Bill Aims to ‘Unbundle’ Gas Distribution to Boost Competition

Frustrated by the high cost of California gasoline, Assemblywoman Christine Kehoe is launching another effort to inject more competition into the state’s tightly controlled fuel market.

Kehoe (D-San Diego) introduced a bill Wednesday that would force California refiners to “unbundle” fuel distribution so that their dealers could buy generic gasoline from any supplier and pay the oil companies separately for the additives that make each brand of fuel unique.

Under the current system, dealers who sell Shell-branded gasoline, for example, must buy their supplies from Shell Oil at prices set by Shell. Dealers and consumer groups have long complained that because most of California’s service stations are branded -- and thus bound by contracts with refiners -- the system keeps dealers from getting the best deal on fuel and allows oil companies to control pump prices without owning the station.

Kehoe believes that allowing dealers to shop around for the best price for generic gas, even if it’s made by a competing refinery, would lower pump prices, which hit a record-high statewide average of $2.327 a gallon at the end of May.

Experts attribute the steep prices to gasoline-production glitches in California, the high cost of crude oil and the growing imbalance between the state’s thirst for fuel and the production capabilities of California’s 13 fuel-making refineries. As refinery profits have soared, however, many have accused oil companies of abusing their power in the market.

“We think it’s a very positive step to breaking up what has essentially become a refining cartel,” said Charles Langley, a gasoline expert with San Diego’s Utility Consumers’ Action Network. “It’ll give the dealers a break, it’ll be good for businesses, and it will help bring down gas prices.”

The oil companies, which have helped kill similar bills over the years, are opposed to Kehoe’s proposal.

The Kehoe bill, “does not add a drop of supply to the system ... and supply is the critical element that has added to the price,” said Joseph Sparano, president of the Western States Petroleum Assn., an industry trade group. “This just shifts the deck chairs around.”

BP, which sells Arco gasoline, “strongly opposes the bill,” according to a company statement. “We believe this would add significant cost and confusion to the distribution system and compromise the integrity of the product being sold to the public.”

Although most people don’t realize it, all of California’s refineries make essentially the same gasoline. On any given day, the refineries swap fuel with one another and commingle gasoline in pipelines and storage tanks along the way to big terminals. At the terminal, the generic gasoline can be sold as-is to unbranded gas stations.

More commonly, however, the generic gasoline is converted to a branded fuel at the terminal, where a Chevron tanker truck, for instance, would mix in the oil company’s special Techron ingredients to the flow of generic gasoline. Many terminals can dispense the additive recipes necessary for all the major brands.