Understanding the Rack Price Impact of California s Carbon Cap and How the Changes Will Affect Your OPIS Report

Understanding the Rack Price Impact of California s Carbon Cap and How the Changes Will Affect Your OPIS Report

California Cap-and-Trade Background Cap-and-trade impacts rack fuels suppliers on January 1, 2015 Each gallon of fuel sold across the rack will acquire a carbon emissions obligation Compliance Instruments - California Carbon Allowances

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OPIS Methodology California Carbon Allowance (CCA) Assessment California Cap-at-the-Rack (CAR) Assessment

Overview On Aug. 1, 2014, OPIS began publishing two new assessments that, together, provide price discovery for the cost-per-gallon impact of the program at the rack level OPIS California Carbon Allowance Assessment OPIS California Cap-at-the-Rack Assessment

California Carbon Allowances (CCAs) Cap-and-trade compliance instruments obtained through public CARB auctions or by trading in the marketplace Current year and previous year vintage CCAs can be used to comply with your carbon obligation 1 CCA = 1 mt of supplier s carbon obligation

Cap-and-Trade Compliance CO2 Equivalent of more than 25,000mt per year 73,000 bbl (3.06 mil gal) of CARB RFG 58,000 bbl (2.44 mil gal) of CARB Diesel Second Phase Compliance Dates November 2016: 30% of the 2015 carbon obligation November 2017: 30% of the 2016 carbon obligation November 2018: 70% obligations from 2015 and 2016, as well as 100% of the 2017 carbon obligation

OPIS CCA Assessment OPIS full-day pricing methodology applied to California Carbon Allowances traded in market Products - Current Year and Previous Year Vintages Timing - Prompt and Forward Price Discovery Min. Volume - 10,000 Pricing - $/Metric Ton

OPIS Cap-at-the-Rack Assessment (CAR) Daily CPG price impact of cap-trade program on products delivered at the rack CARB RFG Gasoline CARB Diesel ULSD No. 2 Biodiesels Based off of OPIS CCA Current Year Vintage, prompt timing assessment and the calculated carbon dioxide equivalents (Co2e) for each fuel gallon

CO2e/gal Values

OPIS CAR Calculation CPG = OPIS prompt timing, current year, CCA assessment mean $/mt x CO2e/gal of obligated fuel Biomass derived fuels have a compliance obligation under the California cap-and-trade program CAR gasoline prices (CARB RFG) = 90% gasoline grade s CO2e/gal x the prompt CCA assessment + 10% ethanol CO2e/gal x the prompt CCA assessment CARB diesel = CARB diesel CO2e/gal x the prompt CCA assessment

OPIS CAR Assessment Examples Prompt OPIS California Carbon Allowance Price Assessment ($/mt) Vintage Timing Low High Mean Current Yr. PMT Sep 14 11.85 11.87 11.86 OPIS CAR Calculation 1 gal Summer CARB RFG: CAR = (((0.00909 x 0.9) x 11.86) + ((0.00022 x 0.1) x 11.86)) x 100 CAR = 9.73cts/gal OPIS CAR Calculation 1 gal CARB diesel ULSD No. 2: CAR = (0.01024 x 11.86) x 100 CAR = 12.14cts/gal

Biodiesel CAR Assessment Prompt OPIS California Carbon Allowance Price Assessment ($/mt) Vintage Timing Low High Mean Current Yr. PMT Sep 14 11.85 11.87 11.86 OPIS CAR Calculation 1 gal B5 Biodiesel: CAR = (((0.01024 x 0.95) x 11.86) + ((0.00001 x 0.05) x 11.86)) x 100 CAR = 11.54cts/gal OPIS Rack Reports will provide a CAR price for each different biodiesel blend percentage.

CAR Winter and Summer Gasoline Prices Air Basin Summer Winter Mojave Desert March 1 November 1 North Coast May 1 October 1 Sacramento Valley April 1 November 1 Salton Sea March 1 November 1 San Diego March 1 November 1 San Francisco Bay April 1 November 1 San Joaquin Valley April 1 November 1 South Central Coast May 1 November 1 South Coast March 1 November 1

OPIS West Coast Spot Market Reports

OPIS California Carbon Markets Publishing CCA and CAR prices in the West Coast Spot Market Reports since August 1, 2014 OPIS will launch CAR prices in California Rack Reports during Q4 2014 OPIS USWC Methodology: http://www.opisnet.com/about/methodology.aspx

How will the OPIS CAR be used in rack prices?

OPIS has been surveying California Suppliers

In the Posted Price Some suppliers have indicated they will pass along the assessed CAR value as a cost factored into their posted price

Line Item on Invoice Other suppliers have indicated they will show the CAR value as a line item fee on their invoices Several suppliers who originally indicated they will show CAR value as line item are reconsidering and may include the CAR value in the CPG posted rack price

ALL CALIFORNIA RACKS ARE IMPACTED

OPIS CCA/CAR Benchmark The CA Fuels Marketplace may or may not reference OPIS Benchmark to show transparency OPIS has learned the OPIS CAR assessment will be an acknowledged benchmark Other suppliers will use the actual cost for the CCAs they buy/trade and use their own calculations to pass along the CPG cost of CAR

When does OPIS make the CAR available? The CAR is updated with the first 6 to 6 file that is sent out after the West Coast Spots are published CAR will be carried through on reports until next Spot Publish Day

Normalization What is it? Ethanol tax credit in 2005 Normalization lasted just 8 month before all suppliers began passing along the credit in the same manner If all suppliers pass the fee along the same way, OPIS will not normalize in any way Many customers see this as the optimal alternative OPIS reports will DEFAULT to Non-Normalized All OPIS standard published reports, normalized and nonnormalized will include our California Cap-at-the-Rack Assessment (CAR)

Non-Normalized/Non-Adjusted OPIS reports would not change from their current layout and would reflect the prices posted by suppliers even when some suppliers include the CAR value in the posted price, while others pass the CAR on as a line item on invoices

Report Example: Non-Normalized

CAR In Price Example Reports will adjust the prices of suppliers who pass the value of the CAR on as a line item on invoices so that the price in the OPIS report reflects the amount the supplier is posting, PLUS THE OPIS CAR Assessment If suppliers make their own CAR assessment available when they send out their rack postings, we will use their individual CAR values instead of the OPIS CAR Assessment Benchmark Averages will reflect the OPIS normalization and supply contracts may need to be adjusted to index this method

Report Example: CAR In Price Normalization

OPIS Contract Averages and other OPIS Reports We need to stress that not all players will choose to use the same type of normalization Consider the contractual challenges Other impacted reports OPIS Newsletter EBIS

Government Contracts Something to consider - will government contracts accept the CAR value? State of California DLA Transit Districts City and County Municipalities, School Districts Others

Your Fuel Contracts - Managing the line item Cap and Trade fee All fuel supply contracts that reference an OPIS index benchmark need to be reviewed Most government contracts spell out what taxes and fees they will pay; any other fees usually must be included in your mark-up and most agencies will not allow you to add any other fees to the fuel invoice You may need to request a contract amendment to change the OPIS index benchmark to the report that has the CAR price added to the suppliers rack posting Even if you are allowed to charge the fee as a line item, you may still need to amend your contract

State Fuel Contract Wording (State Of California Department Of General Services Procurement Division Contract User Instructions - Page 11, May 2014) User Instructions: These taxes shall be listed separately on invoices and shall not be a component of the differential price. Any and all Charges, Levies and or Fees not listed shall be listed a component of the differential price. All Differential prices quoted shall be: Exempt from: Federal Excise Tax. State of California will furnish applicable exemption certificate upon request from supplier. Exclusive of: State Sales Tax, Local Sales Tax, California Motor Vehicle Fuel Tax, Leaking Underground Storage Tank Tax, Oil Spill Liability Trust Fund Tax.

Wrapping It Up OPIS Subscribers should be prepared for the changes Will contract partners be willing to use normalized benchmarks? How to request normalization for your OPIS reports

OPIS Contact Information Dolores Santos OPIS West Coast Fuel Supply Expert T: 240-848-8640 DSantos@opisnet.com Lisa Street OPIS Senior Editor, U.S. West Coast T: 747-333-8792 LStreet@opisnet.com Tanya Feyereisen OPIS Director, Rack Product Development T: 301-287-2531 TFeyereisen@opisnet.com