State finds no fixing of gas prices

<a href=www.sfgate.com>SFGate.com Verne Kopytoff, Chronicle Staff Writer Wednesday, April 2, 2003

An investigation ordered by Gov. Gray Davis into California's escalating gasoline, diesel and natural-gas prices has found no evidence of illegal manipulation.

Rather, the probe attributed the higher costs this year primarily to tensions over the war in Iraq, a strike in Venezuela and an unusually cold winter on the East Coast.

The conclusion, to be officially released today, is a setback for those who believe that the soaring gas prices and heating bills this year are due to collusion. But it is an obvious victory for the oil and natural-gas industries,

which have maintained all along that market forces, not manipulation, were responsible.

"The governor was rightly concerned about prices," said Steven Maviglio, a spokesman for the governor. "Just because they can't find anything, that doesn't mean it doesn't exist. We're going to keep our eyes on it."

Dave Fogarty, a spokesman for the Western States Petroleum Association, an industry trade group, applauded the findings. "We understand consumers are angry about the increase in gas prices, and we are pleased that the report validated what many other investigations have validated."

Davis ordered the probe on March 13 when the average price for a gallon of unleaded was about to hit a state record of $2.15. Natural-gas prices had also increased, but were still lower than during the 2001 energy crisis.

Davis said any evidence of wrongdoing would be forwarded to state Attorney General Bill Lockyer for further investigation and possible legal action.

The California Energy Commission, the state agency that oversees energy planning and policy, completed the gasoline and diesel portion of the investigation. The Public Utilities Commission, the state energy regulatory agency, focused on natural gas.

The report found that higher gasoline prices are being driven mostly by a big surge in oil costs. The price for a barrel of crude on the spot market leaped nearly 40 percent to a high of $37.96 last month, compared with $26.80 in December.

But some of the responsibility also lies with California's peculiar gasoline market, the investigators found. Prices here usually rise in March when refiners perform maintenance and retool their equipment to produce a summer blend of fuel.

This year, the process was complicated by a change in additives to reduce smog. MTBE is being phased out in favor of ethanol.

The overall effect was tight gasoline supplies, the probe found.

Investigators noted that refiner margins had reached unusually high levels. Margins are the refiners' combined costs -- not counting oil -- and profit.

The seven-year average margin for each gallon of gas sold is between 29 and 32 cents. But since the beginning of the year, the margin has ranged from 19 to 76 cents.

The conclusions reached in Davis' investigation aren't new. Many of the problems were cited in a probe by Lockyer of a gas price spike in 1999.

No criminal charges or civil suits came out of that probe. The investigation is still open.

"This pretty much verifies what we've been saying in our report issued in 2000," said Tom Dresslar, a spokesman for Lockyer. "That there's some market conditions in California that make us susceptible to price swings."

Gasoline prices have ebbed modestly since their peak last month. They're down 1.5 cents per gallon during the past two weeks, though they are poised to go far lower, according to William Keese, chairman of the California Energy Commission.

He said retail prices should fall below $2 across much of the state by the end of the week because wholesale gas prices have dropped 42 cents per gallon since mid-March.

Maviglio and Keese stressed that this investigation was done in only 15 days and that the investigation will continue until June, at which time recommendations will be made to stabilize the state's volatile market.

Possibilities include encouraging the development of alternative fuels or building a state fuel reserve that can be tapped in emergencies.

Charles Langley, gasoline project manager for Utility Consumers Action Network, a public interest group in San Diego, said he is disappointed that the investigation didn't uncover any wrongdoing. But he added that any legal action would have to come from the federal government.

"I was hoping there would be some positive news here," Langley said. "But there's not a lot that can be done at the state level."

E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.