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California governor orders investigation into mystery surcharge on gas

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Every California motorist knows that gasoline is expensive in the Golden State. Taxes and fees on the state and federal levels account for more than 80 cents per gallon at the pump.

But even after stripping out all those expenses, the California Energy Commission says drivers are still paying more than they should because of “an unexplained residual price increase” that’s persisted for the last five years.

Gov. Gavin Newsom thinks oil companies may be “engaging in false advertising or price fixing” and he has called on Attorney General Xavier Bacerra to open an investigation into what UC Berkeley professor Severin Borenstein has long called the “mystery gasoline surcharge.”

In 2018, California motorists paid an average of 30 cents more per gallon at higher-priced retail outlets such as Chevron, Shell and 76 than the average American paid for gasoline in other states, the energy commission said in an analysis released last week.

Whatever the reason, the numbers add up. Thirty cents more per gallon translates to $4.50 extra each time a driver fills up a 15-gallon gas tank. That equates to $1.5 billion more paid by California gasoline consumers in 2018 and $11.6 billion more over the last five years.

“There is no identifiable evidence to justify these premium prices,” Newsom said in his letter to Bacerra. The attorney general’s office, in an email to the Union-Tribune, said a decision on launching an investigation has not been made yet.

How it all started

After an explosion at an ExxonMobil refinery in Torrance in February 2015, the state’s already high gasoline prices went up even more. But after normal operations resumed, an overhang remained — a residual price that has never gone away.

Borenstein, a business administration and public policy professor, has been tracking it for years.

“If you look at 2000 to 2014, before the Torrance fire, the difference between California and the rest of the country, on average, was fully explained by (the state’s) taxes and fees,” Borenstein said. “Sometimes it was a little higher, sometimes a little lower but on average the differential was the taxes and fees.”

But since 2015, the differential has generally ranged from 20 cents to 40 cents a gallon — sometimes even higher. In April, Borenstein’s calculations showed a 50-cent differential.

Granted, refinery disruptions can account for increases in price — such as the recent outages from California refineries that contributed to prices in San Diego rising from $3.63 per gallon in mid-September to $4.20 Oct. 8 — but in the past, Borenstein said, offsetting periods saw prices recede.

“That just never happens now,” Borenstein said. “We have had no months since February of 2015 in which our differential was lower than you would expect from the taxes and fees. And back before then, almost half the months were lower.”

© Mel Melcon/Los Angeles Times/TNS A motorist fills up in Los Angeles in May 2018. The California Energy Commission says the state’s drivers have been paying more than they should because of “an unexplained residual price increase” that’s persisted for the last five years.

What’s going on?

The energy commission’s analysis pointed to much higher prices charged at many name-brand gas stations than at independent or non-branded stations.

Between 2010 and 2018, retail margins for gasoline in California far outpaced those in other states. The national average growth in retail margins was 6 cents per gallon but brands such as 76, Chevron and Shell increased their margins by roughly twice the amount of other listed brands.

Jamie Court, president of Santa Monica-based Consumer Watchdog, has long contended oil companies have artificially kept prices high in California.

“Costco (one of the most popular independent gas stations) sells the same gas it buys from refiners that is 30 to 40 cents less than the refiners sell it in their own stations,” Court said. “That’s inexplicable, uncontested. … It’s remarkable to me that it’s taken 4 ½ years for a governor to actually acknowledge a problem that’s plain to any driver that sees the difference in price between independent and branded stations.”

David Hackett, president of Stillwater Associates, a transportation energy consulting company in Irvine, acknowledges there is a price differential but sees potential explanations that are less sinister.

In other parts of the country, “gasoline prices tend to be a lot more competitive,” said Hackett. “That means the gas station operators look at what one another are doing and they are adjusting their prices continuously, based on competition. You don’t see that as much here in California.”

That’s because, Hackett said, California land values can make it more profitable to convert an old gas station into another business, like a Starbucks. According to Stillwater Associates, there are nearly twice as many drivers per gas station in California compared to the national average.

“Consumers aren’t stupid,” Hackett said. “I mean, nobody’s forcing people to go to Chevron to pay more. They’re going to Chevron and they’re paying more because they like Chevron’s offering better than they like Costco’s offering. They don’t have to wait in line … they don’t have to fight the crowds.”

Different prices in different places

It’s common in San Diego to see dramatically different prices among gas stations separated by only a few blocks.

And the energy commission’s analysis cited a study from the National Association of Convenience Stores that said consumers in the West are less concerned with price but more attentive to a gas station’s location and brand. Since 2015, the percentage of California consumers who said they preferred a specific brand of gasoline has increased from 48% to 59 percent.

“California has fewer unbranded stations than the rest of the country,” said Borenstein. “And that’s in part because people are not frequenting them as often. You often see price differentials of 30 cents or more and yet people still go to the branded stations.”

Nannette Frye of San Diego filled up Tuesday morning at the ARCO station at 16th and G Street where regular unleaded sold for $4.40 a gallon. “It’s convenient to where I work,” Frye said. “Convenience and price.”

A little more than one block north, independent station Petroamerica charged $3.94 for credit-debit for a gallon of regular unleaded. One block south, the price at 76 was $4.50 a gallon.

“I’m a regular here, so I make a stop here before going home,” said Mark Tate of San Diego at the Petroamerica station. “It’s always 5 to 7 cents cheaper than a regular gas station.”

Court said branded stations dominate the marketplace, especially in Southern California, so consumers “have nowhere to go” and are ripe for being taken advantage through “tacit agreements” to manipulate prices. And that’s why, Court said, an investigation from the attorney general that includes subpoena power is needed.

“When (the industry does) that for 4 ½ years, even though there’s no smoky backroom or memos saying, ‘We’re going to artificially pump up prices on the consumer,’ a judge or jury is going to get the message on how they do it,” Court said. “I think we’ve got ‘em on an antitrust case.”

Many of the major brands advertise their gasoline as “Top Tier” certified for optimal vehicle performance but the energy commission said “it is not apparent” it is superior to other gas sold in California that meets the standards set by the California Air Resources Board. The energy commission said it requested research from the gasoline industry to “substantiate this point, but none was provided.”

The commission said it does not have “any evidence that gasoline retailers fixed prices or engaged in false advertising” when it came to claims of superior brands of gas. Instead, it said the attorney general’s office is “well equipped” to make that determination.

Going forward

A spokesman for Chevron said the company is “reviewing the report” from the energy commission. Emails from the Union-Tribune to Shell and Phillips 66 — which owns 76 — went unanswered.

The president of the Western States Petroleum Association, a trade group representing oil companies in five states including California, said it is also reviewing the analysis.

“While we all review that report, it’s important to note that CEC’s own numbers show our state’s regulatory environment plays a big role in the ever-increasing affordability challenges Californians face,” Catherine Reheis-Boyd said in an email.

According to the American Petroleum Institute, California pays 80.45 cents per gallon in taxes and fees, 62.05 cents of that from the state. That’s the highest in the country.

So after studying the “mystery surcharge” for four years, does Borenstein suspect something nefarious is going on?

“I’m not sure I would say nefarious, but I think there are a couple of problems that regulations might be needed to address,” Borenstein said.

One possible topic would look at whether large refiners are effectively controlling retail prices by charging stations different wholesale prices.

“So Chevron can, for instance, set wholesale prices to the stations in one neighborhood that are different than in a neighborhood a few blocks away,” Borenstein said. “And that gives them a lot more ability to find where they have more market power and take advantage of it.”

Union-Tribune staff reporter Bradley Fikes contributed to this story.

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