocation share" was a misuse of the words. 4 CHAIRMAN DUNLAP: Okay. So, the notice -- Mr. 5 Bishop, your notice is screwed up? Is that what we're 6 hearing? 7 MR. BISHOP: Well, actually, as they told me when 8 I asked them about it, they said it was an unfortunate 9 choice of words. And I told them yes, they were correct. 10 CHAIRMAN DUNLAP: Okay. 11 (Laughter.) 12 MR. BISHOP: However, I can at least give you a 13 little more detail, and it really comes back to what Al 14 said. Chevron is not allocating anyone in California. 15 CHAIRMAN DUNLAP: Okay. That's enough. 16 MR. BISHOP: I don't want to tell you what that 17 meant when they weren't giving them everything they wanted. 18 Basically, everyone is receiving everything they've 19 contracted for to the maximum amount. 20 There's usually a range in contracts. Nobody is 21 receiving less than their maximum. Many are receiving more 22 than their maximum. And in the cases where they might have 23 held back a little bit -- and I don't know if it's -- since 24 I don't know who that person is, I can't tell you the 25 specifics. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 342 1 But, in some cases, we were actually concerned 2 that wholesalers would be coming to our terminal, lifting, 3 and then going and selling it to another wholesaler because 4 of some price differential maybe in a different part of the 5 State or something. 6 So, basically -- 7 CHAIRMAN DUNLAP: You don't like that, right? 8 MR. BISHOP: Well, basically, we want to make sure 9 that our customers have it first. 10 CHAIRMAN DUNLAP: Okay. 11 MR. BISHOP: And we're supplying all our 12 customers. 13 CHAIRMAN DUNLAP: All right. 14 MS. ADDARIO: The only other -- 15 CHAIRMAN DUNLAP: Exxon has been covered. 16 MR. GARDNER (Phonetic): I think so. And I think 17 Ms. Addario covered it perfectly. And the other thing I 18 want to elaborate on that -- so you understand, that 19 contract is nothing specific to California. 20 Joel Gardner with Exxon. It's nothing specific to 21 California. It's a contract we have with our distributors 22 nationwide. 23 CHAIRMAN DUNLAP: Okay. 24 MR. GARDNER: But she did represent the facts 25 wrong. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 343 1 CHAIRMAN DUNLAP: And Unocal? 2 Denny started. I'm sorry. I didn't mean to cut 3 you off earlier. 4 MR. LAMB: We did have an opportunity with the 5 other lady from CIOMA to talk about an individual 6 circumstance that, unfortunately, I don't think either one 7 of us understand at this point. 8 So, I volunteered to get together tomorrow to try 9 to get with is individual; so, we'll try to understand that. 10 We do not allocate either. But, as I mentioned in 11 my testimony, we have been running above our planned levels. 12 We anticipated that we'll be able to increase that further 13 in the month of May above our plan levels. 14 That's a direct response to -- 15 CHAIRMAN DUNLAP: If I might interrupt. Before 16 the oil company representatives leave, I would just like to 17 offer some counsel as soon as he's through. 18 So, please remain for another moment. Please, 19 Denny, continue. 20 MR. LAMB: We see additional liftings at our 21 racks. And we're not sure where all of that comes from. We 22 have asked at three Northern California terminals for a 23 voluntary holding to the contract provisions. Because at 24 those particular terminals, we see very unusual liftings, 25 and we are concerned that we could run out there. But we're PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 344 1 not on an allocation schedule. 2 CHAIRMAN DUNLAP: Okay. All right. Progress? 3 MS. ADDARIO: Yeah. There was no one here from 4 Texaco, and the gentleman from WSPA was very helpful. And 5 we will research and get more information to you. 6 CHAIRMAN DUNLAP: Thank you. If we can help you, 7 please ask. 8 MS. ADDARIO: Okay. Thank you. 9 CHAIRMAN DUNLAP: A word of counsel, if I may, to 10 the assembled oil company representatives. Certainly, you 11 don't want issues like this brought up here in this venue. 12 It would behoove you to communicate perhaps a little more 13 closely to some of these people from CIOMA and others, so 14 that you keep -- you know, things kind of get screwed up in 15 the communication. 16 So, if you would be vigilant in communicating with 17 them, I would be grateful and I know they would. And I 18 think it's just a matter of just talking to one another. 19 So, please do that. Gina, I'll hold you personally 20 responsible on behalf of WSPA for ensuring of that. 21 Thank you very much. 22 Jim Austin, American Automobile Manufacturers 23 Association, followed by Jim Martens, California Dump Truck 24 Owners Association. Is Gary Patton still here? Planning 25 and Conservation League? Okay. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 345 1 Hello, Mr. Austin. 2 MR. AUSTIN: I guess I can appropriately say good 3 evening, Mr. Chairman and members. 4 I'll try to be very brief. Again, my name is Jim 5 Austin. I'm the Government Affairs Manager of the American 6 Automobile Manufacturers, which include General Motors, 7 Ford, and Chrysler Corporations. 8 We would like to take this opportunity to express 9 our support for the California clean fuels program and 10 enormous it prevents -- or presents to the citizens of the 11 State. 12 The recent fuel price increases experienced in 13 California have been felt across the country and are not 14 necessarily unique to this State. All participants in the 15 discussions leading up to the adoption of this clean fuels 16 program regulation agree that this represents one of the 17 largest vehicle emissions control measures implemented in 18 California over the last decade or so. This has been 19 extensively tested, more so than probably any other fuel. 20 It has been shown to be extremely effective in 21 immediately reducing automotive emissions across the entire 22 fleet of on-road vehicles in California. We believe that a 23 program such as this significantly reduces smog forming 24 hydrocarbons, nitrogens of oxide, and carbon monoxide, and 25 benzene as well. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 346 1 And, as Mr. Carmichael pointed out, this program 2 represents the equivalent of removing some 3.5 million 3 vehicles off the California roads. 4 Additionally, compliance with many of the elements 5 of the California low-emission vehicle requirements are 6 based on availability of these clean burning gasolines. 7 Recently, the Air Resources Board, in close cooperation with 8 the automobile and petroleum industry, small engine, and 9 portable power equipment manufacturers, gasoline 10 distributors, and marketing associations, consumer and 11 public interest groups, and fleet administrators concluded a 12 performance test program on a wide variety of on and off- 13 road vehicles and equipment. 14 This program concluded that the California clean 15 fuels program performed as well conventional fuels in terms 16 of driveability, starting, idling, acceleration, power, and 17 safety, with no difference in the fuel system durability. 18 The Automobile Manufacturers Association continues 19 to support the California clean fuel requirements, and 20 because they believe that this represents the most 21 cost-effective critical component of an effort to keep 22 California standards in a high-quality fashion along with 23 the Federal Clean Air Act. 24 The benefits of the California clean fuels program 25 are most needed during the summer months. We should not PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 347 1 deter from implementation of this program because of the -- 2 hopefully temporary -- increase in fuel costs. 3 We ask the Board continue to stay the course. 4 Thank you very much. 5 SUPERVISOR RIORDAN: Thank you very much, Mr. 6 Austin. Are there any Board members that have any questions 7 for this speaker? 8 If not, then we thank you, and we'll move on to 9 Jim Martens from the California Dump Truck Association. 10 MR. MARTENS: I, too, will bid you good evening. 11 Appreciate your endurance. I think everybody's endurance is 12 great today. 13 My name is Jim Martens. I'm the Executive General 14 Manager of the other trucking association in this State, the 15 California Dump Truck Owners Association. CDTOA is a 51- 16 year-old trade association in the State, second only to CTA 17 in age. 18 We have 1400 trucking company members, and we 19 transport construction commodities. In fact, in California, 20 the for hire industry transports 90 percent of all the rock, 21 sand, gravel, asphaltic concrete, and earth to build, 22 rebuild, and continue to maintain the State's highway 23 system. 24 Additionally, I am the owner of a trucking company 25 that operates two terminals in Southern California. We have PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 348 1 16 power units and 40 sets of trailers. Just over two years 2 ago, I, too, sat here at a meeting very close to this one, 3 but it was over at the auditorium across town, when we 4 discussed CARB diesel. 5 I would like to commend this Board in its work, 6 because all of us are interested in our environment and 7 clean air. But I must tell you I didn't think the trucking 8 industry was going to stand to pay the piper twice for the 9 initiations of establishing clean air. 10 We went through this whole ordeal two years ago, 11 and now we're tagged into this whole ordeal again for a 12 whole other set of circumstances, it appears. 13 Because, obviously, the cost of preparing CARB 14 diesel has been in the system for a long time. What we fail 15 to do is look at those schedules today and realize that the 16 diesel profiteering going on by the oil companies is by far 17 and away greater than the profiteering in the gasoline 18 market. 19 First of all, it started about a month earlier, 20 with increases starting in late February. The bottom line 21 is, we're really concerned with the economy of the State of 22 California. Our 1400 members -- while we represent the 23 largest dump truck carrier in the State to the smallest, 24 over half of our membership is made up of one and two truck 25 mom and pop operators. They're a very hard working, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 349 1 flexible, economic base for the construction industry. 2 They move around and maintain their equipment and, 3 thus, causing the contractors and the shippers of these 4 products in the State not to have substantial investments in 5 additional equipment. 6 In my operation of my own trucking company just 7 last week, I had trucks operating on a construction job on 8 I-40 in Needles, California, and realized -- after my 9 drivers phoned in -- that they could drive 16 miles across 10 the border to Topock, Arizona and buy diesel fuel for $1.29. 11 Is there anything illegal about that, Jim? 12 No, there isn't, because I own an international 13 fuel tax permit, so I can appropriate and pay the proper 14 taxes in California. 15 But a 16 mile trip into Topock compared to fueling 16 in Needles was $1.29 to a $1.69 difference. 17 Very much worth my while to travel 16 miles. Yes, 18 I burned that dirty fuel in California. But an economic job 19 that I did two years ago, there is no fuel escalator in it. 20 I bid at fuel costs of $1.18.5. I was living with $1.26 21 when I went down there, which was something that I thought I 22 could sustain. But a $1.69, no. 23 The bottom line is the construction industry, 24 unlike -- I found out one of our -- Mr. Jessel said his 25 company adjusts its fuel prices 400,000 times a year. In PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 350 1 the last three years, I've adjusted my prices once, once. 2 It's very difficult for a contractor or someone 3 who deals with a contractor on a fixed bid to adjust their 4 prices after they're sent out. 5 Fuel in the construction industry, we burn more 6 fuel than an over-the-highway truck. We only get about 4.5 7 to 5 miles to the gallon. Our average cost annually, and 8 specifically in my company last year, fuel costs was 16.5 9 percent of my gross revenue. 16.5 percent of every dollar 10 to pay for fuel. Fuel has just gone up 40 percent. My fuel 11 cost is now running 22 to 23 percent. That's 6, 7 percent 12 increase. My gross profit last year was 2.8 percent. 13 A mathematician will tell you I made the wrong 14 decision to expand my business last year if this continues. 15 I'm not sure what the answer is. I know one real 16 answer is that we have to maintain and give better air 17 quality and a better economy in this State. But perhaps CTA 18 and others have come up with the idea. Perhaps we need to 19 have one of those valves that the oil refiners have so we 20 can supplement the fuel needs of this State when they can't. 21 If we're 18,000 gallons short, we shouldn't be. I 22 had fuel delivered into my yard last Saturday, and the truck 23 that went to deliver it -- the Colton tank farm is nine 24 miles from my site. We had to go to Long Beach to get the 25 fuel, because supposedly Colton was out of diesel fuel. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 351 1 That was last Saturday. 2 So, I'm not sure you're getting the whole truth 3 here. And perhaps we need to dig a little deeper. Maybe 4 there is a real -- a greater shortage than has appeared to 5 and that's forcing the price up. But if there only is a 6 shortage because we can't produce enough CARB, then, you 7 know, we were producing enough CARB diesel. I don't know 8 what happened. 9 But I know one thing. It is intolerable. It is 10 economic disaster for my company, my membership's companies, 11 and eventually to the State of California. 12 Additionally, I'd like to make one parting remark. 13 I wish we would have had this meeting over at the 14 auditorium. There's much better parking over there. I went 15 out during your lunch break and went for a little walk. And 16 I do know the City of Sacramento is going to be a little 17 better off after this meeting, because I counted 75 cars -- 18 walking around this block -- that had $28 parking tickets on 19 it. Because when you park on the streets on a Thursday, 20 it's sweeping day. 21 Thank you. 22 SUPERVISOR RIORDAN: Well, Mr. Martens, we're 23 sorry about that. I'm sorry that a lot of people didn't see 24 those signs. I guess they're far and few between. 25 Mr. Martens, I don't know if there's any Board PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 352 1 members that wish to ask any questions. And let me ask now 2 if there are any of you -- 3 MR. MARTENS: The difference is, by the way, 4 between Arizona and California, because I checked into it, 5 the sales tax on diesel on California, there's a 3 cent 6 differential in road tax that Arizona does not charge and we 7 do. But even if you do the calculations, that is about 12 8 cents, not 40. 9 SUPERVISOR RIORDAN: We appreciate that. 10 MR. MARTENS: Thank you. 11 SUPERVISOR RIORDAN: Thank you very much. I've 12 forgotten what the Chairman noted as next, but let me call 13 on Monty Daley, and ask Bonnie Holmes to follow Monty Daley. 14 Is Monty Daley here with Brighton Commercial 15 Fuels? I don't see -- Bonnie Holmes, I suspect, is gone. 16 She has turned in testimony. 17 David Atwater? 18 MR. ATWATER: I'm David Atwater from Van De Pol 19 Enterprises. We're a fuel distributor based in Stockton, 20 California. By the way, Texaco's out today in Stockton, and 21 some of us would like to know if and when they're going to 22 get any gasoline in. 23 They weren't able to give anyone a date or time 24 when they're going to get gasoline back in Stockton. We're 25 in the truckstop business. We're in the cardlock business. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 353 1 We supply independent gasoline stations. Those independent 2 gas stations are the people you should really thank for low 3 gas prices over the last several years. 4 Nobody realized that gentleman was quite upset 5 from Thrifty Oil. They're one of the big pushers for low 6 gas prices in this State. I think ARCO copied them when 7 they came up with their price-conscious attitude for the 8 consumer out there. 9 We're going to lose people like that. We've 10 already lost many of them. Right now, the independent gas 11 stations that I supply are paying 10 to 15 cents more per 12 gallon for every gallon of fuel they buy because of 13 restrictions from my suppliers and differential pricing. 14 In other words, if I want to put gas into an 15 unbranded station, I'll pay 10 to 15 cents a gallon less 16 than if I want to buy from the same supplier and put it into 17 an unbranded station (sic). 18 There's a little problem there. 19 As far as diesel fuel, I don't know why the price 20 has gone up. I don't know why the price is different. We 21 just know that our business is going away and our farmers 22 are shaking their heads wondering if they're going to be 23 able to make a buck on the crops they're deciding whether or 24 not they're going to even put in this year. 25 My dealers, we're paying $8,000 for a load of gas. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 354 1 Now, they have to pay $13,000 for a load of gas. They don't 2 just go into their bank account when they're losing money on 3 every gallon and, say, oh, I'll just tell them come up with 4 another five grand to give to my fuel supplier. 5 We're going to lose all these people unless 6 somebody steps in with the safety valve. We went through it 7 with diesel fuel. I was there. We had the good fight. We 8 testified, talked a lot, and that eventually calmed down a 9 little bit. But we insisted this time that there be a 10 safety valve. 11 We said, "C'mon guys. You got to be able to pull 12 the trigger if something happens." And, of course, you guys 13 said, "We'll be ready. If the price goes up or there's 14 supply problems, we'll pull the trigger and we'll solve that 15 problem." 16 Nobody's applied for any variances. CARB hasn't 17 pulled the trigger, and the price is still going up. Okay. 18 What's the problem here? No one's applied for 19 variances. Why didn't the major's apply for any variances 20 to put additional product on the street? Why is there no 21 safety valve? We don't know any of those things. We 22 haven't been given really sufficient answers yet. 23 We don't know why that independent gas stations 24 are being charged 10 to 15 cents more. I know some of my 25 suppliers are out calling on some of those very customers, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 355 1 while they're restricting my sales to them. 2 Why is that? It doesn't make a whole lot of 3 sense. "Well, you got to remember, David, that our contract 4 customers come first." 5 Okay. That's kind of unfair. The majors have a 6 bigger portion of the California market than maybe any 7 State in the Union. And we area creating what's called an 8 oligopoly here. Okay? We have a cartel market. It's 9 happening, and we're pushing it right along. 10 I don't know how to respond to my customers 11 anymore with any of these questions. You know, we've kind 12 of put another rock in the engine that makes California's 13 economy go. And is it really worth half a billion dollars? 14 Is it really worth that? Because that's what California 15 consumers are going to spend -- at least half a billion 16 dollars, okay? Just add it up. It's really easy. I'm sure 17 CEC has done the calculation already. 18 And I'm glad CEC jumped in. It took a little 19 pleading to get them interested. But once they got 20 interested, they jumped in in a big way. And we've been 21 trying to feed them as much information as we possibly can 22 from our associations. 23 But I haven't heard too many answers about 24 protecting markets and helping the little and mom and pop 25 independents to survive. I've got a lot of them who just PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 356 1 say, "Well, you know, when I run out of gas, I run out of 2 gas. And maybe I'll buy some; maybe I won't. I can't 3 compete right now, because I'm gonna lose money on every 4 gallon." 5 I can't brand up right, because the major oil 6 companies may or may not want me. They're going on bended 7 knee and saying, "Can you help me?" 8 I'm cut off from some of my suppliers who have 9 said, "Don't sell any gas to unbranded stations. You can 10 sell gas to branded stations, but don't sell any to 11 unbranded." 12 Is there something wrong there? Jobbers are the 13 great equalizers. We're the great redistributors in this 14 State. We'll try and make sure that people get the gas that 15 they need to survive, and it goes all the way down to the 16 farmers, to the independent marketers. We take care of all 17 the segments of the industry that the oil companies don't 18 want. 19 And nobody's helping us with this at all. We're 20 working against the grain here. And we have been out of 21 fuel many times. Stockton was out of diesel fuel, by the 22 way, for -- at one point for three days. That doesn't seem 23 like a lot, but Stockton is a major distribution center with 24 how many terminals? Are there eight or ten major terminals 25 with many suppliers? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 357 1 And when Stockton's out of fuel, you know there's 2 a problem. 3 CHAIRMAN DUNLAP: Thank you. 4 MR. ATWATER: Any comments? Any questions? Any 5 answers? 6 SUPERVISOR VAGIM: I have a question, Mr. 7 Chairman. 8 (Applause from the audience.) 9 SUPERVISOR VAGIM: Do you have any memos or 10 anything to the effect of not selling to unbranded stations? 11 MR. ATWATER: Well, I was told by one supplier to 12 not sell to any unbranded marketers. And I said, "Well, why 13 can't I? As long as I pull within the gallonage volumes of 14 my contract?" 15 They said, "Well, because we'll cut off your 16 cards." 17 And I says, "Well, you can't do that. You know, 18 that could cause me to go into a legal action." 19 And he said, "Well, first of all, we'll fight 20 about that while you are unable to buy any gasoline or 21 diesel from us." 22 And frankly, I've seen people sue major oil 23 companies. And frankly, here I am. I'm 40 years old. I'm 24 too old to sue a major oil company and live long enough to 25 see anything out of it. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 358 1 SUPERVISOR VAGIM: But these are just verbal 2 comments, not written memos? 3 MR. ATWATER: Yes. But we are on -- we are on 4 volume restrictions from all of our suppliers. ARCO, I've 5 been on a volume restriction from them actually for many 6 years. ARCO restricts all sales to their marketers so they 7 can use the volumes for their own company stations. 8 And my other suppliers, I am on strict gallon 9 restrictions. As a matter of fact, one of those letters 10 that Bonnie Addario was from one of my suppliers limiting 11 to me to 59,323 gallons per week. 12 CHAIRMAN DUNLAP: What do you normally receive per 13 week? 14 MR. ATWATER: About 50 percent more than that. 15 CHAIRMAN DUNLAP: And the reason cited in the 16 communication? 17 MR. ATWATER: Supply, lack of supply. 18 MR. LAGARIAS: Where was that from? 19 SUPERVISOR RIORDAN: Which one, who was it? I 20 thought it was ARCO. 21 CHAIRMAN DUNLAP: Do you care to say who it was 22 from? You don't have to. 23 MR. ATWATER: Frankly, no. 24 CHAIRMAN DUNLAP: Okay. And we'll leave it at 25 that. We respect that. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 359 1 MR. ATWATER: Frankly, I'm scared of my suppliers. 2 Okay? I'm not even sure I even like -- feel very 3 comfortable being up here. 4 MR. LAGARIAS: Well, we don't feel comfortable 5 either. 6 CHAIRMAN DUNLAP: Thank you very much. I 7 appreciate your attention and attendance on this matter. 8 (Applause from the audience.) 9 CHAIRMAN DUNLAP: Donald Brown? Is Donald Brown 10 present? 11 MR. BROWN: (From audience) Yes, I'm here. 12 CHAIRMAN DUNLAP: Okay. Followed by Paul 13 Knepprath. Is Paul here? From ALA. 14 Followed by Miles Smith. Mr. Smith here? 15 Hello. 16 MR. BROWN: How you doing? It's been a long day. 17 I've been here since 6:30 this morning. My name is Donald 18 Brown. I'm from the Oil, Chemical, and Atomic Workers 19 Union. We make the gasoline. 20 We're very concerned about today. We're very 21 proud of what's going on here in California, and we wanted 22 to let you know that you're doing a fine, outstanding job. 23 During today's session, I was able too gather a lot of 24 information, which I'm going to take back and report to my 25 membership. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 360 1 One of the things I'm concerned with is safety at 2 this time, because when we make these new fuels, it makes 3 our refineries a lot more vulnerable. We have a lot more 4 chemicals coming in. And, as you can see, if there's a 5 short supply -- somebody was talking about the pedal to the 6 metal, well, we're going to be out there, We work 24 hours 7 around the clock making this gasoline. 8 And, as we make this gasoline, what we're 9 concerned with is that all the safety standards and 10 requirements are met. And if any variances should come up, 11 that they wouldn't include cutting back on any safety 12 elements. 13 Basically, that's all I have to say today. And 14 I'd like to applaud you for your efforts, and we'll continue 15 to support cleaning up our environment. 16 And thank you for your time. 17 CHAIRMAN DUNLAP: Thank you for your interest on 18 this issue. I appreciate it. 19 Miles Smith. All right. Gerald Goetz, Blackfox 20 Technologies? Norm Covell. I saw Norm. Air Pollution 21 Control Officer from the Sacramento Metropolitan AQMD, 22 followed by Thomas Perardi, the Bay Area District. 23 MR. COVELL: Good evening, Chairman Dunlap, 24 members of the Board. I've been asked by the CAPCOA 25 President, Peter Hess, if my comments could serve to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 361 1 represent that association's. So, I'd like the record to so 2 note. 3 One of the ironies on the agenda hear is that 4 tomorrow, you will be acting on another item, hopefully, 5 that will be requesting EPA to redesignate some 10 urban 6 areas of California from nonattainment to attainment for the 7 carbon monoxide standard. 8 That's possible by a decision that was rendered by 9 this Board some years ago to require the development and the 10 sale of oxygenated fuel. It was successful here in 11 Sacramento, as in other areas, it put us over the top. No 12 carbon monoxide violations. This is the sixth winter that 13 we're just finishing out now. A resounding success. 14 It dealt with fuels. Things had to be done in the 15 refineries to make changes to allow this to happen. We're 16 revisiting that issue now based on a decision that this 17 Board made some time ago. 18 Interestingly, the 34 districts of this State 19 worked with all of the folks, I think, that were in this 20 room, at least their organizations, in crafting the State 21 Implementation Plan that this Board deliberated with in 22 1994, and went forward to EPA. 23 EPA is soon to act on that. We knew about this 24 strategy coming back as early as 1993. It's no surprise. 25 And the little testimony that I've been able to hear here PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 362 1 while I've been here today indicates to me that everybody's 2 agreeing that the cost figures identified by ARB are right 3 on in terms of the range that's been identified. There's no 4 reason to believe that the enormous cost increases that 5 we're facing right now are due in part to -- or due wholly 6 to this strategy. 7 This strategy's important to us, statewide. We've 8 identified some 17 percent volatile organic compound 9 emission reduction for us and some 11 percent reduction in 10 NOx requirements around the State. 11 For those of us doing battle to reduce emissions 12 right now, those are gargantuan emission reductions, 13 certainly levels that we cannot afford to lose anywhere 14 within the State as we deal with this excessive problem of 15 ozone in our urban areas. 16 I think the Air Resources Board and its staff are 17 to be commended for this strategy unfolding the way it has. 18 I think Jim and his staff have done an excellent job in 19 preparing this for the marketplace. I know some of the 20 fleets in the Sacramento area participated in the pilot work 21 that was underway in testing this fuel before it became 22 available on the marketplace. 23 So, we, along with the other districts in this 24 State, look forward to the successful deployment of this. 25 And my request to you is that you stay the course. I don't PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 363 1 know who said it initially, but I think it bears repeating 2 now that this, too, will pass in terms of the issues that 3 are facing us right now. 4 So, in behalf of the 34 districts of California, I 5 want to commend the Air Resources Board's staff for what 6 they have done thus far, and encourage you to stick with the 7 decisions that you have made and allow this program to 8 proceed. 9 Thank you. 10 CHAIRMAN DUNLAP: Thank you, Norm, I appreciate 11 it. Any questions of Mr. Covell? 12 All right. Very good. 13 Mr. Perardi, Bay Area Air Quality Management 14 District, followed by David Hylta, San Andreas Mini-Mart. 15 Mr. Hylta here? Okay. Followed by Jim Lantry from the 16 California Grocers/California Retail Association. 17 MR. PERARDI: My name is Thomas Perardi. I'm 18 Director of Planning at the Bay Area Air Quality Management 19 District, and I'm representing the Air Pollution Control 20 Officer and the staff of the Bay Area District. 21 I'm here to emphasize the importance of the State 22 clean fuels program, and especially the need for California 23 Cleaner Burning Gasoline this summer in the San Francisco 24 Bay Area. 25 We share with other California air districts the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 364 1 need for cleaner gasoline as a critical part of our overall 2 strategy to reduce air pollutant emissions in order to make 3 progress towards attainment of ambient air quality 4 standards, to reduce population exposure to ozone, carbon 5 monoxide, and toxic air pollutants. 6 In addition, we have a particular need and an 7 interest to avoid further exceedances of the national ozone 8 standard during the upcoming summer ozone season. We have a 9 particular spin on this question. 10 This is because the Bay Area was formally 11 redesignated to attainment status for the national standard 12 effective June of 1995. This was a great achievement based 13 on air monitoring data that we accumulated from 1990 through 14 1994. We were very disappointed, however, by our experience 15 during the summer of '95, when we had unusually high ozone 16 values on several days. We had several exceedances of the 17 national standard for our worst ozone season in many years. 18 So far, EPA has not revoked our attainment status. 19 But if we experience more high ozone this summer, our 20 attainment status will surely be in jeopardy. And if EPA 21 finds it necessary to resort to a SIP call, we'll have to 22 prepare a new plan with more costly control requirements. 23 California RFG will bring significant emission 24 reductions during the critical summer ozone season. Our 25 modeling shows that RFG will reduce peak ozone levels by PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 365 1 about 7 percent. Now, that may not sound like a gigantic 2 amount, but because many of our exceedances are just 3 marginal above the standard, this would reduce the number of 4 days exceeding the standard by about half, or 50 percent. 5 This is a very important component in our strategy 6 to avoid Federal exceedances during the '96 summer season. 7 So, again, we need this gasoline in the Bay Area this 8 summer. We find it unfortunate that the introduction of 9 California RFG is occurring coincidentally with other market 10 forces that tend to increase fuel prices. 11 We urge ARB to hold its course on this issue and 12 let the market work itself out. RFG is not responsible for 13 the large price increases noted recently. Producers and 14 regulators have agreed that the real costs are in the range 15 of 5 to 15 cents per gallon. And we know that the cost to 16 own and operate a car is 25 to 40 cents per mile. 17 In the United States, fuel costs are a relatively 18 small part of this. And the incremental cost of RFG in this 19 total is going to be less than one-half cent per mile. And 20 this program is a significant and cost-effective component 21 in our attainment strategies. 22 As Mr. Covell mentioned, we've seen the benefits 23 from the past use of oxygenated fuels in attainment of 24 carbon monoxide standards. We ask that you maintain your 25 resolve to expand the use and benefits of clean fuels in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 366 1 this face of this market bump that we're now experiencing. 2 The benefits of open and competitive markets are 3 clear. However, markets can go up and down. And I think, 4 when they go up, there is pressure to intervene in the 5 market, and we have to recognize that just as clear is the 6 possibility of a temporary anomaly such as this.. 7 These anomalies should not be used as an excuse to 8 delay or dismantle good cost-effective programs. 9 To reiterate, the Bay Area Air Quality Management 10 District finds that California's program for reformulated 11 gasoline is a valuable and necessary component to achieving 12 good air quality and reducing health risks to our citizens. 13 We urge the Board to maintain the requirements and 14 the schedules for implementation. Having heard recent 15 testimony, I would add a postscript or a fallback position. 16 If you should reach a point where you feel compelled to 17 intervene in this market bump, we would request that any 18 relaxation of your requirements be minimized in time and 19 magnitude, and that any non-California fuels that you might 20 allow be directed to the extent possible to the areas of the 21 State where the impacts would be least damaging. 22 That concludes my remarks. Are there any 23 questions? 24 CHAIRMAN DUNLAP: Thank you. Mayor Hilligoss, 25 how'd he do? Did he do okay? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 367 1 MAYOR HILLIGOSS: I thought he did very well. 2 CHAIRMAN DUNLAP: Thought he did well. He 3 represented the Bay Area District well? 4 MAYOR HILLIGOSS: Yes. 5 CHAIRMAN DUNLAP: All right. 6 SUPERVISOR VAGIM: Mr. Chairman, the San Joaquin 7 Valley District encourages the Bay Area District to stay in 8 attainment no matter which way the wind blows. 9 (Laughter.) 10 MR. PERARDI: We'd be pleased to do it. 11 CHAIRMAN DUNLAP: Mr. Perardi, thank you very 12 much. 13 Okay. Why don't we take a five-minute break, not 14 longer than a five-minute break to give our court reporter 15 her "annual" break. 16 (Thereupon, there was a brief recess taken.) 17 CHAIRMAN DUNLAP: Okay. If I could get you to 18 take your seats. David Hylta, San Andreas Mini-Mart? 19 MR. HYLTAN: Hyltan. 20 CHAIRMAN DUNLAP: Hyltan? 21 MR. HYLTAN: The one without the money. 22 (Laughter.) 23 CHAIRMAN DUNLAP: Okay. Is Jim Lantry here? Mr. 24 Lantry? All right. Roger Isom? Mr. Isom here? 25 Bruce Baginski? Richard Skaggs? Bob Segraves? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 368 1 MR. SEGRAVES: Yes. 2 CHAIRMAN DUNLAP: Okay. You're up next. 3 MR. PULLIAM: I told them I'm here. 4 CHAIRMAN DUNLAP: Okay. I'm coming to you, sir. 5 Madeline Arakelian? Karen Wilson? No. All 6 right. Reverend Reggie Jackson. Is the Reverend here? 7 Hamid Amini? All right, sir. You're coming up. 8 Please, those I've called, take a seat in the 9 front row. Margaret Felts and Mr. Pulliam. All right. 10 Mr. Hyltan, please. 11 MR. HYLTAN: Yes. I'm David Hyltan from San 12 Andreas Mini-Mart. I was asked from a few dealers up in 13 Calaveras County to come up and see what was going on, and 14 put our input into today's meeting. 15 Since February, about the 15th, our rack prices 16 went up 43 cents a gallon. I believe the State enjoys a 3.1 17 percent sales tax off of that. 18 I was talking to one of the guys and he says, "By 19 the way, Dave, how you doing?" 20 I says, "Not too good. I've used all my reserves 21 up to buy gasoline." 22 That 43 cents a gallon represents, per load, $4184 23 per load. So, my loads dropped from six loads a month to 24 four. I was looking at my business the other day. On the 25 3rd of this month before this stuff started real bad, I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 369 1 pumped 2,000 gallons. Yesterday, I pumped 976 gallons. 2 I've dropped over half. That represents $1200 3 that day from the previous day that I lost. This is 4 affecting everybody in the State of California that has to 5 buy gasoline. 6 You know, I know the oil companies. I know how 7 they think. I've been a dealer or leased a station since 8 1959. So, I've been around the block. I worked for 9 Standard Oil for ten years. I also worked in their service 10 stations. I also delivered gas from them. I drove a truck 11 and delivered the gas. So, I know how these oil companies 12 think. 13 Before, our tank wagon prices used to be above the 14 independents, because I'm a Beacon. I've got a Beacon 15 brand. We always paid 45 cents a gallon higher. Now, it's 16 flip-flopped the other way. The little independent guy down 17 below me is paying 5 to 6 cents a gallon higher. That 18 should tell you that they want to get rid of the 19 independents, too. 20 And if they get rid of them, then the station 21 volume will be increased, and then they come and buy 'em 22 out. I've got Sonora, got a dealer stationed there. They 23 bought 'em out. Lockford, they bought 'em out. Jackson, 24 they bought 'em out when the volume got up. 25 So, this is an attempt to destroy business. This PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 370 1 is an attempt to destroy all the little independents, the 2 way I look at it, and me with them. Because when I have to 3 spend $24,000 extra in one month to replace the gasoline 4 that I normally sell, this has become real serious. 5 So, I told my jobber, which is Dave Atwater, who 6 testified before, that I will close Saturday and Sunday in 7 protest last week. And I did. And I'm closing Sunday this 8 week. Not to buy gas that I used to pay 9,000, and I'm 9 paying 13,000 now. I'm going to drag the gas out just as 10 long as I can, because it's taken my profit in my store to 11 pay for this gasoline. If it becomes very excessive, I'll 12 go borrow money and make it a store, and forget the gas. 13 I don't want it no more if this is going to 14 happen. So, you people got to do something to relieve this 15 pressure. 16 And I think the people had the right answer. 17 Bring gasoline in to this State to help these people out. 18 Because if they're not going to sell to independents or sell 19 it to them 10 cents higher, you're going to see the 20 independent marketing go away. 21 You're going to see truckers -- you're going to 22 see everybody leaving this State. You're going to lose 23 revenue that you won't believe. I paid $6300 in sales tax 24 last month for a little small station that pumps 60,000 25 gallons. So, you can see that our sales tax really adds up PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 371 1 as individual people. 2 So, I think if you brought gasoline in here and 3 equaled the market out, these people would have no excuse to 4 raise the price of gasoline. 5 Now, I'm one of the few people that have the guts 6 to stand up here and tell you. But to do the regulations, 7 and to what I put in my unit, and what my father-in-law has 8 gave me, kept me in business, or I'd be out today. Because 9 I had to do all these regulations on my own. And everytime 10 you guys make more regulations, you're just weeding out 11 another guy. You've given them the full reign to go after 12 us. You're helping them out whether you want to or not. 13 So, you've got to look at the whole picture here. 14 You just can't look at one industry and say, "Oh, yeah, 15 they're right." 16 You got to look at everybody and what's happening 17 to this State. And what's happened to this State -- and 18 I've been here since 1959, it's not a pretty picture 19 anymore. Business complain to me all the time, little 20 business. They're going to leave the State. 21 If I could sell my business and leave the State, 22 I would. But I'm stuck with it. And I've been there 20 23 years. 24 So, I thank you. 25 CHAIRMAN DUNLAP: Thank you for your time, Mr. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 372 1 Hyltan. I appreciate your concerns and interest in this 2 issue. 3 All right. Margaret Felts. Sorry you didn't 4 hear, Margaret. Mr. Pulliam will be next. Mr. Segraves, 5 and our final speaker, Hamid Amini. 6 MS. FELTS: Good evening, Chairman Dunlap. Can 7 you hear me? I'm Margaret Felts. I'm here as an 8 individual. I was at one time a fuel price forecaster for 9 the California Energy Commission in the early eighties. 10 That job got a little boring after a while, so I 11 found other things to do, but I have kept up with the 12 system. 13 Before that, I was a refinery fuel scheduler for 14 AMCO Oil Company, which is not a company that provides fuels 15 to California. So, I don't feel too bad about sharing my 16 expertise with you. 17 Over the years, I've performed several studies for 18 the California Energy Commission and testified about fuel 19 prices. And so, I thought I would come here today and offer 20 my help to answer your questions and also tell you a little 21 bit about what I know about the situation. 22 The California refinery system is a closed supply 23 and demand system. We do provide fuels to other States 24 right around us, but basically the West Coast system is an 25 isolated system. It's precariously balanced, and over the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 373 1 last few years, it has been balanced with a slight 2 oversupply, which has been good, because the competition for 3 market shares on the West Coast has kept the prices down. 4 This State does not import gasoline. And so, when 5 you look for an alternative supply in a shortage situation, 6 the gasoline is not there. There are spot prices that are 7 quoted for L.A. and San Francisco, but that spot price is 8 actually the cost of purchasing gasoline on the East Coast 9 and shipping it through the Canal to the West Coast, which 10 results in a significant differential. I think it runs 11 about 15 percent between the cost of spot products on the 12 East Coast and the cost on the West Coast. 13 Even if you were to contract for a purchase of 14 gasoline this week on the West Coast (sic) at the spot 15 market price, you probably wouldn't be able to get a 16 delivery for three or four weeks. It just doesn't sit out 17 there in the Pacific Ocean waiting for us to have a 18 shortage. 19 So, that's the backdrop of the situation. In 20 1993, I won a contract with the Energy Commission to perform 21 a study, which I wanted to share with you, because it didn't 22 come up then. This study was a feasibility study of a 23 regional petroleum reserve in California. It was funded 24 with Federal funds and State funds. 25 And the object of the study was to evaluate PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 374 1 whether or not the State should put gasoline and diesel in 2 its own strategic reserve in order to alleviate price 3 spikes. There were other issues that we also looked at, 4 like having that storage available for earthquakes and other 5 problems that might occur in California. 6 But the primary question was, could the State take 7 the edge off of price spikes in the future when they 8 occurred. The answer to that in the study was no, that it 9 was not feasible. I'm sure the study's available. It was 10 published December 3rd, 1993. 11 But let me tell you what the key question was in 12 doing that evaluation. The key question was: If California 13 bought a whole bunch of gasoline and diesel and put it in 14 storage somewhere in California, when the price of gasoline 15 and diesel went up, as it has recently, what would the State 16 charge for that gasoline and diesel? 17 That was the question I posed. Would it charge 18 what it paid for the gasoline and diesel? Or would it 19 charge what the going market price is for the gasoline and 20 diesel? And how would it determine that price? 21 That question essentially killed the study I 22 believe, because there was no way for the State to figure 23 out how they were going to interfere in a pricing scheme on 24 a free market. 25 The current situation I think is temporary. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 375 1 Unfortunately, it's so significant that it's going to last 2 for a while. We did have some downed refineries. There are 3 some other things going on that, by being in this room 4 today, I was unable to verify, but are things that are well 5 beyond the public's control and the oil industry. 6 And, as a result, there is a real supply shortage. 7 There's been a drawdown that's evident in the Energy 8 Information Administration Data, which is publicly available 9 over the web, of about 92,000 barrels a day for the last 10 five weeks in California. 11 And at that rate, you are going to see the 12 refiners go to the spot market to price their product to the 13 market. The way that works is, if I'm a scheduler at the 14 refinery, I have choices. And one of my choices is to make 15 more gasoline, and my other choice is to buy gasoline and 16 give it to my stores or to people that want to buy gasoline. 17 And what I do is make that choice. The harder you 18 run the refinery and the heavier crude that you run through 19 the refinery, the more expensive it gets to make the 20 gasoline. So, you may be weighing that choice. One of the 21 neat things about our refinery system now that didn't exist 22 in the late seventies and eighties was that, in those 23 years,, we could not run heavy crudes. Now, we can. 24 There is not a supply shortage, in that we have 25 the refinery capacity and the extra capacity will come on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 376 1 line to make up the difference. So, there isn't a shortage 2 at the gas pumps like we saw in the seventies. And I don't 3 think we'll get to that situation, because, as you heard 4 today, the refineries have repaired their problems or are 5 about to. And they'll come back on line. And this will 6 even out. 7 But I did want to tell you that the price is 8 essentially set at the market or at the spot price, and the 9 question today has been all along, well, what is that 10 difference in there between the cost of making gasoline and 11 the market price? 12 Well, since I don't have a job to lose over saying 13 this, that difference is profit. It's very simple. I mean, 14 if you had gasoline in storage in your back yard, you would 15 sell it at market price and you would put the money in the 16 bank. And that's what's going on. 17 It's the beauty of the supply and demand market in 18 the United States, and it's the epitome of the American way. 19 This is how we run our business. 20 Okay? Enough of that. I'll go to my crystal 21 ball. Nobody else wanted to give a projection. I don't 22 have a job to lose. I'll give you a projection. 23 I think the prices -- if the information provided 24 today is correct, I think the prices will peak in two to 25 three weeks. I can't tell you how high it'll go, because it PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 377 1 depends on how fast the East Coast demand on the spot market 2 there corrects. 3 The prices will level as soon as the Shell 4 refinery gets back on line and they start building 5 inventory. It will take now, because we're so far into our 6 inventories, it can take all the way through the summer at 7 high prices before you'll start seeing an impact, unless the 8 refiners just decide that they want to be really nice and 9 lower the prices. 10 Eventually, by next year, if there aren't any more 11 huge problems in the supply system, it should adjust back. 12 I would expect the price to adjust back to around $1.20. 13 There it is. 14 I'd be glad to answer any questions. 15 CHAIRMAN DUNLAP: Thank you. Supervisor Riordan. 16 SUPERVISOR RIORDAN: Yes. 17 Part of the equation was apparently the shipment 18 of some out of the Gulf area. And having no knowledge of 19 how many ships that entails, what would that do to your 20 prediction? I mean, if we saw that coming in and in some 21 substantial way, would that begin to force that market to 22 reduce prices? 23 MS. FELTS: The reason we were looking at a 24 strategic reserve in California is because it's really not 25 feasible to expect a fast response in terms of getting any PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 378 1 product. You have to buy -- you have to secure the product 2 from a market right now that's short on the East Coast. And 3 that's difficult. And then you have to get it to the West 4 Coast. 5 So, even from the Gulf Coast, you still have to 6 come either around South America or through the Panama 7 Canal. There are no pipelines that will move product from 8 the Midwest to the West. It's something that the Energy 9 Commission's looked at over the years off and on, but it's 10 just never been feasible. 11 So, you're probably looking at a four to five week 12 delay. We're there right now. I would expect to see a ship 13 of gasoline rolling in here somewhere. Somebody bought some 14 on the spot market about five weeks ago, and it should be 15 arriving. So, that's your delay. 16 And you should see more product coming in. But, 17 basically, this system in California usually responds with 18 increased capacity, just what they're doing right now, the 19 refineries crank up, they put more product on the market, 20 and that usually takes care of the problem. 21 The real answer to the problem is in the 22 consumption. This State has the capacity and has shown it 23 over and over again in the numbers of an elasticity in 24 demand of almost ten percent. 25 So, if a seven percent reduction in demand would PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 379 1 bring this whole thing level within about three weeks. A 2 ten percent reduction in demand would cause the refiners to 3 start building inventories again. 4 That would be the best situation. So, if this 5 Board wants to do something, the thing to do would be to 6 advertise heavily for everyone to conserve gasoline. 7 Because that is the ultimate power that the public has in 8 controlling the prices. 9 They can't charge the prices if no one will pay 10 them. 11 CHAIRMAN DUNLAP: Any other questions, Supervisor? 12 SUPERVISOR RIORDAN: No, thank you. 13 CHAIRMAN DUNLAP: Okay. Ms. Felts, thank you very 14 much. 15 MS. FELTS: Thanks. 16 CHAIRMAN DUNLAP: Oh, yes. Mr. Scheible. I'm 17 sorry, Mike. 18 MR. SCHEIBLE: It's very hard to get absolutely 19 perfect information on what ships are coming. This is out 20 of today's OPIS, Oil Price Information Service. 21 According to well-placed cargo industry sources, 22 Hess has chartered three vessels -- it gives the names -- 23 which will bring an estimated 1.2 million barrels of CARB 24 gasoline. One's slated to arrive May 6th, another's on May 25 12th, another on May 10th. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 380 1 Usually, when you get this much detail, there's a 2 fair amount of truth behind the rumors reported. It goes on 3 to say Hess is not the only supplier bringing cargoes. We 4 hear that at least six other vessels are fixed into the 5 region, and three more have options to come. 6 So, I think in the time frame, since the 7 beginning of April, when Shell went down, this activity has 8 been occurring. And we're in a situation now where the 9 pipeline of vessels coming to California is well underway. 10 Although not immediate relief, it's fairly early in May. 11 CHAIRMAN DUNLAP: That's good news. I appreciate 12 you sharing that, Mr. Scheible. 13 SUPERVISOR ROBERTS: Mr. Scheible, do you know 14 where those are coming from? 15 MR. SCHEIBLE: These are coming through the Canal 16 from the Caribbean or the Atlantic. 17 SUPERVISOR ROBERTS: So, there's a refinery in the 18 Caribbean that's producing -- 19 MR. SCHEIBLE: St. Croix. 20 SUPERVISOR ROBERTS: St. Croix? 21 MR. SCHEIBLE: Yes. 22 SUPERVISOR ROBERTS: And that's the first three 23 tankers? 24 MR. SCHEIBLE: That's what it says. 25 CHAIRMAN DUNLAP: Mr. Pulliam. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 381 1 Good to see you again, sir. 2 MR. PULLIAM: Mr. Dunlap, the last time I was 3 here, you referred me to Bob Cross. Today, to Bob Cross, I 4 gave a 52-page rough draft, because I need some help on 5 editing. 6 CHAIRMAN DUNLAP: This is on the -- 7 MR. PULLIAM: This is the third day my wife has 8 been in the hospital, and my typing isn't good. 9 CHAIRMAN DUNLAP: Okay. 10 MR. PULLIAM: But I do have something to say here. 11 CHAIRMAN DUNLAP: You want to talk about ZEVs, 12 right, Mr. Pulliam? 13 MR. PULLIAM: I want to talk about gasoline use. 14 CHAIRMAN DUNLAP: Okay. 15 MR. PULLIAM: By vehicles. Now, you've seen on TV 16 something referred to as mine sweepers in Bosnia. There are 17 three of those built at McClellan Air Force Base to my 18 choice of plans, and now the people at McClellan would like 19 to have me totally out of that picture. 20 But what they used in each of those was a 45 21 horsepower air-cooled engine to drive an alternator. The 22 output of the alternator goes to a rotary transformer. You 23 turn it 15 degrees to a zero point, and you get no voltage 24 out. You turn it slowly back to the 15 -- there's a certain 25 word for it -- alignment, then you get full voltage across PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 382 1 from the alternator through the transformer to the motors. 2 The 45 horsepower engine drives the 30 horsepower 3 loading status alternator (sic) and that drives four motors, 4 each rated 7.5 horsepower. 5 They never get up to that, except when they do it 6 at 60 miles an hour. 7 Now, the critical point that people don't know is 8 that the voltage applied through the induction motor sets 9 the speed of it. If you were to turn on the full voltage to 10 these four 7.5 horsepower motors, you'd have four smoking 11 tires. So, you have to limit the voltage you apply to them 12 in order to be able for the traction capability of the tires 13 to stay within reason. 14 So, we start off at zero and gradually increase 15 the voltage by that 15 degree motion of the rotor within the 16 center of that rotary transformer. 17 CHAIRMAN DUNLAP: So, is your message that we 18 shouldn't even worry about this gas thing; we ought to just 19 deal with the electric car? 20 MR. PULLIAM: Well, the gasoline goes to the 21 engine up front, and it runs at 1800 rpm -- 22 CHAIRMAN DUNLAP: Okay. 23 MR. PULLIAM: -- to power the alternator. That 24 puts out a 60 hertz frequency and the 120 to 208 (sic) 25 three-phase voltage, which runs the motors. You increase PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 383 1 the voltage to it to pick up the speed. 2 The engines turn from -- 3 CHAIRMAN DUNLAP: Mr. Pulliam, is this in your 52- 4 page document you gave Mr. Cross? Bob, do you have that? 5 MR. CROSS: Yes, I do. 6 CHAIRMAN DUNLAP: Okay. And you're going to 7 analyze this, I trust, and get a full report back up here, 8 right? 9 MR. CROSS: It's in process. 10 CHAIRMAN DUNLAP: All right. Mr. Pulliam? 11 MR. PULLIAM: The four motors go from zero to 14 12 and one quarter rp second (sic) to get to 60 horsepower -- 13 60 miles per hour velocity. And I would like to be told 14 when I can come back to speak more fully on the -- 15 CHAIRMAN DUNLAP: Okay. 16 MR. PULLIAM: -- operation. 17 CHAIRMAN DUNLAP: We'll invite you back. But I 18 promise, after Mr. Cross -- I'll make a commitment for Mr. 19 Cross. After he analyzes this -- 20 MR. PULLIAM: Any questions? 21 CHAIRMAN DUNLAP: -- he'll do the analysis. He'll 22 sit down with you, and we'll give you some time. Thank you 23 for coming again. Good to see you. 24 SUPERVISOR ROBERTS: This sounds as clear as 25 anything I've sat through today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 384 1 CHAIRMAN DUNLAP: It does. 2 (Laughter.) 3 CHAIRMAN DUNLAP: Okay. Mr. Segraves. Sir, did I 4 pronounce that name properly? 5 MR. SEGRAVES: That's correct. If you were south 6 of the border, since my middle initial is "O," they call me 7 Roberto Segraves. 8 CHAIRMAN DUNLAP: Okay. You're with Anglo 9 American Associates. 10 MR. SEGRAVES: Right. 11 CHAIRMAN DUNLAP: All right. 12 MR. SEGRAVES: I saw a front page article in the 13 Orange County Register about this meeting. And, of course, 14 I've been busy with phone calls, faxes, and what not to see 15 if it was worthwhile coming up here. 16 The last time I addressed such an august body as 17 this was when the rocket fuel plant blew up in Las Vegas. 18 And I had the opportunity to address the congressional 19 Subcommittee for Science, Space, and Technology. 20 At that time, I was working with Bob Miller, who's 21 now Governor of Nevada. I thought I might give you a little 22 of my background, so you know who I am. 23 My early career as a chemical engineer and a 24 manager was spent with Exxon Affiliates, which were not 25 called Exxon at that time. Standard Oil of New Jersey. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 385 1 CHAIRMAN DUNLAP: Mr. Segraves? 2 MR. SEGRAVES: Yes. 3 CHAIRMAN DUNLAP: You provided us written 4 testimony. 5 MR. SEGRAVES: Yes. 6 CHAIRMAN DUNLAP: I think we have it and we've 7 looked at it. So, I think we have your background. 8 MR. SEGRAVES: Okay. Very good. I feel like my 9 remarks here are kind of anticlimactic, because I heard some 10 very interesting testimony this afternoon, and the crux of 11 the problem, of course, is CARB products causing the 12 problem? 13 I would say, yes. Why else would diesel in 14 California be selling for 40 cents more than it is in 15 Arizona? Supply and demand. You have a special type of 16 diesel. You have a special type of gasoline. And these are 17 in short supply. 18 And, of course, the petroleum people say they have 19 plenty of supplies, but the prices are still high. And the 20 only thing that sets the price is supply and demand, unless, 21 as one lady indicated, she believes there is some collusion 22 between the oil companies, and she thinks the Attorney 23 General should step into the picture to see if antitrust 24 laws are being violated. 25 She didn't say it in those words, but obviously, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 386 1 this is what she meant. 2 I don't think that's happening. I think they're 3 taking advantage of the supply and demand situation, and 4 they're charging more money for California produced product 5 meeting these CARB specifications. 6 Now, in my written presentation, I wanted to 7 comment on your specifications. Personally, I think they're 8 great, except for one of them. I mean, lower pressure gas-- 9 vapor pressure of gasoline is obviously a step in the right 10 direction. I don't know how good it will run in my 11 eight-cylinder carburetor operated '78 Buick station wagon, 12 but I'm sure my sedan DeVille, which is a much later model 13 automobile with fuel injection, it wouldn't make any 14 difference what the vapor pressure is. 15 I also like the elimination of benzene, because my 16 daughter died of leukemia. But she didn't die in 17 California. She died in Mormon country. She was going to 18 Brigham Young. 19 However, oxygenated hydrocarbon specifications 20 being mandatory, I can't understand that, because all the 21 tests showed that automobiles built since '74, it didn't do 22 any good there. Didn't make those automobiles cleaner 23 burning. It was only in the older cars before '74. And I'm 24 sure the population of those cars is very minor in the total 25 automobile population. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 387 1 So, I don't particularly agree with that. 2 Personally, I don't particularly agree with mandatory 3 government specifications. I'm really not against using 4 oxygenate hydrocarbons. If individual oil companies want to 5 use them, I think that's fine if it's in their best 6 interest; in other words, producing gasoline at the lowest 7 cost. 8 Of course, methyl tertiary butyl ether has a 9 blending octane I think of around 120. And, of course, ARCO 10 produces 50,000 barrels a day of that in their Houston 11 chemical plant. And then it's shipped here through the 12 canal for use in California. 13 That's fine. If they find that to be an 14 economical way of producing gasoline, that's fine. But I 15 don't think it should be mandated by government 16 specifications. 17 CHAIRMAN DUNLAP: So, it's your position then that 18 we should repeal the clean fuels program, right? 19 MR. SEGRAVES: I didn't say that. The only one I 20 was talking about was the one about mandated oxygen content 21 of fuels. All the rest of the program sounds great. 22 CHAIRMAN DUNLAP: Okay. 23 MR. SEGRAVES: The elimination of a lot of 24 aromatics in diesel fuel, I think that's great. The only 25 problem is they really don't have enough refining capacity PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 388 1 in the State of California, from what I've heard here today, 2 to meet the demand. 3 Well, since you have my paper, and since I 4 understand I'm the last speaker, I'm going to catch a flight 5 now. I'll go back to Southern California. 6 Thank you. 7 CHAIRMAN DUNLAP: Thank you, sir, for your time. 8 Any questions? 9 All right. Actually, you aren't the last speaker. 10 We have two or three left. 11 Is the Reverend Reggie Jackson here? Followed by 12 Hamid Amini, and we have a late request to speak from Paul 13 Puich. I know you've been here a long time, probably, the 14 three remaining speakers. 15 I would ask your indulgence; if you could be 16 brief, we'd appreciate it, and we'd get on with concluding 17 this item. 18 REVEREND JACKSON: Okay. I'll be as brief as I 19 can. 20 You know, when I was a child, one of my favorite 21 movies -- I'm a minister, so one of my favor movies was "Ali 22 Baba and the Forty Thieves." 23 And if I could, you know, if I had about an hour, 24 I would love to speak on "Ali Baba and the Corporate 25 Thieves." PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 389 1 You know, that says a lot right here. You know, 2 that says a lot right there. I think that the oil 3 companies' lust for power and wealth, and are very -- you 4 know, I believe they have a monopoly going, because there's 5 no -- you know, you talk about being competitive, you're 6 talking about one gas station that can sell a gallon of gas 7 for $1.20, one can sell it for $1.60. And you take 8 whichever one you think that's, you know, better for your 9 car and so forth. 10 But when they all charge $1.50 a gallon, average, 11 a $1.60, that's what you call a monopoly. I think this will 12 effectively hurt, really hurt middle America. Middle 13 America is already under a strain. It's going to devastate 14 the poor. And, you know, I just don't think there's any 15 excuse for that. You know, this 50 and 60 percent increase. 16 I've heard about 6 or 7, about 7, 8 speakers from 17 Chevron, and Texaco, and -- not Texaco -- Chevron, and 18 Exxon, and the other oil companies. And none of them could 19 actually satisfy my questions that I had concerning why the 20 increase in the gas price. And they use terms like "we 21 anticipate" that this could happen, and that could happen. 22 What I believe they're anticipating is, is this a 23 great profit? And I think that the middle class will be 24 affected in this, because it's going to cost -- affect the 25 supermarkets, in our jobs, and our ability to, you know, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 390 1 remain in the middle class sphere. And it's going to have 2 repercussions throughout our country. 3 I'll give you a copy of this that I went home and 4 typed up on a computer. You know, I only knew about this 5 meeting this morning. So, I didn't have time to properly 6 prepare. But I wanted you to know that the -- I'm just 7 going to read one segment out of all this sheet. 8 I wrote that our economy is already fragile and 9 you are on the verge of its further destruction and 10 collapse. You can't give us specific numbers concerning 11 your raising the gas prices, because there is no 12 justification or saneness for your greed and insatiable 13 appetite for wealth. 14 Revelations, 18, says that these things will be 15 taken away from you soon, and then and only then will you be 16 satisfied as you're supremely judged for robbing the hard 17 working people of this nation as well as the nation's of the 18 world. 19 So, I'm going to close right there. I had a whole 20 sheet that I could have went through, but I was, like I say, 21 only had less than a day to prepare, really an hour, because 22 I had to go home and change and so forth. And you saw me 23 with the sign. 24 But I think it's a travesty for these 25 corporations, for the rest of the corporations in America -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 391 1 and then, you know, you already had your oil increase in '76 2 and '77. And now you want to do it again. And I think 3 there's just no excuse for it. You can't give us a 4 legitimate reason for this. You know, I'm really outraged. 5 And I think that the American people won't stand for it. 6 They don't trust our guys (sic), as well as our people in 7 Congress and so forth anyway. The voting is down. So, I 8 guess you're going to have your day. 9 So, that's all I wanted to say. I could say a 10 whole lot more, but I needed another few hours or so to get 11 all my facts and figures and everything else. 12 Thank you. 13 CHAIRMAN DUNLAP: Thank you very much for taking 14 the time to come here. I appreciate it. 15 The final two speakers, Hamid Amini and Paul 16 Puich. 17 MR. AMINI: Hello. My name is Hamid Amini. Thank 18 you very much for giving me an opportunity here to speak. 19 Excuse me. 20 I'm a small businessman. We own two gas stations, 21 independent gas stations in the East Bay Area, particularly 22 Livermore. And we're one of those, like Mr. Atwater and a 23 couple other gentlemen explained to you, we're, what do you 24 call, the -- on the extinctive race, we're just about dying 25 down, dwindling down. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 392 1 And I'm not talking just about myself. There's 2 many other independent people that I know that are in this 3 business. I'm not asking you guys to care about us, the 4 independent, because, in general, the strong never going to 5 feel too sorry for the weak. 6 What I'm asking is that you guys, you gentlemen, 7 you're very wealthy, I'm sure, over hundred thousand dollar 8 salaries you make. You have no problem. For you guys, gas 9 price is no problem. You put your credit card into Chevron, 10 Shell, Exxon, whatever, and get your card. But your 11 children, your brother, your sister, your uncle, cousin, 12 they use us, us meaning the cheap gas station. 13 We're the thorn, as other people explained to you, 14 in the side of the major oil companies. Why? Because, for 15 example, I got two blocks away from ARCO, two blocks away is 16 Beacon. I try usually to sell a penny below them. That 17 penny, it doesn't sound like a lot, but if that penny goes, 18 that penny becomes a two penny, become a nickel, becomes a 19 dime, becomes 50 cents. 20 And you have to realize that we are the balance of 21 what you call the equalizer in the market. And you like it 22 or not, which I'm sure you guys like it. And so, we have 23 been in this business six, seven years. We have seen ripple 24 effect. We have seen refineries go down. We have seen 25 fires. We have seen explosion in Martinez. We have seen PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 393 1 chemical stuff go up, but never like this, even up two 2 pennies for two days, for three days. Next day, came down. 3 Next day, down; another day, three pennies up. Never like 4 this. 5 Remember, please, I'm going to take a little bit 6 of time, because it's very important. Nobody's talking for 7 us, because we, the small businessman can't afford it to 8 come here to talk. So, please bear with me. 9 I know you guys are tired, just as much as I am. 10 This is an example of the bank merging. Remember when the 11 banks, before they merge, you know, another name -- the 12 names of the companies that merge said, okay, we're gonna -- 13 everything going to be the same. But what happened? They 14 raised their bank checking account price. I'm sure you're 15 all aware of it. Closed branches, blah, blah, blah. 16 But we're not talking about the $6.00 a month that 17 they're going to charge on your checking account. We are 18 talking about every load of gas, every tank of gas the 19 average person that gets from me used to pay $10. Right 20 now, he's paying $14 to $15. It comes to every week, every 21 month, to a year, it's thousands of dollars. People barely 22 can make it. 23 My customers, I swear to God, they're coming to 24 me, they're crying. Hamid, what's going on, Man? I can't 25 afford go to work. What's happening? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 394 1 I say, I don't know. Go talk to your 2 representative. Go do something. I'm not -- believe me, I 3 used to be 20 cents below between Chevron and Shell all the 4 time, 20 cents. Now, I am 2 cents above them. It's crazy. 5 One, because they're trying to close us down. 6 I put in three years ago, spent $280,000 to put a 7 double-walled tank, fiberglass, updated everything, painted. 8 I cannot pay right now to Mr. Atwater for the two stations, 9 we owe him $80,000 behind. Our margin's supposed to be 8 10 cents, 9 cents, we're running a penny, a penny margin. My 11 price of gas, compared two months ago, was 90 cents a 12 gallon, ladies and gentlemen, 90 cents a gallon. Right now, 13 I pay today $1.45.9, plus sales tax. That comes to $1.62. 14 And I'm selling it today 1.59. I'm losing because 15 I wasn't there to go change price. My guys do not know how 16 to change. I have to change the price myself. It's really, 17 really serious. Pay attention, please. 18 If you guys don't pay for the gas, your children, 19 friend, cousin, uncle, they're the one that going to give -- 20 hey, my load, I prove it to you. Eighty-six five dollars 21 (sic) has gone to $12,500 to $13,000 today. I am not on 22 welfare or anything. This quarter, my sales tax every 23 quarter is approximately $20,000. I collect sales tax for 24 every station. I pay State, State of California. 25 This month, I don't how I'm going to pay. Please PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 395 1 understand that. And I don't know what could be, what you 2 call remedy. Another thing, from this meeting today, I've 3 been here from this morning. I've never seen, never in my 4 life seen Chevron, Shell, all these big corporations, all 5 you guys -- what we call -- they're supposed to be in a war 6 with you. They're supposed to be -- what I'm saying is that 7 you are on their throat. They're trying to survive. Now 8 they're telling you, oh, you guys are doing such a great 9 job, keep on doing. Of course. Of course. Because they're 10 making big bucks. 11 Please understand that. Please understand that, 12 because we are the one -- what they call -- we're the 13 scapegoat of their -- because we keep the big guys straight, 14 because he can't be 50 cents above me. 20 cents, yes, 15 because he cares about the environment, because he's wanting 16 to give the poor, to the needy, gives money to the -- what 17 is his name -- those PBS channels, and blah, blah, blah. 18 He can be 20 cents above me. But he cannot be 50 19 cents above me. Remember that. Remember there was the L.A. 20 riot there? They burned the stores. Some of the stores 21 were charging double for a dozen of the eggs. It happened. 22 And they were there ripping them off. 23 So, it's in your hand to do something fast, 24 because -- for example -- 25 CHAIRMAN DUNLAP: Mr. Amini, you've made some PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 396 1 salient points. You're right on the mark. One thing I want 2 to make sure you understand is that what this has been about 3 today for us is to provide a forum for people like yourself 4 that have some concerns. We need to hear those things, and 5 are willing to. 6 But our part of the price issue was very important 7 for us to understand and to pinpoint. And we have we think. 8 It's a nickel to eight cents a gallon can be attributed to 9 our fuel. 10 And we want to identify those things. We also 11 want to -- Supervisor Roberts has spent his whole day 12 working to try to determine where the big price is coming 13 from and what we can do about it. 14 And so, as soon as you're done, sir, we're going 15 to have a chance to talk and maybe take some action that you 16 might find meaningful. 17 MR. AMINI: Okay. 18 CHAIRMAN DUNLAP: But I'll tell you something, I'm 19 going to lose one or two of my members to the airlines, and 20 we might not be able to get to deal with this thing. 21 So, I'd encourage you to wrap up so we can get 22 moving here. 23 MR. AMINI: Yes, sir, I promise you that. Just 24 one minute, that's all I'm going to take. 25 They said, you put a safety valve, a safety net. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 397 1 Well, you know, for example, the stock market -- I don't 2 have any stock yet, maybe some day -- you know, the stock 3 market it crashed, you know that hundred point, whatever, 4 they never had that safety valve, when it hit that 75 or 5 750, or whatever, they shut the automatic dealing or 6 trading. 7 But you guys should do something like that, 8 because it's in your hand so it doesn't run wild. And, 9 please again remember, the oil companies, they're out there 10 to make big profit. Remember that, please. Mr. ARCO is 11 cheap, not because he wants to be cheap. He's working on 12 volume. Okay? If you open up next to ARCO within two 13 blocks, he's 10 cents higher in the other area that has 14 competition or not competition. 15 So, for your sake and the sake of your other 16 family members, the poorer people that this burden is on 17 them, think about them. And I appreciate it very, very 18 much. 19 CHAIRMAN DUNLAP: Thank you. You're very well 20 spoken. And I appreciate you coming today. 21 SUPERVISOR VAGIM: Mr. Chairman? 22 CHAIRMAN DUNLAP: Supervisor Vagim. First of all, 23 I want you to know I always look for your stations, believe 24 me. Price is very important to all of us. And I want to 25 ask you one question, because you alluded to it. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 398 1 Do you feel that you and independents like 2 yourself, there is kind of a "skulduggerous" method going on 3 here to run you folks out of business to get rid of you? 4 MR. AMINI: Sir, I don't want to say a hundred 5 percent, a thousand percent. There is no doubt about it. 6 There's no doubt about it. I have already oil companies 7 come and talk to me. Hey, look, you want to go under our 8 brand? You want to go under our flag? This is the benefit 9 you will get. 10 But I don't want to. Because I know what's going 11 to happen six months down the road. I'll be in the price 12 gouger, and I will lose my independence. 13 SUPERVISOR VAGIM: So, you think this is the 14 extension of that kind of offer to maybe get you to maybe go 15 with them, because it's a little bit more pressure than you 16 want? 17 MR. AMINI: Yes, sir. That, and also the proof is 18 that in the last six months, about maybe -- I don't want to 19 say 30 percent -- but 10 to 25 percent of the independent 20 gas stations have gone -- they've gone under brand, under 21 the flagship of certain major brand in order to survive. 22 And many of them right now are scrambling. But, you know, 23 we had a good business, and a good oil supplier, Mr. 24 Atwater, that has extended credit to hopefully survive this 25 ripple. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 399 1 SUPERVISOR VAGIM: Thank you, Mr. Amini. 2 CHAIRMAN DUNLAP: Any other questions for our 3 witness? 4 Thank you, sir. 5 MR. AMINI: Thank you very much. 6 CHAIRMAN DUNLAP: Paul Puich, our final speaker. 7 Sir, you are all that stands between us and 8 finishing up this item. 9 MR. PUICH: I do realize that, and I thank you. 10 Mr. Chairman and members -- and gracious members 11 of this Board, I thank you for allowing me to address you. 12 I will try to be light and try to be brief. 13 I address this to the subject of patriotism and an 14 analysis of some of the arguments we've all heard today. 15 Much to the shock of dismay to oil company 16 speculators, Saddam Hussein may not like California as much 17 as they think. According to some, all 700 million barrels 18 of oil from Iran will flood into California, causing a 19 disastrous fall in the gas prices. 20 Having touched upon this issue, I changed the 21 focus of my comments, and I'll return to those which I will 22 detail later. 23 I assume the hearing was called to correct -- to 24 investigate the fuel price increases and the reason behind 25 them, and to find possible remedies. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 400 1 That's why I raised the issue of patriotism. I 2 will be brief. 3 As you know, the Desert Storm War occurred in 4 1991. It was a short war, one which revitalized pride in 5 America, pride in America's armed forces, America's morale 6 improved, patriotism was in fashion. 7 Saddam Hussein caused very little damage to 8 America. America's losses were very few. Iran's (sic) 9 losses were very many. 10 America won the war. However, now because of oil 11 speculators counting on a huge wave of oil from some 700 12 million barrels of oil, and artificially reducing the 13 reserves by reducing production in anticipating the oncoming 14 tidal wave of oil from Iraq, they have played into his 15 hands. 16 Then it might be just coincidental that California 17 had a lessened supply at a time when the demand increases. 18 The argument goes, increase the supply of cost and 19 demand (sic). I turn from simplistic economics, again to 20 patriotism. 21 Patriotism, because all that former enemy, Saddam 22 Hussein, had to do to manipulate America oil speculators by 23 remote control is to induce -- and induce more hurt to 24 Americans and Americans' environment than his 200,000 25 warriors did during the Desert Storm War. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 401 1 All he has to do before the next round of the U.S. 2 negotiations in May is to pretend to act as if he will 3 cooperate with all or most of the U.N. demands, and American 4 oil speculators will again reduce supplies for adequate 5 defenses against Iraq's onslaught of mad oil and again shift 6 control of a person's livelihood and standard of living away 7 from him. 8 You have already heard the testimony of the 9 negative effects on California citizens and on the 10 environment. All Saddam has to do is, after making a show 11 of cooperating and allowing the reserves to fall, is to not 12 cooperate with the U.N. They, in turn, will refuse his 13 allocation of oil and Americans will suffer again. 14 How many times can Saddam make Californians 15 dependent upon his whim? During World War II, America's oil 16 companies may have considered selling oil to Adolf for a 17 huge profit, and just call it business. The cost of supply 18 and demand. 19 Why didn't they, aside from government regulation? 20 But, if they consider patriotism not relevant or old- 21 fashioned, I ask them to consider. Why can Saddam make the 22 Americans jump when all he can economically affect is about 23 1 percent, 1 percent of Americans' gasoline supply? 1 24 percent. 25 This morning, I learned by calling the United PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 402 1 Nations Sanction Committee -- that's at Area Code 212-963- 2 1337. Unlike figures stated here earlier that Iraq has the 3 capability of producing 2 million, 2.5 million, or 3 million 4 barrels of oil per day, a fact which may be true, it is 5 totally irrelevant. 6 I quote -- 7 CHAIRMAN DUNLAP: Sir, the hour is late. You seem 8 to have an awful lot written on that paper. Are we close? 9 MR. PUICH: I only have two pages. I'll try to be 10 as brief as possible, and I wish that you would have -- yes, 11 sir? 12 CHAIRMAN DUNLAP: We've examined the international 13 situation, I believe, pretty thoroughly. I appreciate your 14 weaving patriotism into the discussion, but could you please 15 conclude so that we might wrap this item up, sir? 16 MR. PUICH: Yes, I will. I'll read from the U.N. 17 Resolution 986, that was April, 1995. 18 I authorize states, notwithstanding the provisions 19 of paragraph 3A, 3B, and 4 of Resolution 666 -- 661, 20 correction -- of 1990 and subsequent relevant resolutions, 21 to permit the import of petroleum and petroleum products 22 originating in Iraq, including financial and other essential 23 transactions directly relating thereto, sufficient to 24 produce the sum not exceeding a total of 1 billion United 25 States dollars every 90 days. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 403 1 They do not mention an allocation of barrels. 2 It's dollars, and U.S. dollars to boot. You have to 3 remember that we won the war. 4 Now, what does that mean? I would like to -- I'll 5 drop the other part, but I would like to issue this. 6 In other words, the resolution does not mention 7 any quantity of barrels, it takes 1 billion American dollars 8 of oil. 9 Now, the cost of barrels of -- the barrels of oil 10 from the past year range from the low of 16.25 to the high 11 of 23.25, which was yesterday. 12 To figure the accurate amount of oil glut that's 13 going to occur if they ever did cooperate with the U.N., 14 divide 1 billion U.S. dollars by the cost of a barrel of 15 oil. Say, $23,25. Your answer is 23,010,753 barrels, a 16 total amount within a 90-day period. That's not $43 million 17 per day. To figure that daily amount, you divide that 43 18 million by 90. That comes out to 477,897 barrels. 19 In returning to my first statement about oil to 20 California's oil speculators, that 477,897 barrels of crude 21 oil is the world's allocation, not California's. 22 To crack that figure further, I turn to 23 information derived from the data supplied by the United 24 States Energy Information Administration Center. 25 Area Code (202) 586-8800. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 404 1 And I state that crude oil to refine gasoline 2 ratio varies between 1 to .41 to 1 to .47, depending upon 3 demands. Using the 1 to .47, figure used in the summer 4 months. Thus, to talk about apples to apples and keeping 5 comparisons equal, conversion of the the Iraqi crude oil to 6 gasoline, it's helpful, simply multiply that times .47, the 7 figure that was mentioned before, and you get the figure. 8 The figure is 224,612 barrels per day, worldwide. 9 224 million 612 barrels -- worldwide (sic). 10 Now, according to the latest U.S. Government 11 figures, the world production of refined gasoline for 1992, 12 is 17 billion 415 million barrels per day. The U.S. 13 production of -- is 7 million .0580 million (sic) barrels 14 per day. 15 The U.S. produces approximately 40.5 -- 16 CHAIRMAN DUNLAP: I need you to wrap up, because 17 I'm going to lose one of my members. 18 MR. PUICH: Give me one minute. 19 CHAIRMAN DUNLAP: I need you to wrap up now, sir. 20 Just do your comparison, please, and we'll be happy to 21 consider the point you're trying to make. 22 MR. PUICH: Okay. I admit I make an assumption 23 when I say the U.S. may be buying 40 percent of that Iraqi 24 oil, and not all of that is purchased by California. But 25 assuming California purchased all the Iraqi oil that came to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 405 1 America, the percentage is 1.02 percent of the market. 2 I'll leave it at that. 3 CHAIRMAN DUNLAP: Thank you very much, sir. 4 MR. PUICH: Would you like to have this resolution 5 so you can see it? 6 CHAIRMAN DUNLAP: I think it would be most helpful 7 for us to have that. 8 Would you give it to the Board Secretary. 9 If I may have my Board member colleagues' indulgence, I'd 10 like to attempt to try to summarize this. 11 We have come to the end of our witness list and 12 concluded testimony on this item. And I want to express my 13 personal appreciation for those who participated in today's 14 hearing, all 51 people that provided testimony today. 15 The Board certainly has a better understanding of 16 the factors influencing the higher fuel prices being 17 experienced throughout the nation, and specifically in 18 California. 19 We have collected a great deal of information on 20 the nature and reasons behind the significant gasoline and 21 diesel price increases that we Californians and the rest of 22 the nation have been experiencing over the last 45 days. 23 We've gained a better, if somewhat imperfect, 24 understanding of this extremely serious situation and the 25 role that Cleaner Burning Gasoline has played in affecting PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 406 1 supply and price of both gasoline and diesel fuel in our 2 State. 3 We know that the benefits of Cleaner Burning 4 Gasoline are -- removing one billion pounds of pollution a 5 year and reducing cancer risks by 30 to 40 percent are too 6 important to give up. It will get us further along the path 7 of protecting health than any other pollution control 8 measure of the last 20 years. And we will probably never 9 see its equivalent again in the future. 10 It is fully one-quarter of the pollution reduction 11 requirements in our clean air SIP for ozone. 12 Let there be no mistake, we will not and we cannot 13 give up our Cleaner Burning Gasoline program. Cleaner 14 Burning Gasoline has been providing public health benefits 15 at least since February of this year, well ahead of 16 schedule, giving California a clean air bonus. 17 The State of California has no authority to 18 regulate the price of gasoline, nor should we. The prices 19 are controlled by so-called market forces as we've heard 20 described today. 21 We heard testimony both from the Energy Commission 22 and our own staff here at the ARB that gasoline and diesel 23 production and supplies are sufficient to prevent an 24 immediate supply problem. Further, there is hope on the 25 horizon that the Shell refinery will resume operation very PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 407 1 shortly -- within a few days -- and that cargoes of fuel 2 will be arriving over the next few weeks. 3 All of these factors should provide the needed 4 boost in supply that logic tells us will return prices to 5 more rational levels. 6 We have heard that Cleaner Burning Gasoline is a 7 relatively small portion of the price increase we've seen. 8 Finally, many analysts have suggested that prices will 9 decline over the next few months. I hope they are right. 10 We had some testimony that changes to our rules 11 would not have a meaningful effect on either supply or 12 price; however, this is an area where we need more analysis, 13 and I will be asking staff to work with the Energy 14 Commission to quantify what the effect of changes to our 15 clean fuel rules would be, what they would mean. 16 We must be prepared to act immediately if a 17 temporary suspension of our rules can reduce prices and 18 California citizens can be assured of the fuels they need to 19 conduct and ensure mobility. 20 With the concurrence of my colleagues, I propose 21 we adopt a plan to ensure that we are at a stage of 22 readiness to take definitive steps that are within our 23 authority. 24 Considering the recent rapid rate of price 25 increases at its current level, the question we must address PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 408 1 squarely is what can we do in the interim until supply is 2 restored to moderate the price increases and preserve this 3 important clean fuel strategy for California's long-term 4 health. 5 If we have the ability to influence this 6 situation, we have the duty to help California consumers 7 during this difficult transition period. It is premature to 8 discuss suspension of our clean fuel program. We need more 9 data regarding supply, especially supply prospects between 10 now and June 1. 11 If we suspend our rules, we need data to answer 12 four questions: 13 1. How much additional fuel would be imported? 14 2. How quickly would that happen? 15 3. What effect would those imports have on price? 16 4. What would the short and long-term 17 environmental consequences be? 18 From a clean air perspective, we must bear in mind 19 that even if we experience the temporary suspension of our 20 Cleaner Burning Gasoline program, Northern California would 21 join Southern California in using and realizing the benefits 22 of the Federal reformulated gasoline. 23 Therefore, with the concurrence of my Board 24 colleagues, I'm directing our staff to work expeditiously 25 with the Energy Commission to answer these four questions; PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 409 1 and, if it is determined that suspension or modification of 2 our rules would measurably reduce prices, we authorize the 3 Executive Officer to suspend the 15 cent per gallon variance 4 penalty associated with producing, importing, or supplying 5 noncomplying fuel to the market. This will increase supply 6 without incurring any additional fuel cost as someone said. 7 Secondly, allow fuel producers to produce, import, 8 or supply the market with noncomplying fuel at a ten to one 9 ratio based upon their production. This would allow fuel 10 makers to increase the market's fuel supply by an additional 11 10 percent with non-California fuel, but with the Federal 12 reformulated gasoline. 13 What I would propose is that we direct our 14 Executive Officer, Mr. Boyd, that he should use his existing 15 authority to carry out the Board's will if action is 16 warranted. 17 At this time, I'd like to ask Mr. Kenny how this 18 could be accomplished. Mike? 19 MR. KENNY: In terms of the Executive Officer's 20 authority, the Health and Safety Code does provide the 21 Executive Officer with the full powers of the Board, unless 22 the Board reserves those powers to itself. 23 So, if it's the Board's consensus that the 24 Executive Officer act in this matter, it is appropriate. 25 CHAIRMAN DUNLAP: Okay. Thank you, Mr. Kenny. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 410 1 I think and I hope my Board colleagues will agree 2 that the mechanism that you've just described is appropriate 3 and something that could be done in very short order. 4 It is my feeling that this is acceptable -- 5 certainly it is to me. And if my Board colleagues concur, I 6 would ask that you support me in asking our Executive 7 Officer and staff to follow -- follow this course. 8 Any questions? 9 SUPERVISOR RIORDAN: Mr. Chairman, I think that 10 you very succinctly have put what's before us. I would 11 certainly concur. And I don't know that it takes a motion, 12 necessarily, but just a simple concurrence, and I would 13 offer that on my part. 14 CHAIRMAN DUNLAP: Thank you, Supervisor Riordan. 15 MR. LAGARIAS: Mr. Chairman? 16 CHAIRMAN DUNLAP: Yes. Mr. Lagarias. 17 MR. LAGARIAS: Well, I have a number of 18 reservations. I'd like to separate this into the diesel 19 supply issue and the clean burning gas issue. 20 Four months ago, the diesel price differential 21 between California and neighboring States was very small. 22 Now we hear it's about a 40 cents difference. And there's 23 no action that's been taken to change the diesel, the 24 California diesel, in the last two years. 25 So, there's clearly some kind of a price issue PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 411 1 here, and we hear it's supply and demand. We've heard that 2 there was temporary loss of capacity in Southern California, 3 but that's now up -- up and running. But the cost has not 4 come down. The price has not come down. 5 And this is very similar to the same situation we 6 had in '93. When diesel was first introduced, there was a 7 problem of some refineries going down and some dislocations 8 of supply and demand. And the price increase at that time, 9 the answer was: It's supply and demand. But there were 10 unconscionable profits made at that time. And this scenario 11 seems very similar. 12 In regard to diesel, I'd like to see the Energy 13 Commission look into their pricing structure of how this 14 diesel differential can exist or be justified, because I 15 think this is an energy issue. 16 Now, on the Cleaner Burning Gasoline, I'm not 17 satisfied with the answers I heard from the major oil 18 suppliers. I think they have a tremendous pipeline. And if 19 there's a ripple or a supposition that the stocks are down 20 because a deal wasn't struck between the U.N. and Iraq, that 21 ripple goes right back to the station on the corner, even 22 though there may be months before any of that oil ever 23 enters into the scene. 24 And they say they have a ponderous pipeline where 25 refineries, supply, distribution comes in. And yet, the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 412 1 moment there's a change anywhere in the system, it's 2 affected immediately in the rack price. 3 I think, if they have the flexibility to look at 4 supply and demand, they are taking advantage of that. I 5 can't justify the price increase. We've heard several 6 conversations that say that clean burning gas costs anywhere 7 from three to five, maybe as high as ten cents per gallon. 8 They were very, very eager to take the five to 9 fifteen cent range as an example of what cleaner burning gas 10 would be, even though the dialogue we hear says it's closer 11 to five than it is to even ten. 12 REVEREND JACKSON: (From Audience) Amen! 13 MR. LAGARIAS: And I think they're hiding behind 14 that -- that scenario to use supply and demand. I believe 15 in market pricing, but I think it's being manipulated here, 16 and I think we have to make more room for independents to 17 come in here. 18 REVEREND JACKSON: Amen! 19 MR. LAGARIAS: If we're going to allow oil -- any 20 kind of suspension to allow non-CARB gasoline to come into 21 the area, I'd like to have it come from independents. I 22 wouldn't like to have it produced by the major suppliers. 23 Because what are they going to do? They're going to look at 24 the ratio of what's the profit for the non-CARB gas to the 25 profit for the CARB gas, and they'll just manipulate that. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 413 1 So, I would like to see that focused to the 2 independents. And I'd like to ask the Energy Commission to 3 again look into the pricing -- the way supply and demand is 4 possibly being manipulated or taken advantage of into this 5 costing, how fast prices should come in. 6 Now, I'd like to switch to one other point. 7 Everytime the price goes up, the sales tax goes up. And 8 maybe the State ought to look at whether the tax should be 9 on the volume produced and not on the price, because then we 10 won't be seeing the position of the State taking advantage 11 of the price changes as well. 12 But the bottom line is: We've heard today that 13 the clean burning gas is not the problem. Supply and demand 14 is. Incidentally, I don't have any gasoline credit cards. 15 (Laughter.) 16 CHAIRMAN DUNLAP: Thank you, Mr. Lagarias. I 17 think that's wise counsel. 18 I think, Mr. Boyd, I certainly would include that 19 in the items to track and work with the Energy Commission. 20 Yes, Mr. Calhoun, then Ms. Edgerton. 21 MR. CALHOUN: My comments will be very brief. I 22 support and concur with Jack Lagarias' recommendation, and 23 maybe they could be incorporated with those you suggested to 24 Mr. Boyd. 25 And with that, I'll take leave. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 414 1 CHAIRMAN DUNLAP: All right. Thank you, Mr. 2 Calhoun. Ms. Edgerton. 3 MS. EDGERTON: Mr. Chairman, I generally concur 4 with what you've said and with the approach that you've laid 5 out. 6 I wanted to just state for the record my 7 understanding that there are within your proposal several 8 understandings or conditions. I think the one that I heard 9 you say was that the Executive Officer would only consider 10 suspensions of any sort -- or to suspend the 15 cent 11 variance -- if it were shown that such a change would have a 12 beneficial effect on the price, in a sense that it would 13 then bring the price down. And -- 14 CHAIRMAN DUNLAP: I'd add supply to that as the 15 key. 16 SUPERVISOR RIORDAN: Yeah, the key is supply. 17 CHAIRMAN DUNLAP: The key concern is supply. 18 SUPERVISOR RIORDAN: You want to drive supply. 19 CHAIRMAN DUNLAP: Or drive supply, which would -- 20 we need to have a directional impact on the price downward. 21 MS. EDGERTON: Well, that's a little different 22 then, isn't it? Yes. 23 Well, I guess my understanding was that, from the 24 testimony and also from my understanding of the economics, 25 was that the capital investment had already been made in the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 415 1 reformulated fuel and, therefore, it was unrealistic to 2 expect any change that we might make to affect that 3 proportion of the increase in the price. 4 CHAIRMAN DUNLAP: That's correct. 5 MS. EDGERTON: So, that being the case -- and I'm 6 prepared to and agree with -- I'm going to agree that we 7 need to explore that and make sure that that is the 8 conclusion of the CEC and of the ARB. 9 If it is the truth -- if it is our conclusion, 10 then I don't think -- my understanding of the way you're 11 going is I don't think there would be any suspensions. Is 12 that correct? 13 CHAIRMAN DUNLAP: Well, we don't want to preclude 14 any action -- 15 MS. EDGERTON: All right. 16 CHAIRMAN DUNLAP: -- Lynne, as you know. 17 MS. EDGERTON: Right. 18 CHAIRMAN DUNLAP: But we want to make sure we have 19 the facts at our disposal. And one thing we've learned 20 here, there are people out there that are hurting. Some 21 have asserted that we are the cause. We feel today, I 22 certainly feel, that we got a clear picture painted for us 23 relative to our impact on the price. It's a nickel to eight 24 cents. 25 That's what the Energy Commission is telling us, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 416 1 and the oil companies have concurred with that. There's 2 some, as Mr. Roberts has said -- I've teased him today -- 3 he's devoted so much time and attention on the core issue, 4 which is: What's going on out there with the pricing 5 strategy? 6 We don't have enough facts to know what role we 7 could play, but we want to assure -- I certainly want to 8 assure the citizenry of our State that we are doing 9 everything we can to understand our role relative to price, 10 and are willing to take action, if warranted -- based upon 11 factors -- swiftly to remediate any unnecessary impact we 12 may be having that's harmful to them relative to price and 13 supply. 14 And that's what we'll be empowering Mr. Boyd to 15 do. And I have supreme confidence in the Energy 16 Commission's capabilities relative to the work they're doing 17 on verification. And in consultation with Mr. Imbrecht, I 18 know, not only is his heart in the right place, but he 19 understands his role in this clean fuel universe. So, I 20 know that he'll be working closely with us. 21 So, Ms. Edgerton, let me assure you that I 22 certainly would not take lightly any such action, nor would 23 Mr. Boyd, to suspend or do anything precipitous. But we 24 need to be able to react to information that comes in 25 swiftly. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 417 1 MS. EDGERTON: I appreciate that, Mr. Chairman. 2 Just as a point of clarification again then, I was unclear 3 as to whether the proposal was that Mr. Boyd would come back 4 to this Board at our next meeting with a way to do it or 5 whether the proposal was that we would be empowering a 6 suspension at the end of the day today? Whether we would 7 be-- whether we are saying that Mr. Boyd could do that next 8 week if he thought it was important -- 9 CHAIRMAN DUNLAP: Well -- 10 MS. EDGERTON: -- without coming back to us. 11 CHAIRMAN DUNLAP: -- staff is going to provide us 12 with a monthly report, which I've been planning to do, I 13 guess, monthly, Mike? 14 MR. LAGARIAS: You're not empowering the Chair -- 15 you're asking for a plan to empower. 16 CHAIRMAN DUNLAP: Yeah, we're -- 17 MS. EDGERTON: That's not a point of information. 18 I'm trying to find out whether this Board is getting another 19 bite of the apple or whether this -- or whether we are 20 expecting to read in the paper a week from -- you know, 21 whether it could happen, under this proposal, that we would 22 read a month from now that there was a suspension without it 23 coming back to us. I'm trying to understand what is the 24 proposal, so. . . 25 CHAIRMAN DUNLAP: Mr. Boyd, relative to Ms. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 418 1 Edgerton's comment about another bite at the apple, why 2 don't you touch on that for a moment. 3 MR. BOYD: Well, Mr. Chairman, I'm going to have 4 to rely on what I heard you say. And I heard you say that 5 you wanted the Board, through the Executive Officer, to be 6 prepared to act should -- to use my own terminology -- a 7 supply emergency emerged that would be triggered by 8 basically a finding of the Energy Commission, in concurrence 9 with the ARB, that the staff of the Board -- i.e. the 10 Executive Officer -- could act to suspend. Although, let me 11 assure Ms. Edgerton and every Board member here that you 12 wouldn't read about it in the newspaper without knowing 13 about it beforehand. 14 And that, furthermore, we would continue our 15 series of monthly reports on the status of the situation no 16 matter what. 17 But, Mr. Chairman, you set the policy, and you can 18 clarify. 19 CHAIRMAN DUNLAP: We want to make sure, Lynne, 20 too, that we're not perceived as the great equalizer in the 21 gasoline market; that people are not trying to whipsaw us to 22 take action or take responsibility for factors that are not 23 within our control. 24 And what is my intent to do is to empower our 25 Executive Officer to work with the Energy Commission to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 419 1 examine those factors, to determine our impact on an ongoing 2 basis. And, if we have a crisis situation where relief is 3 necessary from our regulation due to supply shortages and 4 price increases that are extraordinary, that Mr. Boyd is 5 empowered then to act and to take necessary action, 6 including dealing with the variance matter as I have 7 outlined. 8 MS. EDGERTON: Mr. Chairman, if I understood 9 correctly what Mr. Boyd said and what you endorsed, I 10 believe I could support Mr. Boyd's acting under those 11 circumstances. 12 But let me clarify. I think I heard him say that 13 if there were, under California law, a finding of an 14 emergency -- and that meant to me by the California Energy 15 Commission under legislatively determined criteria. I don't 16 know if that's Phase 2 or Phase 3. 17 Then, you would be able to play the supportive 18 role that the Air Board needs to have the authority to do 19 with the Governor under the whole scenario of emergency 20 powers, but not that we would go off absent a CEC -- does 21 that mean I should -- does that mean it's time to go home? 22 (Remarking on the accidental extinguishing 23 of lights by a member of the audience.) 24 CHAIRMAN DUNLAP: No. 25 MS. EDGERTON: But not -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 420 1 (Laughter.) 2 MS. EDGERTON: But not that we would be acting 3 absent such a finding. 4 CHAIRMAN DUNLAP: Correct. 5 MS. EDGERTON: So, I can be sure the first thing I 6 would read about would be the finding in the paper of an 7 emergency under the Emergency Preparedness Act. 8 What is it called, Mike, again? Because, let's 9 make sure we get it right in the record that -- 10 MR. KENNY: There's a pre-emergency finding by the 11 Energy Commission and then an emergency finding. 12 So, right now, the verification phase is 13 essentially Phase 1, and then they have a Phase 2, which is 14 pre-emergency, and they have emergency at Phase 3. 15 MS. EDGERTON: And can you tell me what are the 16 criteria for pre-emergency versus emergency? 17 MR. LAGARIAS: It's in their writeup that we got 18 earlier today. 19 MS. EDGERTON: I know they were in there. I just 20 wanted to make sure that I understand it. 21 MR. KENNY: Not right off the top of my head, I 22 couldn't. I'd have to basically pull the information up and 23 provide that to you. 24 CHAIRMAN DUNLAP: The Energy Commission's here. 25 MS. EDGERTON: Oh, yes. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 421 1 MR. GLAVIANO: I can answer that. 2 MS. EDGERTON: Oh, good. 3 MR. GLAVIANO: Since we wrote the program. 4 The pre-emergency phase is basically when we take 5 a look at the information available to us. And based upon 6 that finding, believe that an emergency or a shortage is 7 likely or imminent. We then can go into the pre-emergency 8 phase, which allows us to do things, such as ask for 9 voluntary conservation, the Governor ask for voluntary 10 programs that would relieve some of the pressure on the 11 supply. And then, also, that would set us up for starting 12 to initiate programs that we would implement during an 13 emergency, which only can be made after a proclamation by 14 the Governor that there is a shortage or an emergency. 15 So, in essence -- 16 MS. EDGERTON: Good. That clarifies my concern 17 there, and I do appreciate your doing that, clarifying that. 18 And I guess I have one other concern, and that is, 19 I very much agree with the Chairman that the supply issue is 20 critical. And if we are the cause -- and I respect very 21 much your leadership with accepting the responsibility for 22 our actions and what we need to do to be sure that we're 23 doing the very best that we can by the citizens of 24 California. 25 I think, however, that I do -- even if we are the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 422 1 cause of a 10 or 5 percent, or 10 percent -- even if our 2 regulations are the cause of a 5 or 10 percent increase in 3 price, I would also need to know that rolling that back was 4 a solution. 5 CHAIRMAN DUNLAP: Yes. 6 MS. EDGERTON: And that's the thing that -- 7 (Thereupon, the simultaneous speaking 8 was not intelligible to the reporter.) 9 CHAIRMAN DUNLAP: As a matter of fact, as you may 10 note in my comments, I mentioned we need to be able to 11 understand fully the economic and environmental impact of 12 any action that we may take. 13 We could find that, by the mere act of initiating 14 a suspension, there could be a strange market reaction to 15 that that could increase prices. We don't know. That's 16 what we need to find out. That's why we need more data. 17 That' why we're asking our Executive Officer to work with 18 the Energy Commission. 19 Ms. Edgerton, I don't take lightly even saying or 20 suggesting that any type of suspension or modification is in 21 order. But we need to be able to do it if conditions 22 warrant it. 23 And I know how deeply Mr. Boyd and his team feel 24 about this program, about the air quality benefits we 25 derive. And I have supreme confidence in them again, as PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 423 1 well as the Energy Commission, in moving in a very 2 deliberate manner. 3 MS. EDGERTON: I just want to be careful. I want 4 to be sure that -- I know you do and everybody here does -- 5 that we don't send some signal that -- 6 CHAIRMAN DUNLAP: Right. 7 MS. EDGERTON: -- we don't intend to send. 8 CHAIRMAN DUNLAP: We don't want to send any 9 inadvertent signal. 10 MR. LAGARIAS: Mr. Chairman? 11 CHAIRMAN DUNLAP: Yes, Mr. Lagarias, then Mr. 12 Roberts. 13 MR. LAGARIAS: I think we're being made a 14 scapegoat on this issue. The issue is supply and demand. 15 And if the supply and demand get out of line, we're going to 16 do what we can do to alleviate the supply and demand by 17 effectively easing one of our regulations, where we've 18 already heard that our part of the impact on this cost 19 differential is in the order of less than 10 percent or so. 20 So, here we are. We're trying to modify 10 21 percent of something. I think that people are going to use 22 us as the scapegoat. "This is why we had to do this." 23 And anytime there's a change in pricing structure, 24 this is where they'll pick as being responsible for it; 25 whereas, this may not be the case at all. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 424 1 CHAIRMAN DUNLAP: Supervisor Roberts. 2 SUPERVISOR ROBERTS: Thank you, Mr. Chairman. I 3 guess I want to express a similar amount of frustration, 4 perhaps from a little different perspective. And I think 5 this is what causes the problem for us. 6 It seems to me that one can demonstrate pretty 7 clearly that the reformulated -- the cost of the 8 reformulated fuel isn't what's created this enormous 9 problem; that all day long, I've looked for where this extra 10 20 cents is, and I've yet to find it. I've yet to hear any 11 kind of an explanation as to why the price of gasoline has 12 gone up as much as it has. 13 I take that, however politely, that's what the 14 Energy Commission has told us. And I think, to a very large 15 extent, it was agreed to even by the oil companies 16 themselves. And the problem seems to be that, in creating a 17 reformulated gas and even diesel fuel, we've created a 18 shield behind which these things can happen and these rather 19 exorbitant price increases can take place. 20 And while it's not the cost of that element that 21 we've added, that element is playing a pretty critical role 22 in the free flow of supplies in and to this State. 23 I don't want to lose the benefits from that clean 24 fuel and the equivalent removal of 3.5 million cars from 25 California's roads. But I am concerned that that is being PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 425 1 used in a rather creative way to hide those cost increases. 2 What we've heard today is really kind of 3 interesting. We've heard that certain situations, including 4 the prospect of having Iraqi oil, that have caused the oil 5 companies to cut back on their reserves in anticipation that 6 there might be cheaper oil around the corner. 7 And when that didn't materialize, in fact, to 8 fully take advantage that those reserves weren't there, to 9 raise the prices to very high levels. So, one way or 10 another, it was a no lose situation. If they got the oil, 11 they were going to have cheaper oil. If they didn't get the 12 oil, they were going to have higher prices. 13 We didn't hear any testimony from any oil company 14 saying they were losing money in this deal. I don't 15 remember hearing that at all today. We did hear from a lot 16 of independents, and a lot of the guys at the street level, 17 and at the pump level that they were being squeezed. 18 But I don't remember that testimony. We did hear 19 that, yeah, we ought to stay the course. But I'm concerned. 20 I think we have to somehow develop a safety valve. I'm not 21 comfortable with delegating that authority, and I think it's 22 this Board's responsibility. 23 If we have to act swiftly, there isn't any reason 24 why this group can't be assembled quickly to do what needs 25 to be done. But I don't want to lose those benefits. And PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 426 1 to the extent that we could enter into the next stage, the 2 pre-emergency stage or any other stage, and start to set a 3 different tone to these discussions, I would -- I would 4 encourage that. 5 And let me just continue for one more minute. I 6 heard from at least one or two speakers a mention of the 7 Attorney General doing a review. It seems to me that what 8 we've heard from the independents, there seems to be an 9 unusual pressure -- price pressure -- on them that ought to 10 be looked at and ought to be looked at in some detail. 11 The sum total of this is not only higher prices, 12 but there seems to be a real threat to the continued 13 existence of a part of this industry. I think Mr. Lagarias 14 said that in a different way and I think was right on the 15 mark. 16 But this is all happening behind the shield of the 17 reformulated fuels. And to that extent, we may be unwilling 18 and unwitting accomplices in what's going on. 19 I don't like that, and I want to find a way out of 20 this. And I'm not sure that your direction to staff does 21 that. 22 CHAIRMAN DUNLAP: I would disagree, Supervisor, 23 for two reasons. Number one, there are people out there now 24 hurting. There are people that are confused. There are 25 people that are being told that the Air Resources Board's PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 427 1 clean fuels program has a much greater impact on the price 2 situation than it does. 3 This answered a lot of questions for me today. 4 What I'm suggesting we do is we empower our Executive 5 Officer to work with the Energy Commission to get facts. I 6 am certain, given the scenario we have before us, which many 7 people cited as an anomaly, as an unusual situation, and a 8 difficult situation -- given those facts, we all came away 9 today understanding our part of the puzzle. And it is a 10 small part. 11 I don't think that where we are today would 12 warrant anything as harsh as suggested in the extreme, but 13 certainly something we want to get to the bottom with. 14 Now, the other concern I have, too, we had a lot 15 of very well-meaning, interested people come here today and 16 express concern. We had a wide range of discussion. We are 17 the only place where people can go to try to get relief or 18 answers. I'm not suggesting that we're an inappropriate 19 place, but we should not be the only place. There are other 20 places to go. 21 The oil companies certainly need to do a better 22 job of communicating to people that buy their products. 23 Those that are involved in the service station industry need 24 to communicate and are trying, it seems, to communicate with 25 them, association groups, et cetera, to consumers -- need to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 428 1 communicate to consumers. 2 This provides some assurance to the citizenry of 3 our State that should circumstances arise whereby "we" 4 determine that "we" are a part, a significant part of the 5 problem, we can take action to right the course. And that's 6 what we're about, and that's what I'm suggesting today, not 7 to do anything, Supervisor, to take away those clean air 8 benefits. And we need them, you know that. We cannot 9 achieve the clean air standards without this program. 10 But at the same time, we want to assure the people 11 of this State that we are prepared and willing to take 12 action to provide relief, if warranted, under specific 13 circumstances. 14 MS. EDGERTON: It would be my hope that before the 15 Executive Officer suspended -- took such a drastic action as 16 to just -- to suspend any part of our regulation, even 15 17 percents (sic) on the variance, that such State response, 18 such as conservation, would be put in place. I think that 19 would be much more in the State's interest to conserve their 20 use of fuel and to expand some of our other programs, 21 possibly renewables, and -- before we altered our own 22 program with respect to clean fuels. 23 I also am not one of those people who would feel 24 comfortable taking a look at lifting any of the State tax on 25 energy whatsoever. And I thought I might as well say so. I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 429 1 think that one of our problems is that American fuel is -- 2 our gas has been so low, the price has been so low, and it 3 doesn't include the cost to our environment; that we've had 4 some problems coming to deal -- coming to terms with all 5 that. 6 So, I just want to put down a marker on that point 7 as well. Thank you. 8 CHAIRMAN DUNLAP: Thank you. Any other comments 9 or questions? Supervisor Vagim. 10 SUPERVISOR VAGIM: I'll make this brief. First of 11 all, I agree with what has been said before. I want to make 12 sure, though, that I emphasize that I would prefer to have 13 the Executive Officer be deferred to. I think the action 14 needs to be immediate if it's going to be needed. I don't 15 think we can be mustered that fast. 16 I think they're already empowered to find and do 17 fact-finding all they want. I think the next step needs to 18 be empowering to act. I don't think they're going to act in 19 a fashion that would not be in total communication with the 20 Chair and other members of this Board. 21 My concern is, first of all, I don't want to lose 22 the clean air benefits of the fuel. But we may well lose 23 the clean air benefits if some other agency like the 24 Legislature acts, because there's so much reaction over some 25 of the things we heard today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 430 1 And I don't think this Board would look very good 2 if that happened. And I want our staff to be able to have 3 their finger on the pulse so that quick action can happen. 4 If I feel -- I do feel that an anomaly is here not 5 by anybody's hand, but knowing human nature, sometimes that 6 hand can be rearranged sometimes to the benefit of those who 7 are in the power of control. 8 And if you're a producer, you're going to take 9 care of your own kind, people who belong to you. It's just 10 human nature. 11 I don't want to see these nonaligned folks, like 12 this gentleman who was next to the last, go away. Because I 13 firmly believe they are the ones and are the ones that keep 14 the price in control. I sure shop for them, believe me. 15 And if they go away and everyone has to be 16 aligned, because they weren't able to survive through this 17 round -- and we were the excuse that was used to make that 18 last precipice for those folks going over the edge -- then I 19 think we've all lost. 20 CHAIRMAN DUNLAP: Yes. 21 SUPERVISOR VAGIM: And I think we need to have 22 some reactive force that allows us to make this quick 23 amendment. So, I would support giving the Executive Officer 24 that power. 25 CHAIRMAN DUNLAP: Thank you for that. I think PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 431 1 that's in concert with Mr. Lagarias' -- 2 SUPERVISOR VAGIM: Sure. 3 CHAIRMAN DUNLAP: -- concern. And, again, for Ms. 4 Edgerton and Supervisor Roberts, I, like you, know how 5 important this is to the clean air strategy. It's just 6 essential. 7 But at the same time, we need to show that we're 8 prepared. And again, Supervisor Roberts, I don't know if 9 you're familiar with this, but the Legislature, as they do 10 on issues that are important that they hear about, they've 11 had a number of hearings -- starting to have them. Mr. 12 Scheible, and Mr. Boyd, and I went over earlier this week 13 and spent several hours trying to explain our part of this 14 issue. 15 And they were very heartened to hear that we were 16 having this meeting today to discuss these issues. And I 17 think we've been invited back early next week to try to 18 explain what we have done, what planning work we have done 19 to be prepared should anything else -- should it go further, 20 you know, get further away from us. 21 MR. LAGARIAS: Mr. Chairman, I'd like to put it in 22 my own words. 23 I support your motion. But, as I understand it, 24 we are empowering the Executive Officer to issue a variance 25 to allow a certain amount of non-CARB gasoline if, working PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 432 1 with the Energy Commission, he finds that the supply is not 2 adequate to meet our needs. Is this correct? 3 CHAIRMAN DUNLAP: Yes, and to suspend the 15 cent 4 per gallon variance penalty associated with producing, 5 importing, or supplying noncomplying fuel to the market, and 6 also greater action should it be warranted relative to a 7 suspension -- if warranted under extreme circumstances in 8 concert relative to that framework that Ms. Edgerton 9 mentioned with the Energy Commission. 10 MR. LAGARIAS: For a definite time period. 11 CHAIRMAN DUNLAP: For a limited time. 12 MR. LAGARIAS: Not extended over -- 13 CHAIRMAN DUNLAP: For a limited time. 14 Do I have concurrence of my colleagues? We don't 15 need a motion, but with those concerns Gene mentioned, Mr. 16 Boyd, it seems we have that concurrence. But again, the 17 Board needs regular feedback, and we'll count on you to 18 provide that to us through your periodic reports. 19 MR. BOYD: Rest assured, Mr. Chairman, you'll be 20 closely advised. 21 MAYOR HILLIGOSS: Mr. Chairman? 22 CHAIRMAN DUNLAP: Yes. 23 MAYOR HILLIGOSS: Will you be contacting the rest 24 of the Board, too, at the same time? 25 MR. BOYD: Yes, we would keep the Board all -- PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 433 1 MAYOR HILLIGOSS: So that we all know -- 2 MR. BOYD: -- advised on a regular basis of what 3 we're finding and what actions we're taking. 4 And I look -- And I anticipate and look forward to 5 working with the Energy Commission on continuing the kind of 6 brokering we heard going on today, matching of people with 7 individual problems with some of the oil companies and using 8 the power of communication. I thought it was very 9 effective, frankly, today in a few short minutes. I think 10 some more of that can take place to address the problems of 11 some of the small marketers and to pursue the questions 12 about why the -- you know -- across the State borders 13 there's such a significant price differential. 14 SUPERVISOR ROBERTS: Mr. Chairman? 15 CHAIRMAN DUNLAP: Yes, Supervisor Roberts. 16 SUPERVISOR ROBERTS: Just a point of order. It 17 seems to me that what we're doing is suggesting a transfer 18 of a major amount of authority to the Executive Officer. I 19 would feel uncomfortable doing that without some type of a 20 structured motion that's clear. I think this thing should 21 have its limits. 22 CHAIRMAN DUNLAP: Mr. Kenny? 23 MR. KENNY: The reason I was suggesting that no 24 motion is necessary is that the Health & Safety Code already 25 provides for this power to vest any Executive Officer, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 434 1 unless the Board basically removes it from the Executive 2 Officer. 3 So, essentially, it is presumptively within the 4 Executive Officer's power to act in the place of the Board 5 traditionally. Essentially, the Board has -- traditionally, 6 the Executive Officer, however, has simply come to the Board 7 on all the matters. 8 So, this is just simply a little bit different 9 than the tradition, but it is presumptively acceptable 10 through the Health & Safety Code. 11 CHAIRMAN DUNLAP: So, it's consistent then. 12 MS. EDGERTON: But there is a -- there's a 13 reservation of powers in which we specifically reserve 14 certain powers to ourselves. And if I understand you 15 correctly, you are saying it has not been exercised in this 16 area. 17 MR. KENNY: The reservation of powers has not been 18 exercised with regard to emergency or fuels rulemakings. It 19 does apply to motor vehicle rulemakings, but not this one. 20 MR. BOYD: Mr. Chairman, let me make a statement 21 that maybe is obvious on its face. I've been sitting in 22 this chair for almost 15 years. I've had this power that 23 Mr. Kenny mentions, and obviously I have not used it 24 injudiciously or you or previous Boards would have sent me 25 packing. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 435 1 So, I'm very cognizant of the significance of the 2 issue we're talking about here, have no intention of 3 jeopardizing the Board's reputation, the reputation of 4 staff, my own reputation, or the program in question -- 5 particularly the program in question -- which, having sat 6 here so long, we personally fought so hard to see put in 7 place. 8 So, I appreciate the concern. I would certainly 9 have those concerns were I in your seat. In fact, I am 10 having concerns sitting in this seat having such a weighty 11 responsibility. But just let me make it clear that I intend 12 to keep you all advised -- maybe to a fault -- with the 13 information of what's going on and no intention of taking 14 action that I didn't know that, frankly, you concurred with. 15 MS. EDGERTON: Well -- 16 CHAIRMAN DUNLAP: Thank you. Ms. Edgerton. 17 MS. EDGERTON: Yes. And may I ask a point of 18 clarification with respect to ratification of that issue? 19 Would it be the -- it would seem to me that it 20 would be as a matter of course, and perhaps this could help 21 some of -- could help to reconcile Supervisor Roberts' and 22 Vagim's respective points of view is that, of course, you'd 23 come back for a ratification of whatever action was taken 24 between the Board meeting. 25 CHAIRMAN DUNLAP: Mr. Boyd. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 436 1 MR. BOYD: I'd ask my attorney for some advice on 2 that one. 3 MR. KENNY: Technically speaking, because the 4 Health & Safety Code already provides for the power to the 5 Executive Officer, there would be no need for ratification 6 from a technical, legal standpoint. Essentially, the action 7 taken by the Executive Officer through the Health & Safety 8 Code provision would be the same as this Board acting. 9 MS. EDGERTON: But there'd be nothing to prohibit 10 it. 11 MR. KENNY: That's true. But it would not be a 12 condition. It would be essentially an informational -- the 13 Board, at any point in time, could subsequently take a 14 different action than taken by the Executive Officer. 15 CHAIRMAN DUNLAP: And we could hold an emergency 16 meeting if we desired, et cetera, et cetera. 17 Okay. 18 SUPERVISOR VAGIM: I suggest you bring back the 19 mine sweeper. 20 (Laughter.) 21 MR. BOYD: You mean electrically powered. 22 (Laughter.) 23 SUPERVISOR ROBERTS: John, would you restate -- 24 CHAIRMAN DUNLAP: Certainly. 25 SUPERVISOR ROBERTS: -- your direction, because PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 437 1 I'd like to -- at this late hour, it's -- not everything is 2 registering with me. And I have to apologize for that. But 3 I'd like to -- 4 CHAIRMAN DUNLAP: Sure. 5 SUPERVISOR ROBERTS: -- I'd like to hear your 6 direction -- 7 CHAIRMAN DUNLAP: All right. 8 SUPERVISOR ROBERTS: -- specifically. 9 CHAIRMAN DUNLAP: Direct our staff to work 10 expeditiously with the Energy Commission. Staff answer four 11 questions I've outlined. Would you like me to run through 12 those again, Ron? 13 MS. EDGERTON: Yes. 14 SUPERVISOR ROBERTS: Please. 15 CHAIRMAN DUNLAP: How much additional fuel would 16 be imported or needed regarding supply? 17 Well, let me start over. 18 We need more data regarding supply, especially 19 supply prospects. Again, supply being the key trigger. 20 If we were to suspend our rules, we would need 21 answers to the following four questions: How much 22 additional fuel would be imported? How quickly would that 23 happen? What effect would those imports have on price? 24 What would the short and long-term environmental 25 consequences be? And then, from a clean air perspective, we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 438 1 must bear in mind that even if we experience the suspension, 2 say, now, that we would be reverting back to Federal 3 reformulated gasoline. 4 So, direct staff to work with the Energy 5 Commission, staff answer those questions. And if it is 6 determined that suspension of our rules would measurably 7 reduce price, positively impact supply, we would authorize 8 the Executive Officer to suspend the 15 cent per gallon 9 variance penalty associated with producing, importing, or 10 supplying noncomplying fuel to the market. 11 Allow fuel producers to produce, import, or supply 12 the market with noncomplying fuel at a ten to one ratio 13 based upon their production. This would allow fuel makers 14 to increase the market's fuel supply by an additional 10 15 percent with non-California fuel but, again, with Federal 16 reformulated gas. 17 So, I propose that we direct the Executive Officer 18 that he should use his existing authority to carry out our 19 will if action was warranted. 20 And Mr. Lagarias had a point or two that he wished 21 to add relative to coordination, as I understand it, with 22 the Energy Commission and -- 23 SUPERVISOR VAGIM: Mr. Chairman, I've heard Mr. 24 Lagarias, and I'm sure he can speak for himself, but there 25 was a little more emphasis on the independents and the issue PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 439 1 there, and I hope he would restate that as far as the 2 independents. 3 MR. LAGARIAS: -- refiners to produce noncomplying 4 gasoline as well as CARB gasoline, it is not the intent to 5 let them switch back and forth, but to encourage the 6 importing of independent sources of gasoline to supplement 7 the noncomplying CARB gas rather than let the distribution 8 go within the refinery itself. And also -- so, that was an 9 attempt to -- 10 SUPERVISOR VAGIM: And I agree with that. 11 MR. LAGARIAS: -- increase the independent supply 12 of fuel. 13 SUPERVISOR VAGIM: To the independent or the 14 nonaligneds. 15 MS. EDGERTON: Well, it may be good policy, but I 16 don't think it's within our -- I don't care whether it's -- 17 I don't think it's appropriate for us to do, frankly. 18 MR. LAGARIAS: Well, it is inappropriate for us to 19 do anything to affect supply and demand really. We're 20 trying to address this issue. 21 CHAIRMAN DUNLAP: Mr. Kenny, you want to say a 22 word on Mr. Lagarias' suggestion? 23 MR. KENNY: What I hear Mr. Lagarias saying is, 24 essentially, that he was hoping that the Executive Officer 25 would exercise some bias toward the independents. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 440 1 MR. LAGARIAS: Some judgment. 2 MR. KENNY: The Health & Safety Code does provide 3 for essentially a recognition of the economic impacts on 4 different segments of the economy. So, I think it is 5 something that Mr. Boyd could look at. 6 CHAIRMAN DUNLAP: But we're treading on sensitive 7 ground there. 8 Okay. Mr. Roberts, does that answer your 9 questions? 10 SUPERVISOR ROBERTS: Yeah. Thank you. 11 CHAIRMAN DUNLAP: More or less comfortable now? 12 SUPERVISOR ROBERTS: Well, I'm comfortable -- I 13 guess I have a concern that, number one, with respect to who 14 should be calling the shot, if indeed it's made here. 15 But that's my own sort of way of doing business. 16 I'd rather us all get together and look and review the 17 answer to these four questions, and then make that decision. 18 And I'd be willing to do that on a day's notice. 19 But I don't feel so strongly about that. But I 20 don't -- 21 CHAIRMAN DUNLAP: Okay. 22 SUPERVISOR ROBERTS: I support the thrust of where 23 you're going. 24 CHAIRMAN DUNLAP: Okay. 25 SUPERVISOR ROBERTS: I am concerned that -- that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 441 1 there seems to be a part of this that says, let's get this 2 situation under control, and that should be the first 3 priority. But I'd also like to see some followup to better 4 understand this situation, especially what's happening with 5 some of the independents, to see if there are more lasting 6 sorts of changes that we also have to bear here. 7 CHAIRMAN DUNLAP: Right. 8 SUPERVISOR ROBERTS: You know, when I said there's 9 a shield created. I think that there are groups taking 10 advantage of this situation in every respect, and -- and I 11 think that we need to address that on a long-term basis. 12 CHAIRMAN DUNLAP: Well said. Can I assume 13 concurrence -- 14 MS. EDGERTON: No. 15 CHAIRMAN DUNLAP: -- so we may move on or -- 16 Ms. Edgerton. 17 MS. EDGERTON: I'm less comfortable about one 18 aspect of this. In your -- what you've read, you said, 19 "measurably reduced price"? 20 CHAIRMAN DUNLAP: Correct. 21 MS. EDGERTON: I wanted to ask what that means. 22 "Substantially" is what we would ordinarily have. So, you 23 mean really getting a bang for the buck. "Measurably," does 24 that mean in direct proportion to the amount we increased 25 it? Three percent for three percent? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 442 1 CHAIRMAN DUNLAP: It could. 2 Some have suggested -- I think some of the oil 3 companies, the majors, said today that if we were to 4 suspend, in their humble opinion, that there wouldn't be a 5 price change. And so, one of the things that I, for one, 6 would expect Mr. Boyd and our capable technical staff to do, 7 in consultation with the Energy Commission, is to deal with 8 that scenario and say, if we did suspend our part of the 9 price scenario, five to eight cents -- I mean 10 theoretically-- would we get any appreciable impact. And 11 given the fact that -- I don't know the percent -- it's 50, 12 40 to 60 percent is infrastructure they've already sunk that 13 wouldn't be reflected in any change. 14 And whether or not the market was such at any 15 given time that it would provide for a decrease, we don't 16 know. But we want to analyze that in the individual case. 17 And you'd want it to have meaning beyond symbolism, too, Ms. 18 Edgerton. 19 So, I think I know what you're getting at. 20 Would it be a fraction of a penny to make it worth 21 it? I don't think so. I certainly wouldn't think it -- 22 MS. EDGERTON: (Interjecting) Well, I heard -- 23 well, yes. And I appreciate your -- your reflecting on 24 that. Because, to me, it would mean to me that we needed to 25 get as much back as we gave. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 443 1 For example, if we are three -- just say, if we 2 are ten percent of the cause of the increase, and we could 3 alleviate three percent, I don't want to do it. 4 CHAIRMAN DUNLAP: Well, there may be a contextual 5 problem here with how we're looking at this. 6 MS. EDGERTON: Well, yes. 7 CHAIRMAN DUNLAP: Mr. Scheible, let me just pick 8 up one point you will find particularly compelling. Since 9 March 1, since we had the early introduction of this fuel, 10 because some have been making it earlier, what do you 11 guesstimate the clean air benefits to be since, say, March 1 12 to now that were unaccounted for, I guess, in our SIP? 13 MR. SCHEIBLE: First of all, we assumed -- 14 CHAIRMAN DUNLAP: Because of the early -- 15 MR. SCHEIBLE: We assumed by June 1st. 16 CHAIRMAN DUNLAP: Right. 17 MR. SCHEIBLE: And we actually had partial 18 compliance in February, pretty good compliance in March, and 19 full compliance basically in April-May. And that's in the 20 order of 15,000 tons of ROG and NOx reduced. So, we have a 21 little better early benefit. 22 MS. EDGERTON: And that actually makes me reflect 23 that I probably would -- if I had my ideal situation, I 24 probably would feel most -- I'm leaning toward Mr. Roberts. 25 I would like for us to come back. And I suppose PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 444 1 the reason is that I'm just recalling some of the issues we 2 went through last month on some of the calculations of 3 emissions reductions and transfers and my -- my discomfort, 4 you know, with some of those issues and how I would have 5 felt more comfortable if I could have reviewed them more. 6 So that is something I would be more comfortable 7 with if we had it very clear as to what we were deciding 8 here at 8:30 at night, exactly -- I mean, if we had just 9 sort of a paragraph. 10 I know we have what you've said. But then, 11 everybody's talked about things. For example, on the 12 independent issue, while I am concerned about the 13 independents, I'm thinking of other votes -- another vote on 14 this Board before you came on this Board. I believe I was 15 the lone voter, because I felt that the emissions reductions 16 had to be paramount, and that the economic considerations, 17 which could be considered -- and Mr. Kenny quite rightly 18 said could be considered. 19 However, in my sense of how much they could be 20 considered, I had to vote a different way from some other 21 folks. 22 So, there are a couple of issues that have been 23 raised. I think it's an excellent discussion. I know 24 everybody -- I don't actually know that everybody wants to 25 go home, but maybe that other people want to discuss it PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 445 1 more. But I think it's really -- it's tremendously 2 important. 3 As you say, it's 25 percent of our reductions -- 4 CHAIRMAN DUNLAP: Correct. 5 MS. EDGERTON: -- for the SIP. And I feel that at 6 8:30 at night, I'm probably not as sharp as I might be. But 7 I would like -- and so, it would be helpful if we had it 8 written down exactly what we're doing, or we had a motion, 9 or -- 10 MR. LAGARIAS: We've got direction and -- 11 (Thereupon, there was simultaneous 12 conversation.) 13 CHAIRMAN DUNLAP: And we believe, when we hired 14 the staff, that they reflect our priorities to carry out our 15 will. And I'd like to give Jim and his team a little bit of 16 leeway to noodle this thing. 17 And I can ask Jim, I can ask -- be happy to direct 18 Jim, with the concurrence of my colleagues in the back, at a 19 future meeting, as part of your report, to provide the 20 necessary feedback to us about how -- how you've been 21 contemplating carrying out our direction and provide the 22 necessary assurance or outlining whether it's in the process 23 conceptually. 24 MS. EDGERTON: Mr. Chairman, I think this is a 25 tremendously important issue. It is for the Air Board. It PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 446 1 is for California. 2 CHAIRMAN DUNLAP: It's important that we take 3 definitive action and demonstrate to the public and not -- 4 and not add to the hysteria, countercharges, and assertions 5 about our role, Ms. Edgerton. 6 My concern is to move from this meeting, assure 7 the citizenry of our State that we're concerned; we're ready 8 and willing to move, should we need to, to take corrective 9 action if we're impacting the market in an unforeseen way. 10 That is my desire. 11 It is not my desire to have hearings like we've 12 had today. We've had people come in, well-meaning people, 13 with concerns and issues that people need to know about and 14 direct them to us, put them on our doorstep when they're 15 inappropriately placed here. 16 And that's happened in many cases today. That is 17 my desire. That's why I've suggested the course I have. 18 So, what is the will -- Supervisor Roberts, you 19 willing to go along with me on this or do you still require 20 a motion, which we can do if you desire. 21 SUPERVISOR ROBERTS: I suggested that I'm willing, 22 but -- 23 CHAIRMAN DUNLAP: Okay. 24 SUPERVISOR ROBERTS: -- I will hold those 25 reservations. So, it's kind of an uncomfortable position, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 447 1 although I'm willing to go along. It's not just the 2 lateness of the hour. I think there's -- I think you've 3 stated the question well. 4 CHAIRMAN DUNLAP: Thank you. 5 SUPERVISOR ROBERTS: But I'm concerned on the 6 basis of which that decision will be actually made or not 7 made. 8 And I don't know if we've given a whole lot of 9 criteria for that. And I suspect I would be uncomfortable 10 if all of a sudden I got a call that says, "Here, we've 11 decided to do this." 12 CHAIRMAN DUNLAP: Okay. Well, then, I will -- 13 MS. EDGERTON: Let me ask a question. 14 CHAIRMAN DUNLAP: -- entertain a motion. 15 MS. EDGERTON: Are we coming back tomorrow? 16 CHAIRMAN DUNLAP: Pardon? 17 MS. EDGERTON: Are we coming back tomorrow? 18 CHAIRMAN DUNLAP: It depends on what happens here 19 to see what we can - 20 MR. LAGARIAS: We're not going to take this up 21 tomorrow, I'll tell you that. 22 (Laughter.) 23 MS. EDGERTON: Well, it would give -- 24 CHAIRMAN DUNLAP: I would entertain a motion. 25 MS. EDGERTON: -- people a chance to write down PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 448 1 what we understood what we were -- 2 CHAIRMAN DUNLAP: I would like to -- 3 MS. EDGERTON: -- we have a motion that we 4 could-- we could ratify -- 5 SUPERVISOR VAGIM: I'm prepared to make a motion. 6 I think Supervisor Silva has one. 7 (Thereupon, the reporter requested 8 one person speak at a time.) 9 CHAIRMAN DUNLAP: Supervisor Silva. Jim, would 10 you care to make a motion? 11 MR. LAGARIAS: Mr. Chairman, I think we've given 12 direction to the Executive Officer on the direction we want 13 to go. And I think he can exercise the judgment to follow 14 this course of action. 15 He'll be coming back to us on how he proposes to 16 do it and what he will do. 17 But if immediate action is necessary, after 18 consultation with the Energy Commission, I think we have to 19 give that authority now. And it's not going to be forever. 20 SUPERVISOR VAGIM: The way I read it, Mr. 21 Chairman, we actually have to take overt action to take away 22 the power from the Executive Officer and reserve it for 23 ourselves. 24 MR. KENNY: Supervisor, that is correct. 25 One other comment that I might make, which might PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 449 1 be of some benefit, is that if the Executive Officer was 2 going to act, he would be acting in pursuance of the 3 emergency regulatory authority of the Administrative 4 Procedures Act. 5 For any action to be taken under the emergency 6 authority of the Administrative Procedures Act, there has to 7 be a finding, at least initially, that the action is 8 necessary for the immediate preservation of the public 9 health -- public safety, health, and welfare, or general 10 welfare. 11 And so, that finding is an initial requirement. 12 SUPERVISOR VAGIM: The loss of inexpensive gas. 13 MS. EDGERTON: Well, I'll do a motion. I'll move 14 that we direct the -- 15 SUPERVISOR VAGIM: It's very important. 16 CHAIRMAN DUNLAP: Mr. Lagarias has the floor. 17 You're free to make a motion. 18 MR. LAGARIAS: I'll move that we direct the 19 Chair-- the Executive Officer to follow up the direction 20 given to him by the Board tonight. 21 (Thereupon, several seconders were heard.) 22 MS. EDGERTON: That's too -- 23 CHAIRMAN DUNLAP: Any other discussion? 24 SUPERVISOR ROBERTS: This, in effect, is your 25 statement, John? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 450 1 Work with the Commission, supply needs to be 2 studied, and all the other comments -- 3 MS. EDGERTON: And the friendly amendments. And 4 did you include that it wouldn't happen unless there was the 5 pre-emergency finding by CEC? 6 CHAIRMAN DUNLAP: Correct. 7 MR. LAGARIAS: If that's necessary. 8 MS. EDGERTON: Thank you. 9 CHAIRMAN DUNLAP: Any other discussion? 10 Madam Secretary, will you call the question? 11 MS. HUTCHENS: Edgerton? 12 MS. EDGERTON: Yes. 13 MS. HUTCHENS: Hilligoss? 14 MAYOR HILLIGOSS: Aye. 15 MS. HUTCHENS: Lagarias? 16 MR. LAGARIAS: Aye. 17 MS. HUTCHENS: Riordan? 18 SUPERVISOR RIORDAN: Aye. 19 MS. HUTCHENS: Roberts? 20 SUPERVISOR ROBERTS: Aye. 21 MS. HUTCHENS: Silva? 22 SUPERVISOR SILVA: Aye. 23 MS. HUTCHENS: Vagim? 24 SUPERVISOR VAGIM: Aye. 25 MS. HUTCHENS: Chairman Dunlap? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 451 1 CHAIRMAN DUNLAP: Aye. 2 MS. HUTCHENS: Motion passes 8-0. 3 CHAIRMAN DUNLAP: Okay. 4 What is the will of the Board about continuing the 5 meeting till tomorrow morning, or would you like to -- 6 SUPERVISOR VAGIM: We've got about 500 staff out 7 there waiting for us. 8 MS. EDGERTON: Let's go. 9 CHAIRMAN DUNLAP: Okay. We'll continue. Mr. 10 Boyd? Let's continue and finish up the agenda. Want to 11 finish up the agenda tonight? 12 MR. LAGARIAS: Want to wait. 13 CHAIRMAN DUNLAP: Want to wait. 14 SUPERVISOR RIORDAN: I think what we should do, 15 Mr. Chairman, is take a poll. 16 CHAIRMAN DUNLAP: How many want to stay, remain, 17 and finish it this evening? 18 (Thereupon, hands were raised, and a 19 discussion ensued between the Board 20 members.) 21 CHAIRMAN DUNLAP: Mr. Boyd, could you characterize 22 the remaining part of the agenda for us? Difficult? Fairly 23 routine? How would you characterize it? 24 MR. BOYD: Fairly routine. 25 CHAIRMAN DUNLAP: Okay. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 452 1 MR. BOYD: But it will take a while. 2 (Thereupon, further discussion was had 3 between the Board members.) 4 CHAIRMAN DUNLAP: What would be the time you'd 5 like to reconvene? Mr. Boyd, what would be the time to 6 reconvene the Board tomorrow? 8:00, 9:00? 7 MS. HUTCHENS: 8:30. 8 CHAIRMAN DUNLAP: 8:30? 9 MR. BOYD: I would defer to the Board on this one. 10 You can start anytime you want. The standard second-day 11 starting time is 8:30, but we're not bound by that. Would 12 you like to start at 9:00, 8:30? 13 CHAIRMAN DUNLAP: Okay. We'll reconvene at 8:30. 14 Thank you very much. 15 (Thereupon, the hearing was recessed 16 for the evening at 8:50 p.m.) 17 --o0o-- 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 453 1 CERTIFICATE OF SHORTHAND REPORTER 2 3 4 I, Nadine J. Parks, a shorthand reporter of the 5 State of California, do hereby certify that I am a 6 disinterested person herein; that the foregoing meeting was 7 reported by me in shorthand writing, and thereafter 8 transcribed into typewriting. 9 I further certify that I am not of counsel or 10 attorney for any of the parties to said meeting, nor am I 11 interested in the outcome of said meeting. 12 In witness whereof, I have hereunto set my hand 13 this day of , 1996. 14 15 16 Nadine J. Parks 17 Shorthand Reporter 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345