California Advances Gasoline Spot Market Transaction Regulations Through Emergency Rulemakings

Following passage of Senate Bill X1-2 (SB X1-2), the California Gas Price Gouging and Transparency Law, in March 2023, the California Energy Commission (CEC) has begun promulgating a series of regulations to increase state regulatory control over the fuels market. The regulations will affect a wide swath of the California economy, going beyond the refiners and importers that physically bring fuel to market to touch all parties involved in spot trading transactions with any conceivable nexus to the state as well as the ultimate retail customer (including those who rely on unaffiliated, independent service stations for gasoline). Prompted by retail gasoline price spikes in the fall of 2022, SB X1-2 formed CEC’s Division of Petroleum Market Oversight (DPMO) in order to impose requirements on the California transportation fuels market in four key areas: reporting, assessment, oversight, and investigation. The statute includes a provision that purports to allow DPMO to bypass the standard administrative rulemaking process (which typically invites meaningful public comment over an extended period of time) and designates any rule developed by DPMO an “emergency” rule that may be rolled out after a mere five-day public comment period.

In November 2023, DPMO kicked off its rulemaking efforts in earnest and set forth its plan to roll out a series of regulations to be used to increase data collection and monitoring activities that, in turn, will enable DPMO to assess and flag potential manipulation in the transportation fuels market and ultimately establish a maximum refining margin and associated enforcement mechanisms. These data collection and monitoring-related activities will focus on the following areas:

• Refinery Maintenance — providing insight into timing of planned and unplanned outages in order to create rules to control schedule adjustments that may cause acute shortages
• Monthly Refining Margin Reporting — providing standardized refinery cost reporting for defined cost categories such as labor, energy, land costs, maintenance, and capital investments
• Cargo and Import/Export Reporting — providing standardized reporting for sales and shipments
• Spot Market Transactions — providing for daily submissions to report on the initiation and settlement of transactions in the spot market 

While DPMO initially indicated that its first set of emergency regulations would come in June 2024, it launched its first rule several months before that, on February 6, focusing on the last of these four data collection activities: spot market transactions. The proposed rule was sent to the Office of Administrative Law (OAL) on February 15 for consideration. Because the proposed rule is an emergency regulation, OAL has 10 days to consider it, along with its five-day public comment period (which closed on February 20).

Under the proposed rule, DPMO has set forth a detailed list of specific transaction attributes that must be reported by 9 a.m. for the prior day’s trading activities. And unlike many of the reporting obligations contemplated by SB X1-2, the spot market transaction reports apply not only to petroleum refiners and imports but also to newly defined “brokers” and “traders” that participate in the spot market without physically holding any fuel. 

As this proposed rule sits with OAL for consideration, DPMO announced a Pre-Rulemaking Workshop for the next round of regulation. This workshop, originally planned for February 27, has been postponed. The CEC will post notice with a new date for the workshop and is expected to include a presentation regarding draft language for additional regulatory proposals and amendments to preexisting reporting requirements. Interested parties and members of the public can and should attend, participate in, and comment on the workshop through CEC’s regulatory docket 23-OIR-03. 

Ultimately, the scope and structure of DPMO’s reporting and data monitoring requirements will set the stage for future rules that could include dictating caps on set margin prices, but the net impact on the availability of retail gasoline in the state and the associated price consumers pay at the pump remains to be seen.

Thank you to Arielle Rodriguez, associate in Sidley's Commercial Litigation and Disputes practice, for her significant contribution to this Sidley Update.