“You’re welcome for the iPhone ... and we’re sorry about everything else.”
I’ve started several conversations with colleagues from outside California this way. It is a fun reminder of the state’s reputation for innovation and economic growth, and a grim reminder of its policies for millions of Americans outside its borders. As a sixth-generation resident of the Golden State who has spent most of his life in public service to it, I would like to believe the truth lies somewhere in between. For the propane industry, however, the state’s future will define the industry’s future for good or ill.
Bellwether of the Future
California was the economic powerhouse of the United States in the post-war economy. Its manufacturing, technology, entertainment, agriculture, oil and gas, and aerospace industries — to name just a sampling — built the state into the juggernaut that is, by most metrics, either the fourth- or fifth-largest economy in the world today. Forty million residents call California home, and its geographic diversity ranges from the sunny beaches of Southern California to the snowy mountaintops of the Sierra Nevada range.
California has been on the bleeding edge of the political, cultural and industrial zeitgeist for decades. Ronald Reagan mounted successful campaigns for governor and then president long before people could imagine a celebrity in those positions. California’s highway system was one of the models used by President Eisenhower for building the national interstate system. The first flight may have been at Kitty Hawk, North Carolina, but California aerospace businesses like Lockheed, Douglas and Northrup helped the country win World War II, provided for the Jet Age of travel and put human beings on the moon.
The zeitgeist cuts both ways, however. The Free Speech Movement in Berkeley and Summer of Love in San Francisco ushered in the national counterculture and hippie movement. The booms and busts of the tech economy incentivized businesses to invest outside of the U.S. and avoid keeping too many eggs in one geographic basket for the workforce.
And, importantly for our industry, complaints of smog spouting from Southern California traffic jams created the California Air Resources Board (CARB), and an oil spill off the coast of Santa Barbara in 1969 created the U.S. Environmental Protection Agency (EPA). They pushed the modern environmental movement from the fringe and into the mainstream of American life.
It’s also worth noting that it was Californians — Governor Reagan in 1967 and President Richard Nixon in 1970 — who created those respective governmental agencies.
The California Carve-Out
The creation of CARB matters a great deal because it was that creation that would eventually lead to national emission reduction mandates, increased fuel efficiency standards and more. But how could a state agency drive national energy policy? The Clean Air Act (CAA) established the federal government as the primary driver of emissions policy, and other environmental standards related to combustion are codified through the EPA.
Due to California’s unique air quality concerns, the creation of CARB and emission standards that predated enactment of federal standards, and the desire by California-elected officials — including Reagan and Nixon — to “protect” their state, California is allowed by federal statute in Section 209 of the CAA to request higher standards than what would be allowed by federal regulation. If the EPA administrator approves that waiver request, California can hold manufacturers, dealers and consumers to higher emissions and efficiency standards.
This is the California waiver process — and the single-most important reason California is the trendsetter on vehicle policy. Once California establishes a standard and receives a waiver, any other state may adopt its rule language. Per Section 177 of CAA, 42 U.S.C. § 7507:
“Any State … may adopt and enforce for any model year standards relating to control of emissions from new motor vehicles or new motor vehicle engines … if:
(1) such standards are identical to the California standards for which a waiver has been granted for such model year, and
(2) California and such State adopt such standards at least two years before commencement of such model year (as determined by regulations of the Administrator).”
So far, more than 17 states have adopted one of California’s many approved waivers over the years. These smaller states also have the benefit of coordinating with colleagues from California on how best to adopt these rules. CARB has a staff of approximately 1,700 individuals and is rivaled only by the EPA in its size, scope and technical sophistication. When a state wants to adopt a regulation, they will reach out to California before the federal government and seek their assistance. We are seeing that now as states adopt cap-and-trade or clean fuels programs like those implemented in California.
But a state adopting the California standard is only one factor that drives the national energy conversation.
Market Forces & the Power of Consumer Trends
California is home to 40 million people. Nearly one in eight Americans live within its borders. It has a boundless diversity of races, ethnicities, countries of origin, socioeconomic statuses — you name the demographic, and California has a sizable percentage of that population. For organizations seeking to use California’s policies for their own ends, that is a prime feature for seeking action.
The waiver process allows California to set its own market for goods. That means manufacturers must build vehicles and machinery that comply with California’s more rigorous environmental standards. If a relatively small state tried to leverage their market for goods and services, a manufacturer could, hypothetically, make the hard decision to not sell within that jurisdiction rather than go through the agony of meeting compliance.
The California market is so large and so critical to just about every global manufacturer that companies will bend to California rules rather than abandon the market. Appointees to CARB will even comment from the dais that they are taking votes on particular policies to “send hard market signals” to those building and selling products in the state. The result is that there can be vehicles certified in 49 other states that cannot be legally driven within California.
Market forces are not bound to just California, however. Electric and hybrid vehicles, heavily subsidized by California and supported by its regulatory policies, began to sell within California’s market. After more than a decade of such support, those companies began to develop economies of scale and bring down their prices, make their technology more attractive to non-California consumers, and expand the footprint of their sales to a national audience.
Once a company has taken the time and energy to develop equipment for the California market, it becomes much more attractive over time to find other markets for that equipment — even when government regulation does not mandate its use! All you need to do is watch TV or the internet for ads of electric vehicles to understand that market forces will go anywhere there is a dollar to be made.
Avoid Getting Caught Flat-Footed
The reason why these two forces matter — government mandates from one side and market forces from the other — is that they can snare the propane industry in their pincers if we are not prepared. The on-road segment was the first to fall, with light-duty manufacturers, convenience stores and many others having to rapidly evolve to limited success. However, California has now set its sights on off-road segments like forklifts and drayage fleets, while it continues to underwrite the costs of electric school buses to subsidize that market.
In a worst-case scenario, the exported technologies mandated by the California market will create competition in markets that we’ve never previously worried about before and put the industry at a disadvantage in a way we have never previously had to consider.
If you are not prepared for these shifts, you will be at a competitive disadvantage when your state does consider adopting a California-style regulation. The headaches in Washington state after the adoption of their cap-and-invest program were so heavy that there are currently multiple efforts to attempt to wind back its impacts, all while keeping the program going.
Likewise, compliance costs money. If you are a smaller business owner, you can likely not afford to invest in front-office staff that can be dedicated toward government compliance or regulations. Luckily, trade organizations like the Western and National Propane Gas Associations exist and can help, but we cannot work for your company alone. Joining these associations and learning about what is happening in real time can allow you to adapt early and get engaged before compliance becomes fatal.
While California can certainly seem like a joke from afar, the reality is that its policies, market and consumer choices are already affecting your lives whether you realize it or not. Understanding what the state is trying to do and how it uses its power and influence is one of the best ways for our industry to get ahead of the curve of governmental regulation rather than behind it.
