California agencies are trying to figure out the implications of a vague executive order issued by Gov. Gavin Newsom in September that orders many policy decisions to be made with the need to “mitigate climate change” kept in mind.

A recent Sacramento Bee story suggested that among the most vexed were the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, the two pension giants with estimated unfunded liabilities of $136 billion and $107 billion, respectively, according to 2018 data.

The Bee reported that while the Newsom administration wasn’t ordering CalPERS and CalSTRS to divest from firms involved in fossil fuel, it was requiring them to make new investment decisions that reflect “the increased risks to the economy and physical environment due to climate change.”

Newsom thinks fossil fuel companies are in trouble

This reflects the assumption of the Newsom administration that there will be a rapid shift away from fossil fuels – a view that many hedge funds, mutual funds and large institutional investors don’t share. Large energy corporations remain popular with their stock pickers despite global warming fears. And contrary to the idea that these companies are in decline, some investors see fracking continuing to increase oil production in the U.S. for years to come. Last week, for example, the Motley Fool investment website strongly recommended buying ExxonMobil in 2020, noting that its annual divided “has increased more than 100 percent over the past 10 years.”

Newsom’s edict is producing heartburn with some members of the CalPERS board. That’s because, as the Bee noted, “pension systems have a financial obligation to earn as much as cash as possible to provide retirement security for millions of government employees.”

Former Garden Grove Unified manager Margaret Brown, a CalSTRS critic who won election to the board in December 2017, wrote on Twitter that “unless the governor is willing to take even more $$$ from over-taxed California citizens, Newsom should step back.” 

Corona police Sgt. Jason Perez upset CalPERS Board President Priva Mathur in the October 2018 election after running a campaign that blasted Mathur and other trustees for not focusing solely on returns in their investment decisions.

But the CalPERS and CalSTRS boards have a history of using investments for decades to make political statements. In September, state Treasurer Fiona Ma – who sits on both boards – strongly endorsed such investment activism.

CalPERS quietly shifting from low-risk ‘passive investing’

That means CalPERS and CalSTRS executives are under heavy pressure to improve returns while making investments that can be defended as socially responsible.

The Naked Capitalism website reported in October that this pressure may have led to CalPERS making a major shift in investing part of its portfolio. Instead of traditional “passive equity investing” in index funds that track the S&P 500 or other large categories of stocks and emphasize diversified portfolios, CalPERS has begun to adopt a more aggressive “factor investing” approach that has a chance of generating bigger returns by focusing on industries with better prospects for short- and medium-term gains, among its many tenets. The approach is also somewhat riskier than using index funds.

Reporter Yves Smith wrote that this was a major shift in investment strategy on a par with “CalPERS’ renouncement of hedge funds” in 2014.

The website, which is run by veterans of the global financial industry, has broken a series of stories about CalPERS in recent years.

In August 2018, it revealed that CalPERS CEO Marcia Frost had misrepresented her academic background and didn’t have a college degree.

This August, it offered evidence that CalPERS was hiding a negative audit of its hiring practices that had been triggered in part by the agency’s failure to vet Frost’s claims.

By Joseph Perkins

Taking time out from negotiations over the fiscal cliff, a half-dozen U.S. senators asked the Justice Department this week to investigate whether “market manipulation” by California oil refineries led to the run up in gasoline prices the Golden State’s motorists suffered in both May and October.

The lawmakers, led by California Sens. Dianne Feinstein and Barbara Boxer, suggest that “false reporting” by refineries, including Chevron, Valero Energy and Tesoro, “created a perception of a supply shortage when in fact refineries were still producing.” In their letter to U.S. Attorney General Eric Holder, they urge a “refinery-by-refinery probe.”

The lawmakers are disingenuous. They attribute California’s all-too-frequent gasoline price spikes to predatory pricing by evil oil companies, while completely ignoring laws enacted by the state Legislature, rules enforced by state regulatory agencies, that have given California the most expensive gasoline on the U.S. mainland, almost guaranteeing occasional price spikes.

Indeed, even the “independent” energy consultant retained by Sens. Feinstein, Cantwell, et al. to “examine the oil industry on the West Coast,” acknowledges the uniqueness of the Golden State’s gasoline market.

“The West Coast is an ‘island’ in the North American gasoline market because there is no gasoline pipeline across the Rockies,” wrote Robert McCullough, in a report this month. “Within this island,” he added, “California is an even smaller island, since California law mandates a specific formulation for gasoline during spring and summer months.”

So California oil refineries need not artificially limit the state gasoline supply to drive up pump prices. They need not manipulate the market at the expense of California motorists. The regulators in Sacramento already have done that for them.

Fewer refineries

Indeed, over the past three decades, California’s population has nearly doubled, yet the state has not allowed any new refineries to be built. In fact, at least 10 California refineries have permanently shut down over the span, reducing the state’s overall refining capacity 20 percent.

California’s 20 remaining refineries have to produce at near maximum capacity to meet the gasoline demand of California motorists. And when even one refinery shuts down unexpectedly, it creates an immediate gasoline shortage, which leads to the run up in pump prices to which Sen. Feinstein and her colleagues attribute to market manipulation.

But there was no market manipulation when a massive fire broke out this past August at Chevron’s 245,000 barrel-a-day Richmond oil refinery.

Nor when Chevron in September shut down its KLM pipeline, which carries up to 85,000 barrels of crude each day crude oil from the Central Valley to Bay Area refineries, due to the presence of elevated organic chloride levels in the crude stream.

Nor when ExxonMobil was forced to reduce production by 65,000 barrels a day at its Torrance refinery last month after a problem at a Southern California Edison substation caused a power outage at the refinery.

Instead of siccing the Justice Department’s prosecutorial hounds on California’s refineries,  Feinstein and her Senate colleagues would better serve the interests of California motorists by taking a hard look at both state and federal regulations that have done much to make the West Coast an island in North America’s gasoline market, and the Golden State an even smaller fuel island.

The only problem with California’s refineries is that there aren’t enough of them.