California fuel retailers fear regulatory scrutiny

US fuel retailers like neither the regulatory precedent being set in California nor how the transition to renewable fuels is being managed, but companies sticking it out in the Golden State may reap rewards.

California governor Gavin Newsom (D) in March last year signed SB X1-2 into law, allowing the California Energy Commission (CEC) to gather a broad range of profit data from refiners and set a maximum gross gasoline refining margin in an effort to avoid price spikes at the pump.

"Unfortunately in California there is no shortage of bad policies that are being proposed," California Fuels and Convenience Alliance director Alessandra Magnasco said this week in a legislative affairs meeting at fuel retailer trade association SIGMA's conference in Austin, Texas.

She worries that if the CEC fails to make progress in capping margins at the refiner level, they will look further downstream and regulate retailers.

The alliance is opposed to what it sees as burdensome reporting requirements mandated by SBX 1-2 that were rushed through the legislature. "They are doing it in a way to leave out industry," Magnasco said.

The CEC this week approved further reporting requirements for refiners in the state, mandating they file maintenance schedules with the commission at least 120 days in advance of planned work and within two business days after the start of unplanned shutdowns.

"Every bad idea we face has generally been socialized in California first," David Fialkov, vice president of government affairs for US fuel retailer trade association NATSO, said during the SIGMA session.

The increased adoption of renewable diesel in California is also causing headaches for fuel supply managers.

"I can't even tell my customers which specific terminal might have traditional diesel versus renewable or if they're going to have both," said Deborah Neal, director of price risk management for fuel supplier World Kinect during another SIGMA panel discussion.

The introduction of renewable diesel to the California market was done without a specific time line or transition plan, Neal said. "It's messy to say the least."

The regulatory environment in California has also dampened appetite for mergers and acquisition activity in the eyes of bankers doing the deals. Gas station buyers who are looking to consolidate smaller assets are not looking at California if they are not already invested there, Matrix Capital Markets' co-head of downstream energy investment banking Cedric Fortemps said at SIGMA.

"The operating and legal dynamics are completely different than other parts of the country," Fortemps said.

But for companies already operating in California, there is limited out-of-state competition and high barriers to entry. Those companies are keen to grow their existing operations, Fortemps said.

By Nathan Risser