U.S. GOVERNMENT PRINTING OFFICE

75–190 DTP WASHINGTON : 2001

S. HRG. 107–90 (Pt. 2)

U.S. ENERGY TRENDS

HEARINGS

BEFORE THE

COMMITTEE ON

ENERGY AND NATURAL RESOURCES

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

TO CONSIDER NATIONAL ENERGY POLICY WITH RESPECT TO FEDERAL,

STATE, AND LOCAL IMPEDIMENTS TO THE SITING OF ENERGY INFRASTRUCTURE

MAY 15, 2001

JUNE 21, 2001

PART 2

(

Printed for the use of the

Committee on Energy and Natural Resources

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

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COMMITTEE ON ENERGY AND NATURAL RESOURCES

FRANK H. MURKOWSKI, Alaska, Chairman

PETE V. DOMENICI, New Mexico

DON NICKLES, Oklahoma

LARRY E. CRAIG, Idaho

BEN NIGHTHORSE CAMPBELL, Colorado

CRAIG THOMAS, Wyoming

RICHARD C. SHELBY, Alabama

CONRAD BURNS, Montana

JON KYL, Arizona

CHUCK HAGEL, Nebraska

GORDON SMITH, Oregon

JEFF BINGAMAN, New Mexico

DANIEL K. AKAKA, Hawaii

BYRON L. DORGAN, North Dakota

BOB GRAHAM, Florida

RON WYDEN, Oregon

TIM JOHNSON, South Dakota

MARY L. LANDRIEU, Louisiana

EVAN BAYH, Indiana

DIANNE FEINSTEIN, California

CHARLES E. SCHUMER, New York

MARIA CANTWELL, Washington

BRIAN P. MALNAK, Staff Director

DAVID G. DYE, Chief Counsel

JAMES P. BEIRNE, Deputy Chief Counsel

ROBERT M. SIMON, Democratic Staff Director

SAM E. FOWLER, Democratic Chief Counsel

HOWARD USEEM, Senior Professional Staff Member

SHIRLEY NEFF, Staff Economist

COMMITTEE ON ENERGY AND NATURAL RESOURCES

JEFF BINGAMAN, New Mexico, Chairman *

DANIEL K. AKAKA, Hawaii

BYRON L. DORGAN, North Dakota

BOB GRAHAM, Florida

RON WYDEN, Oregon

TIM JOHNSON, South Dakota

MARY L. LANDRIEU, Louisiana

EVAN BAYH, Indiana

BLANCHE L. LINCOLN, Arkansas

FRANK H. MURKOWSKI, Alaska

PETE V. DOMENICI, New Mexico

DON NICKLES, Oklahoma

LARRY E. CRAIG, Idaho

BEN NIGHTHORSE CAMPBELL, Colorado

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

PETER G. FITZGERALD, Illinois

CONRAD BURNS, Montana

ROBERT M. SIMON, Staff Director

SAM E. FOWLER, Chief Counsel

BRIAN P. MALNAK, Republican Staff Director

JAMES P. BEIRNE, Republican Chief Counsel

* Note: Senator Bingaman assumed the Chairmanship on June 6, 2001.

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C O N T E N T S

Page Hearings:

May 15, 2001 ..................................................................................................... 1

June 21, 2001 .................................................................................................... 53

STATEMENTS

MAY 15, 2001

Burns, Hon. Conrad, U.S. Senator from Montana ................................................ 3

Cook, David N., General Counsel, North American Electric Reliability Council, Princeton, NJ .................................................................................................. 10

Craig, Hon. Larry E., U.S. Senator from Idaho .................................................... 4

Halvorsen, Jerald V., President, Interstate Natural Gas Association of America .......................................................................................................................... 17

Murkowski, Hon. Frank H., U.S. Senator from Alaska ....................................... 1

Nugent, William, Commissioner, Maine Public Utilities Commission, Augusta,

ME, on behalf of the National Association of Regulatory Utility Commissioners ................................................................................................................... 6

Szwed, Stanley F., Vice President, Transmission, FirstEnergy Corp., Akron,

OH ......................................................................................................................... 21

Thomas, Hon. Craig, U.S. Senator from Wyoming ............................................... 5

JUNE 21, 2001

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 53

Card, Robert, Under Secretary, Department of Energy ....................................... 68

Dinneen, Robert, Vice President, Renewable Fuels Association .......................... 103

Fisher, Linda, Deputy Administrator, U.S. Environmental Protection Agency,

accompanied by Robert D. Brenner, Acting Director of Air and Radiation

Program ................................................................................................................ 61

Grumet, Jason S., Executive Director, Northeast States for Coordinated Air

Use Management (NESCAUM) ........................................................................... 92

Johnson, Hon. Tim, U.S. Senator from South Dakota .......................................... 54

Keese, William J., Chairman, California Energy Commission ............................ 110

Murkowski, Hon. Frank H., U.S. Senator from Alaska ....................................... 58

Segal, Scott, Partner, Bracewell and Patterson, on behalf of Oxygenated Fuels

Association ............................................................................................................ 98

Wyden, Hon. Ron, U.S. Senator from Oregon ....................................................... 55

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U.S. ENERGY TRENDS

TUESDAY, MAY 15, 2001

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC.

The committee met, pursuant to notice, at 9:37 a.m., in room

SD–366, Dirksen Senate Office Building, Hon. Frank Murkowski,

chairman, presiding.

OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,

U.S. SENATOR FROM ALASKA

The CHAIRMAN. Good morning. We will call the Committee on

Energy and Natural Resources to order. This is a hearing to consider national energy policy with respect to Federal, State, and

local impediments to the siting of energy infrastructure.

It is unfortunate that we have a conflict, but that is really not

anything unusual around here. We have the markup of the Finance

Committee that began at 9 o’clock this morning. There are 174

amendments pending before that committee, and Senator Bingaman and I are both on the committee. We thought of putting this

off, but in deference to the witnesses who have come in, we are

going to go ahead with the hearing and do the best we can. Senator

Craig and perhaps Senator Thomas will help me out a little bit.

But in view of the fact that I think 148 of the amendments are

Democratic amendments and I think we have got somewhere in the

area of 24 amendments, we decided to let the Democrats go first

down at the committee. So, I think they will be pretty well occupied for a while. But enough of that.

Why we are here is to talk about are the realities associated with

that segment of our energy flow that is constricted. We obviously

take for granted the fact you turn the light on and it works, but

the more we hear about inadequacy of transmission lines, the more

we hear about our gas pipelines being called upon for movement

of more gas, more pressure, we are suddenly aware of things, and

where have the experts been? Where have we been? Why is this

problem just coming to the surface, and what should we and what

can we do about it?

It is kind of like awakening one day and finding that not only

have we not built a new nuclear plant in 10 or 12 years, we have

not really done anything in coal since 1995. We have found our dependence on oil up to 56 percent. We suddenly opened SPR for relief, and we find our refineries are operating at capacity and we

really cannot accommodate the 30 million barrels from SPR without offsetting imports. Then we find that our natural gas has douVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 75-190 SENERGY2 PsN: SENERGY2
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bled and tripled in some areas, and then we find our transmission

lines are inadequate, both electric and gas distribution. It is almost

like, as I said, everything coming together at one time.

So, today the committee, in holding the oversight hearing, will

review the impediments to building new energy infrastructure,

such as gas pipelines, electric transmission lines.

I think it is important to emphasize what we have to do to get

them built. Obviously, you have to have assurance you are going

to get a return on your investment.

Now, according to the Energy Information Administration, U.S.

energy demand is going to increase 32 percent over the next 20

years. That means oil is going to increase 7 million barrels. Consumption is going to go from 20 to 27. And apply it to gas and everything else. That is a pretty staggering increase in demand.

Those who are saying we can simply pick up our shortage on conservation with these kind of figures looking at us in the eye I think

are sadly mistaken. We are going to need all our sources of energy,

plus our new technology, to achieve and meet the demands.

I do not think the American public is simply going to stand by

and be satisfied for nebulous promises in general terms as opposed

to what I think the administration is going to be doing when they

announce their Energy Task Force, come up with some real solutions. You need real solutions to these problems, not hypothetical

generalizations that you can get there by conservation or you can

get there by CAFE standards. You just cannot do it. What have we

got? 207 million vehicles on the road, 130 million are automobiles?

That fleet is going to turn over in 10 years, not tomorrow.

A lot of people forget a couple of factors as we look at our energy

crisis. One is the reality that Americans are used to cheap, affordable, and ample supplies of energy, and it is what focuses and

funds our standard of living, which is I think something we have

to begin to relate to. Are we willing to compromise our standard

of living? Well, I do not know, but hopefully we will find out today.

I think California’s energy problems are a case study of what can

happen. We have seen their resistance in building new powerplants, new power lines, opposing offshore drilling, and they have

even resisted new natural gas pipelines such as Kern River. So, it

is the old NIMBY, not in my back yard. I think it should come as

little surprise that California has electric shortages and price

spikes and some of the highest oil and natural gas prices in the

United States.

We are criticized, allegedly, for not being sympathetic to California’s problems. I think every member of this committee is sympathetic, but the reality is that California is going to have to make

certain decisions relative to whether or not they are going to pass

on the price of electricity to the taxpayer or the ratepayer. I personally do not see any difference in the two, but I think there is

a desperate effort in California to finesse that and put the obligation for the power price on the taxpayer as we look at the manner

in which retail price caps have prevailed.

The L.A. Times reported Monday a debate over San Diego Gas

and Electric’s plan to construct a 270 million, 31-mile long, 500,000

volt transmission line through Riverside County in California. The

line would help alleviate the transmission bottleneck in the region

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that has seen such a significant factor behind the State’s factor the

State’s rolling blackouts. But the project has been dogged by opponents. Neighborhood groups are organizing door to door against the

project. And as a consequence, I can quote the following. ‘‘See, this

isn’t about us not wanting this in our back yard,’’ said one of the

leaders fighting the transmission line. It is called the Southwest

Riverside County. ‘‘This is all for one and one for all. We don’t

want this in anybody’s back yard.’’ Well, it has got to be somewhere, folks.

California’s problems are a warning sign of what will happen in

other parts of the country if we do not take action to ensure our

energy future. We are going to have to learn from the mistakes in

California so they do not spread across the rest of the Nation. I

hope today’s witnesses will give us their perspective about this

problem and what can be done to facilitate new energy projects.

Senator Craig, Senator Thomas, and Senator Domenici in that

order.

[The prepared statement of Senator Burns follows:]

PREPARED STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR FROM MONTANA

Mr. Chairman, I thank you for your commitment and focus on the energy situation we have before us. You have called several hearings to bring attention to a national energy policy—building an energy infrastructure is one of the most important

yet.

Nearly everyone on Capitol Hill and in the White House, including myself, has

thrown their support behind alternative energies and energy conservation. For those

willing to be honest and blunt about the current situation, we know that, in this

stage of the game, conservation and available alternative energy is not enough to

provide energy for the United States to continue as a leading economy. Expansion

of natural gas, oil, and coal development is crucial.

Although more discussion and action is needed, we’ve had a significant focus on

the generation of energy in this committee. The question remaining for everyone is,

once we generate traditional or alternative power, how will it be transmitted when

and where it needs to be? How can we eliminate barriers blocking the creation of

natural gas pipelines?

Whether a net importer or exporter, one state cannot completely shelter itself

from this grid-wide crisis brought about by lack of generation and transmission infrastructure. Impediments to siting are hampering natural gas pipelines and electric

transmission lines. A tangled web of regulation, transmission line bottlenecks, environmental extremism, and plain apathy has put us in this situation. Hopefully this

committee’s hearings serve as a wake up call.

At the same time the Pacific Northwest is facing supply shortages, transmission

bottlenecks and lack of transmission for additional supply place another layer of

burden on a grid facing skyrocketing market rates. The Bonneville Power Administration has at least five to six major bottlenecks, that if dealt with, will ease the

crunch in Western Montana. Along with bottlenecks, we have situations where

weather conditions in the summer affect the transmission lines in Kalispell, MT.

Transmission issues, as my fellow committee members well understand, are not

limited to my state of Montana, and the effects of transmission problems in Montana are not limited to Montana. A tree knocking out a power line in Idaho could

mean power shortages in San Francisco. Limited transfer capability from a sub-station in Spokane, WA means limited electricity coming to the Flathead Valley in MT

or vice-versa. All you folks out there who need power—we have it in Montana, but

with the current state of our transmission lines, we don’t have a way to get it where

its needed.

Added authority for siting transmission lines and pipelines appears to be a necessity. For transmission lines, upgrades and new construction is essential. For natural

gas pipelines we can loop the lines and add compression to pump more gas down

the same path. But with the amount of transmission capability needed over the next

20 years, it is apparent that we cannot stop at upgrades, new lines must be built.

We can, and must, identify and reform, or in some cases, remove some of the regulatory burdens. We have a mandate to assess and improve agency performance,

which could lead to more timely processing of permits and applications to produce

4

power. A similar mandate must also follow for increasing and upgrading transmission capabilities as well as natural gas pipelines. That’s why I support S. 172,

the Electric Reliability Act, with my friend Gordon Smith. This bill will benefit electricity consumers by promoting the reliability of the bulk-power system.

Three hundred and ninety three gigawatts of new generating capacity is needed

by 2020, and a 52 percent increase is expected in natural gas consumption. With

that increase expected in generation and consumption—the same should be planned

for transmission. We have an Administration that inherited a lot of chores left undone by the previous administration, but with an energy intensive Administration

under President Bush and Vice President Cheney I am confident that we will begin

the work that is needed, no matter how late. I look forward to hearing from our

distinguished panel of witnesses and how they are working to meet these challenges, as well as how this committee can meet the challenges.

STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR

FROM IDAHO

Senator CRAIG. Mr. Chairman, thank you very much.

A couple of winters ago my wife and I and a group of business

people from Idaho had an opportunity to spend a couple of weeks

in China. We were in Shanghai in a beautiful hotel that had been

recently built. My guess is it would have qualified as a Four Seasons or possibly a medium grade Ritz. It was a very fine, beautiful

hotel, meeting all western standards except one: The power kept

going out. Places to plug in the computers, places to get on line,

places to uplink to the satellite, but about every time you tried,

your connection was broken by a power blink. The reason is they

have no grid. They have no uniform system of delivery of power

through China, and it clearly is an impediment to their growth and

to the quality of the kind of growth they will have in the future.

Of course, they are moving very quickly to try to remedy that.

That was never our problem as a country because of foresightedness on the part of State public utilities commissions and the Federal Government working together to resolve that early on in our

processes of electrifying the country.

But somehow we have dropped behind a bit, and I think this

hearing is critically important to determine where we go now and

what kind of new authority we give, if necessary, to reawaken this

country and to build upwards of 230,000 miles of transmission line

and tens of thousands of miles of gas pipeline that are going to be

necessary to meet these growth curves that are predicted, and reasonably predicted, for the future.

As many of you know, I have been a critic of giving the Federal

Government eminent domain over private property, believing that

that siting authority could best reside in the States. At the same

time, I recognize the problem and recognize that we cannot sit idly

by, as our chairman just recognized, and allow the NIMBYphites

of this country to understood the kind of connective processes we

have so effectively put in place over the years that have built the

marvelous electrical system that we have.

It needs to be upgraded and it needs to be upgraded rapidly. We

are changing concepts of management in how we handle transmission systems in this country in a restructured environment. All

of that has to come to play as we determine how we solve the energy crisis we are clearly in. There is no excuse for this other than

the blame ourselves for allowing it to happen. Now we ought to be

5

smart enough—and I think we are—to get out of it and to do so

in sometimes extraordinary ways.

But we should not walk all over the right of the private property

owner, nor will we walk all over the environment. All of this can

be done and done I think effectively with the environment in mind

and with private property in mind, and out of that, our job is to

strike a balance.

So, I am anxious to hear from all of you this morning, as you express your concerns—some of you have had direct experience in

this problem—and how we deal with it. We must deal with it.

Thank you.

STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR

FROM WYOMING

Senator THOMAS. This is, I think, going to be a very interesting

time. We all know what the problem is. I think most of us understand and most people understand what needs to be done over

time. When consumption goes up and production does not, then you

have obviously a problem.

I think a couple of issues, however, that we have not talked

about a lot are, one, what we can do, if anything, in the more immediate future. I think that is going to be important. And the other

then is having gotten into a position to produce energy, whether it

be through gas, whether it be through coal or electricity or whatever, then how do we get it where we are going?

The electricity is supposed to grow. 1,300 plants are projected

over the next several years in order to do something there.

Natural gas, a 52 percent increase in the next several years.

So, what are we going to do?

Limitations on infrastructure have been a real problem, of

course. There has been a decline of 5 percent in transmission investments over time. But I think we have to look at interstate—

and I agree with my friend from Idaho, but if we are going to have

interstate transmission, if you are going to produce coal, mine

mouth, for example, in Wyoming, and the market is in California,

then how do you do that? I think we have to find a way to have

interstate transmission. We need maybe to take a look at a national transmission grid, perhaps operated by an independent operator of some kind.

But eminent domain is going to be an issue.

Who is going to own these facilities, and how does a producer,

particularly a merchant producer or generator, get on these movements? The cost of transmission. Someone said the other day that

gas at the wellhead in Wyoming is less than $5 and about $14

when it gets to the State of California. If that is the case, we have

got a little problem in the cost of movement of these kinds of

things.

So, in any event, it is very exciting to talk about it.

I notice in today’s paper they are saying the Cheney report is

probably going to say that the Nation needs 36,000 miles of natural

gas pipeline in order to meet the needs. So, we have got some problems.

I look forward to your comments.

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Senator DOMENICI [presiding]. I am not going to have any opening remarks. We are going to proceed. We have four witnesses

today. Mr. Nugent, Commissioner of Maine Public Utilities Commission, Augusta, Maine, on behalf of the National Association of

Regulatory Utility Commissioners, would you please proceed?

STATEMENT OF WILLIAM NUGENT, COMMISSIONER, MAINE

PUBLIC UTILITIES COMMISSION, AUGUSTA, ME, ON BEHALF

OF THE NATIONAL ASSOCIATION OF REGULATORY UTILITY

COMMISSIONERS

Mr. NUGENT. Thank you, Mr. Chairman, members of the committee. Thanks for having me back.

You may recall the last time I was here I was asking you that

you work with the administration to produce a fully constituted

FERC, appointing the people to the two vacancies. Now, I do not

know what you did, but the two nominations have been made. I understand you are going to have hearings on them very quickly, and

President Bush has nominated in Pat Wood of Texas and Nora

Mead Brownell of Pennsylvania two able, energetic, and knowledgeable people. There are no finer candidates among the 220

State commissioners. So, I thank you for however you pulled that

off. You did a good job.

But on today’s subject, on the infrastructure thing, I think it is

useful to divide your consideration of it into the three broad categories of natural gas pipelines, electric generating facilities, and

electric transmission lines.

In my experience, the FERC-run siting process worked very well

in Maine for the gas pipelines. FERC sited, permitted, and supervised construction of more than 400 miles of natural gas pipelines,

including several river crossings, crossings of trout and salmon

streams and other environmentally sensitive areas, in about 36

months. There may be problems in pipeline siting, but they do not

seem to be apparent in Maine or, for that matter, in New England.

There seem to be few impediments to building new generation in

New England. As Mr. Cook is likely to tell you, New England has

brought 2,300 megawatts on line this year, a 10 percent addition

to New England’s capacity. We now have a capacity margin, with

a tie line from Hydro-Quebec, of more than 18 percent. Maine alone

has built five generating stations totaling more than 1,600

megawatts in the last 3 years. That is twice as much generation

as California and we are one-twenty-fifth their size.

Right now the real impediments, if they may be called that, in

siting generating stations or the real realities are fuel supply and

capital. 3 or 4 years ago, the announcement was we were going to

build 30,000 megawatts, 30 gigawatts of new generating capacity

in New England. And many of us wondered how you are going to

do that. The question is is there enough natural gas supply to

power 30,000 megawatts of new generating stations. And the answer was, well, there seems to be enough for four to six. Now we

are up to six to eight. On one of those new pipelines that was created through Maine, new compressors are being added to increase

the capacity by 50 percent. So, the market seems to be responding

there. I do not know whether we will get all the way to 30,000

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megawatts in the short-term future, but it does seem to be responding.

Generating companies seem to announce three, four, or five

projects across New England and then actually build maybe two or

three of them, abandoning the remainder for the moment. It seems

to be a response to a dynamic market. Someone else’s project may

have gotten to the market first. While you were planning and

building yours, someone else already brought theirs on line. It may

be that the best way of being certain of having two new plants

playing in the local market in 3 years is to start developing for and

then move in response to the opportunities. You want to see where

you can get the best combination of local support and access to

markets.

The biggest puzzle remaining is transmission development. It is

a puzzle because I am not aware of very many examples in this

area and because New England, to my knowledge, has not yet developed a program to beef up the system for future growth in a

comprehensive way.

There are four examples that come to mind. We constructed 38

miles of transmission across Maine to connect a new generator in

Rumford to the grid. There is now under consideration a 90-mile

transmission line, a second transmission line, to connect Atlantic

Canada to the New England grid. There was some transmission development in the Boston area, and transmission upgrades in Maine

to bring that 16,000 megawatts into the New England market.

The Rumford program went quite well actually, although it confronted State regulators with some new problems. Normally in a

regulated environment, when you wanted to build transmission

and to issue a certificate of public convenience and necessity, you

first examined need. Does the market need more power? Then what

plant were you going to build to supply that power. Then if you

needed a transmission line, it followed that you would grant the

authority to condemn the land, or eminent domain, if necessary.

First you try to acquire it. If you cannot get it, use the eminent

domain.

Where are you in a world where four developers may see a market opportunity and each does develop his own generation to meet

the same need? Do you grant eminent domain authority in that circumstance? It is not as clear as it was in a fully regulated environment. There are more alternatives and you are trying to respond

to markets.

With regard to the MEPCO line, right now the proponents of

that line are not pushing it very aggressively, and to some extent,

it is a question of cost. Can you build that line and bring Atlantic

Canada energy into the New England market in a cost effective

manner?

In the Boston area, you are dealing with a situation in which

there was a load pocket. Sithe Energy started to develop a generator, was under construction with a generator in that area to meet

the load in that area, and transmission interests moved up and developed an alternative solution to the problem, socializing the costs

across the New England area. The importance of this example is

that you have to see generation solutions as an alternative to

transmission solutions. Do you put generation close to the market

8

and avoid the need to build transmission, or do you build the generation at some distance, and then are you confronted with the

need to move the power from that distant location into the market?

To some extent, we are dealing with mismatches in these circumstances. Who should build these transmission facilities? Utilities or merchant transmission plants? Should it be a regulated activity or an entrepreneurial activity? Before anyone jumps aboard

the ‘‘let it just be fully competitive,’’ remember that we are dealing

with a very scarce resource, and freeing it up to a fully competitive

environment could produce pricing behavior similar to what is

going on in the California energy market.

Now, with regard to regional solutions, you should know that the

New England Conference of Public Utilities Commissioners has a

long history—these are the six commissions from the six New England States—of working closely together. We have paralleling us in

the private sector an independent system operator, which operates

the transmission grid throughout the New England system.

The New England commissioners have recommended that a regional regulatory authority be established—they have done this in

comments to the FERC—and that it work in concert with the

FERC to oversee market activities. Our commission recommends

that we take that a step further and make it a fuller regional regulatory advisory group to the FERC so that the authority would

repose in the FERC. People close to the scene would develop solutions that met the conditions on the ground in New England, recommended to FERC. If FERC felt it met the national standards,

the FERC, over a period of time by affirming these decisions, would

tend to give credibility to this model.

I offer that as a model for New England only. I do not suggest

that this is what western Governors ought to do or anyone else. I

think maybe what we ought to do is let models develop in different

parts of the country that meet a national standard, but that the

individual models are tailored to meet local conditions.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Nugent follows:]

PREPARED STATEMENT OF WILLIAM NUGENT, COMMISSIONER, MAINE PUBLIC

UTILITIES COMMISSION, AUGUSTA, ME

Good morning. My name is Bill Nugent. I am a Commissioner on the Maine Public Utilities Commission and First Vice President of the National Association of Regulatory Utility Commissioners, commonly known as NARUC. I greatly appreciate

the opportunity to appear before the Senate Energy and Natural Resources Committee on behalf of NARUC and I respectfully request that NARUC’s written statement

be included in today’s hearing record as if fully read.

NARUC is a quasi-governmental, nonprofit organization founded in 1889. Its

membership includes the state public utility commissions for all states and territories. NARUC’s mission is to serve the public interest by improving the quality and

effectiveness of public utility regulation. NARUC’s members regulate the retail rates

and services of electric, gas, water and telephone utilities. We have the obligation

under State law to ensure the establishment and maintenance of such energy utility

services as may be required by the public convenience and necessity, and to ensure

that such services are provided at rates and conditions that are just, reasonable and

nondiscriminatory for all consumers.

Today I have been asked to address the issue of ‘‘impediments to siting energy

infrastructure.’’

As a nation, we want the lights to come on whenever we flip the switch. We want

to run all of our consumer goods that use electricity as inexpensively as possible.

We want to be able to be employed by and own companies that produce these elecVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
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tric-powered consumer goods. We want our companies to be able to buy power at

interruptible rate levels, but never have to be interrupted.

However, we do not want generation facilities fouling the air, water, and land, nor

do we want transmission lines running through our communities or near our schools

or homes. We do not want gas pipelines running under our feet or near our communities. We do not want to pay any additional costs associated with renewable energy. We do not want to spend the money necessary on research to find technologies

to replace the energy sources we currently depend upon.

Therefore, the conclusion that we must draw from all of this is that the main impediment to siting energy infrastructure is the great difficulty in getting public acceptance for needed facilities. Quite frankly, this tells us that no matter where

siting responsibility falls, with State government or the Federal government, siting

energy infrastructure will not be easy and there will be no ‘‘quick fix’’ to this situation.

Historically, the States have had the responsibility and authority to site transmission, generation, and intrastate pipelines. In fact, the generation and transmission infrastructure that is currently in operation now, as well as that infrastructure currently under construction, has received State siting approval. Additionally,

those infrastructure projects that are in the planning stages are being planned with

State approval in mind.

Make no mistake, NARUC and its membership understand that additional generation and transmission is necessary in all regions of the country. NARUC’s members are also well aware of the difficulties evolved with the siting of these facilities.

The fact remains that in spite of these difficulties, the States have been successful

in siting the electric infrastructure that exists today. However, we must also continue to be cognizant of the basic laws of physics. As much as we all would like to

be able to move electrons from wherever they are produced to wherever they are

needed, like we can with natural gas molecules, the electric transmission system is

not able to accommodate those types of transactions. In other words, the transmission system as it now exists was not built to handle the types of wholesale transactions that a competitive market will require. This means we will have to be innovative to make the system function the way we need it to function.

NARUC believes that the States should do more to improve upon the tremendous

success story of the nation’s electricity infrastructure. States exercising jurisdiction

over the siting and certification of transmission facilities should not discriminate

against interstate facilities, meaning that in general, interstate facilities should be

sited, certificated, and otherwise regulated under the same standards and procedures as intrastate facilities.

NARUC supports voluntary regional bodies that permit the States in which an

interstate transmission facility is proposed to be sited, to issue certificates authorizing the construction of the proposed facility through collective decisionmaking. If

States choose to retain certification authority for themselves, there should be agreed

upon mechanisms to resolve disputes where individual States involved have come

to conflicting and/or inconsistent determinations in their respective deliberations.

These voluntary regional bodies could: address siting of transmission; identify regional bulk power market needs for State siting agencies to consider in their respective deliberations; and, plan for the construction of new interstate transmission facilities.

Congress should affirm that States have the primary authority to establish, operate and govern these voluntary regional siting bodies, and the Federal Energy Regulatory Commission (FERC) could act as an appropriate ‘‘backstop’’ authority where

States or regions fail to act. Additionally, Congress should provide an explicit grant

of authority to the States and FERC to act in cooperation.

In conclusion, NARUC believes that States are the appropriate authorities to exercise jurisdiction over the continued siting of most energy infrastructure, including

electric transmission and generation. Additionally, NARUC supports a voluntary regional body approach to address the siting of transmission facilities. Until we all

begin to make sacrifices, it will continue to be extremely difficult to improve our energy infrastructure. We as public officials must also try to use our positions to apply

reason rather than fanning the flames of emotion.

Thank you for your time and attention. NARUC members and staff look forward

to working with the members of this Committee to put forth a successful national

energy policy. Thank you again and I look forward to your questions.

The CHAIRMAN [presiding]. Thank you very much.

Mr. Cook.

10

STATEMENT OF DAVID N. COOK, GENERAL COUNSEL, NORTH

AMERICAN ELECTRIC RELIABILITY COUNCIL, PRINCETON, NJ

Mr. COOK. Good morning, Mr. Chairman and members of the

committee. My name is David Cook. I am general counsel for the

North American Electric Reliability Council. I have submitted detailed testimony for the record.

NERC commends this committee for taking on the critical issues

of transmission infrastructure. NERC firmly believes that steps

must be taken to improve that infrastructure if the Nation is to

reap the benefits of competitive electricity markets.

The committee’s hearing is especially timely. Today NERC is releasing its 2001 summer assessment which evaluates the reliability

of the bulk electric system for June through September. NERC

agrees with the overall conclusions of the California independent

system operator that it will not have sufficient resources to meet

expected demand this summer and that rotating blackouts will be

necessary. However, NERC expects those conditions to be more severe than reported by the California ISO, in part because our assessment is based on more current information. We expect rotating

blackouts in California for about 260 hours over the course of this

summer, with the average size of the curtailments about 2,100

megawatts and as much as 5,000 megawatts curtailed at peak periods.

Extreme drought conditions throughout the Pacific Northwest

will reduce the available output of hydro resources. Although we

expect it to be able to serve all its firm demand this summer, it

will not have electricity available to export to California and elsewhere. Unless the region receives significant precipitation during

the summer and fall, the Pacific Northwest may well experience capacity shortages this coming winter.

New England and New York have adequate resources to meet

their demand this summer, but they bear watching because those

areas are particularly sensitive to long-term heat waves and higher

than anticipated generating unit outages.

Attachment A to my testimony is the Summer 2001 Assessment

Summary Report. The full report, as well as a more detailed special

report focusing on California and the Pacific Northwest, may be

downloaded from NERC’s website.

Several factors contribute to the challenges we face. First, demand has been steadily increasing. Actual demand and energy

growth rates experienced in the United States over the last 10

years have been consistently above what people have projected that

growth rate would be. Merchant generators are now building new

plants to meet that increased demand in response to increased

prices that we have been seeing on the wholesale markets.

But the same is not true for transmission. Over the last 10 years,

circuit-miles of high voltage transmission lines increased at less

than 1 percent per year. Over the next 10 years, we are projecting

that circuit-miles of high voltage transmission will increase at a

rate of less than half of 1 percent a year. Stated another way, in

North America 10 years ago, we had a little under 200,000 miles

of high voltage transmission lines. Right now we have about

200,000 miles of high voltage transmission lines, and 10 years from

11

now, we are projecting that we will have just a little over 200,000

miles of high voltage transmission lines.

The lack of additional transmission capacity means that we will

increasingly experience limits on our ability to move power around

the country and that commercial transactions that could displace

higher priced generation will not occur. It could also mean that

areas experiencing supply shortages will not be able to count on

other areas with ample generating resources to help in emergencies.

The existing grid is also being pushed harder and used in ways

for which it was not designed. The systems were not generally designed to move large blocks of power from one part of the country

to another across multiple systems. Yet, that is the way business

is being conducted today.

The increasing stress on the grid shows up in two ways. First,

there is more congestion on the grid for more hours. On many days

last summer, NERC transmission loading relief procedures had to

be invoked to curtail transactions that were overloading the transmission facilities between north and south in the Eastern Interconnection. The interruptions resulted in lost business for the merchants. For the buyers, it meant replacing that power with higher

priced generation and, in some cases, interrupting interruptable

customers. What did not show up are transactions that merchants

or marketers decided not to engage in because of the likelihood

they would be interrupted. We expect those conditions again this

summer.

NERC is also seeing increased violations of the reliability rules.

There are steps that we can take to improve our structure, however.

First is to pass legislation that would establish mandatory reliability rules. NERC and a broad coalition has been pushing that.

Senator Smith has reintroduced the reliability legislation that

passed the Senate last year as S. 172. The NERC legislation has

been included in both Senator Murkowski’s bill, S. 389, and Senator Bingaman’s bill, S. 597. I was pleased to note that just last

week the Western Governors Association reaffirmed their support

for such legislation.

Second, we need to remove impediments to expansion of the

transmission grid, and I would put those impediments in three

areas. The first has to do with siting and certification. Projects that

would strengthen the grid are just not getting built. Imagine a

mine-mouth generating plant in the Powder River Basin with a direct current transmission line to Chicago and to the west coast.

Under our current process, some sort of separate certification and

siting would be needed in each State that that line crossed, as well

as dealing with the Federal resource and land management agencies. If we had a single unified process, that kind of project could

get built. We need to change how we do things.

A second major impediment has to do with economics. The rates

of return that are being given on transmission are not likely compensating people for their risk. A robust transmission system

would pay large dividends by increasing our supply options and allowing us to move large blocks of power around. We are being

penny wise and pound foolish about the transmission system.

12

* Retained in committee files.

Finally, under utility restructuring, it is now less clear who has

responsibility and authority to build transmission. We need to develop mechanisms for assessing what additional facilities the network requires and clearly assigning who has the responsibility and

authority to build them.

There is no magic bullet. There is no single thing to be done that

will solve these problems. We need to pursue a whole portfolio of

actions. But operating around limitations and foregoing economic

opportunities because we cannot find a way to expand our energy

infrastructure is not a sound or responsible strategy.

Thank you very much.

[The prepared statement of Mr. Cook follows:]

PREPARED STATEMENT OF DAVID N. COOK, GENERAL COUNSEL, NORTH AMERICAN

ELECTRIC RELIABILITY COUNCIL, PRINCETON, NJ

SUMMARY

The North American Electric Reliability Council (NERC) firmly believes steps

must be taken to improve the electricity transmission infrastructure if the Nation

is to reap the benefits of competitive electricity markets. The development of the

United States transmission infrastructure has lagged far behind other developments

in the electric industry. Even if competitive electricity markets were not the goal,

the limitations of the transmission system seriously restrict the choices that we

have available for meeting the growing demand for electricity.

NERC is a not-for-profit organization formed after the Northeast blackout in 1965

to promote the reliability of the bulk electric systems that serve North America. It

works with all segments of the electric industry as well as customers to ‘‘keep the

lights on’’ by developing and encouraging compliance with rules for the reliable operation of these systems. NERC comprises ten Regional Reliability Councils that account for virtually all the electricity supplied in the United States, Canada, and a

portion of Baja California Norte, Mexico.

RELIABILITY

The challenges before us are to develop a robust transmission system to support

expanding trade in electricity and to maintain the high level of reliability that our

nation’s businesses, citizens, and the economy itself depend on. Reliability means

different things to different people. For the customer, it could mean, ‘‘Does the light

come on when I flip the switch?’’ Or, ‘‘Does a momentary surge or blip re-boot my

computer or cause me to lose a whole production run of computer chips I was manufacturing?’’

NERC defines the reliability of the interconnected bulk electric system in terms

of two basic and functional aspects, adequacy and security. Adequacy means the

ability of the electric system to supply the aggregate electrical demand and energy

requirements of the customers at all times, taking into account scheduled and reasonably expected unscheduled outages of system elements. Security means the ability of the electric system to withstand sudden disturbances such as electric short

circuits or unanticipated loss of system elements. The challenges we face concern

both the adequacy of the transmission system and our continuing ability to maintain the security of the bulk power system.

2001 SUMMER ASSESSMENT

The Committee’s focus on this issue is especially timely: Today NERC is releasing

its 2001 Summer Assessment,* which evaluates the reliability of the bulk electricity

system in North America for June through September of 2001. It assesses the expected demand and the resources available to meet that demand this summer and

also addresses transmission reliability issues.

The Assessment concludes that California will experience significant difficulties

meeting its projected electricity demand this summer, with involuntary demand curtailments (rotating blackouts) expected during many hours of the summer. Extreme

drought conditions throughout the Pacific Northwest will reduce the available output of hydroelectric resources. Although the Pacific Northwest is expected to serve

13

all its firm demand this summer, it will not have electricity available to export to

California and elsewhere. In addition, the report cautions that New England, New

York City, and Texas should be closely watched, despite having adequate re sources

to meet demand. New England and New York City are particularly sensitive to

long-term heat waves or higher-than-anticipated generating unit forced outages.

Texas will undergo a major shift in its operation in June when it opens up a new

retail market system and consolidates to a single control area. The report concludes

that generating resources should be adequate to meet projected electricity demands

in other areas of North America this summer.

The Assessment also points to concerns regarding north-to-south transmission

transfer capability in the eastern portion of the United States, particularly east of

the Mississippi River. The ability to transfer electricity from the north to the south

in the Eastern Interconnection was severely tested last summer, spurred on by temperature diversity (cool temperatures in the north and hot in the south), plus high

fuel prices in the south. Early indications are that key transmission interfaces used

to transfer electricity from north to south are already fully subscribed and transmission congestion will again be prevalent in this area throughout the summer.

As a supplement to its 2001 Summer Assessment, NERC conducted an in-depth

independent examination of the expected summer conditions in both California and

the Pacific Northwest based on interviews with experts from both the California

Independent System Operator (CAISO) and the Northwest Power Pool (NWPP).

NERC agrees with the overall conclusions of the CAISO that the CAISO will not

have sufficient resources to meet expected demand this summer and that involuntary curtailments of firm customer demand (rotating blackouts) are expected. However, NERC expects those conditions to be more severe than reported by CAISO, in

part because the NERC assessment is based on more current information. NERC

anticipates that firm demand in California may be curtailed for about 260 hours

over the course of this summer, with the average size of the curtailments about

2,150 MW, and as much as 5,000 MW required to be curtailed at peak periods.

The NERC assessment of the NWPP concludes that this subregion will serve all

its firm electricity commitments this summer. However, due to limited energy output from hydroelectric facilities resulting from severe drought conditions, NWPP

will not have the ability to export the amounts of electricity it traditionally has to

California or elsewhere. Unless the region receives significant precipitation during

the summer and fall, the Pacific Northwest may well experience capacity shortages

this coming winter.

Attachment A to my testimony is the 2001 Summer Assessment Summary Report.

The full report, as well as the Special Report that focuses in more detail on California and the Pacific Northwest, may be downloaded from NERC’s web site at

www.nerc.com.

HOW THE SYSTEM WORKS

The California experience has focused peoples’ attention on electricity issues in

ways they never have in the past. Because of that increased awareness, we can use

the California experience to talk about how the bulk electric system really works.

California is not an island; it is part of a much larger grouping that we refer to

as an Interconnection. The North American grid is divided into three Interconnections. The Western Interconnection includes not only California, but also the rest

of the United States from the Rocky Mountains to the Pacific coast, as well as the

Canadian provinces of British Columbia and Alberta, and a portion of Baja California Norte, Mexico. The Eastern Interconnection includes not only most of the United

States east of the Rocky Mountains, but also Canadian provinces from Saskatchewan through the Maritimes. The third Interconnection comprises the Electric Reliability Council of Texas.

The interconnected nature of utility operations makes possible the transfer of

power from one area to another for economic reasons as well as sharing resources

in emergencies. California is a summer-peaking area, and it normally imports surplus power from the Pacific Northwest in the summertime to augment its own generating resources. By contrast, the Pacific Northwest is a winter peaking area, and

it normally imports surplus power from California in the wintertime. That hasn’t

happened this year.

California has also demonstrated the limits on the transmission system. No doubt

you’ve heard of Path 15, a link between Southern and Northern California. Earlier

this year, on some days the California Independent System Operator had to curtail

firm load in Northern California, even though sufficient generation resources existed

in Southern California to meet the load. Path 15 was loaded to its limits and there

simply was no way to move additional energy into Northern California.

14

Interconnected operations also mean that a disturbance occurring in one part of

an Interconnection can have adverse effects throughout the Interconnection. The

1996 Western outage that affected San Francisco, Los Angeles, and the desert

Southwest and shut down the Diablo Canyon nuclear power plant started with a

tree contacting a power line in Idaho. And whether an individual state chooses to

open up to retail competition or not, the states are still connected together as part

of one Interconnection.

WHAT’S HAPPENING NOW: DEMAND AND GENERATION

A number of factors have contributed to our present circumstance. First, demand

has been steadily increasing. The consensus projection for the average annual peak

demand growth over the next ten years is a relatively modest 1.9% for demand and

1.9% for energy use. The projected growth in demand is similar to the projections

of the last several years. High and low bands around the base forecast show a range

of the forecast uncertainty to account for weather, economic growth, industry deregulation, and other factors. Both peak demand and energy projections are substantially below the actual growth rates experienced over the last ten years as demand has been driven by extreme weather at peak times and a strong economy. Actual demand and energy growth rates experienced in the United States over the last

ten years have actually been closer to the rate calculated as the high band for both

demand and energy.

Second, in many parts of the country merchant generators are now building new

plants to meet that increased demand, in response to the increased prices that we

have been seeing in the wholesale electricity markets. During the past 10 years,

generation was being added at the rate of only 0.86% per year, even while demand

was growing at the rate of 2.7% per year. That picture is changing, although in

some parts of the country supplies will be tight for the next few years. Over 20,000

MW of new merchant capacity came on line to serve demand in the United States

for the summer 2000. This year, New England has added another 2,300 MW. The

Electric Reliability Council of Texas has added more than 6,000 MW. The East Central Area Reliability Council has added more than 4,000 MW since last summer. A

crucial 600 MW is being added within New York City and Long Island. While that

story is not being repeated everywhere, even California, which is experiencing shortages now, is expected to have significantly increased reserve margins within a few

years.

WHAT’S HAPPENING NOW: TRANSMISSION

The same is not true for transmission. Over the last 10 years, circuit-miles of high

voltage transmission lines (230 kv and above) increased at only 0.75% per year.

Over the next 10 years we are projecting that circuit miles of high voltage transmission will increase a total of just 4.2%, or a rate of less than 0.5% per year. Stated

another way, in North America 10 years ago we had a little less than 200,000 circuit-miles of high voltage transmission lines. Right now we have about 200,000 circuit-miles of those lines. And 10 years from now we are projecting that we will have

just a little over 200,000 circuit-miles of high voltage transmission lines. The transmission dollars that are being spent today are to connect the new generation to the

grid—they are not going to build new lines to strengthen the grid’s ability to move

large blocks of power from one part of the country to another. That lack of additional transmission capacity means that we will increasingly experience limits on

our ability to move power around the country and that commercial transactions that

could displace higher priced generation won’t occur. And, it will mean that areas

experiencing supply shortages, like California is now, won’t be able to count on

other areas with ample generating resources to help in emergencies.

Moreover, the existing grid is being pushed harder and is being used in ways for

which it was not designed. Historically, each utility built its system starting in the

city-centers, because the early generating stations were located close to load centers.

As the cities grew, the electric systems grew with them, spreading outward from the

center. The weakest part of the electric grid is generally at the places where one

system abuts another. Initially utilities installed connections between two systems

for emergency purposes and to share generating reserves to keep costs down. Gradually those interconnections were strengthened so that adjoining utilities could buy

and sell electricity when one had lower cost generation available than did the other.

But the systems were not generally designed to move large blocks of power from

one part of the country to another, across multiple systems. Yet that is the way

business is being conducted today. The volume and complexity of transactions on

the grid have grown enormously since the advent of open access transmission.

15

Electric industry restructuring adds to the challenge. In the past a vertically integrated utility had complete responsibility for all aspects of its electric system, from

planning and building the transmission system, through assuring that sufficient

generation was constructed, to operating and maintaining the transmission and distribution systems. With restructuring, those responsibilities are being divided

among multiple entities and, in some cases, those responsibilities may be falling between the cracks. Regional Transmission Organizations may provide a means to reintegrate some of these functions. But the RTO proposals that have been filed to

date vary considerably in the extent to which the RTO has the authority to take

on the responsibility for expanding the transmission system. In some parts of the

country existing entities, such as the PJM Independent System Operator, have successfully integrated those functions. It remains to be seen whether that degree of

integration will be replicated in other parts of the country, and whether neighboring

RTOs will strengthen the interconnections between them.

The result of all this is that the transmission grid is being increasingly stressed.

That stress shows up in two ways. First, NERC is seeing more congestion on the

grid, for more hours of the day. Last summer in the Eastern Interconnection there

were substantial transfers of power from north to south. Cooler temperatures in the

north meant that surplus generation could seek higher prices in the south where

the temperatures were hot. On many days security coordinators had to invoke

NERC transmission loading relief procedures to curtail transactions that were overloading the transmission facilities between north and south. The interrupted business deals resulted in lost business for the merchants and a need to replace the

transaction with higher priced power for the buyers and, in some cases, interruption

of interruptible customers. What do not show up are the transactions that merchants or marketers decided not to engage in because of the likelihood they would

be interrupted. We know that those same transmission facilities are fully subscribed

for the coming summer, meaning we could see a repeat of last year’s pattern if we

experience similar weather conditions and fuel prices.

Second, NERC is seeing increasing violations of its reliability rules. The grid is

generally operated in a first contingency mode, that is, so that the grid can withstand the loss of its largest element and remain stable and secure. That means that

all the transmission lines are operating within their own thermal limits as well as

the operating security limit of the grid (meaning that the failure of a particular line

won’t cause a cascading failure of another line, collapse of system voltage, or instability of generators). So when a large transformer fails or lightning strikes a power

line, as happens as a matter of course, the grid can absorb that loss without losing

its integrity. Operating in this manner preserves the stability of the grid, but it does

sometimes place limits on the amount of power that can be moved from one part

of the grid to another.

This is the area where NERC’s rules operate, setting the standards by which the

grid is operated from moment to moment, as well as the standards for how future

transmission systems must perform. Those latter standards include the things that

need to be taken into account when one plans and constructs an integrated system

that is capable of being operated securely. The NERC standards do not design

where facilities go, either transmission or generation, or what kind or how many

facilities should be built. They do indicate what system performance tests must be

met, which influences how the system must be built if it is to be capable of secure

operation. So, when fewer transmission facilities are built, operating the system in

a secure fashion will place limits on the amount of power that can be transferred.

Last summer there were a number of instances where operators allowed facilities

to remain loaded above their security limits for extended periods of time, placing

the grid at prolonged risk of major failure. Some entities have made the economic

judgment that it is less costly to them to violate the rules than to follow them. We

have seen entities improperly leaning on the Interconnection, causing unscheduled

and unmanageable flows and potential voltage problems. As the limits of the system

are reached and transactions must be curtailed, we are beginning to hear suggestions to relax the reliability rules to allow higher flows to occur. In an interconnected system, taking such risks to realize some short-term economic gain affects

not only the system where the limit occurs, but also all the systems in the same

Interconnection. For example, in the 1996 outages in the Western Interconnection,

customers far away from the initiating problems were interrupted for significant periods of time.

WHAT’S NEEDED

Fortunately, there are steps we can take to improve our transmission infrastructure. First is legislation to change from a system of voluntary reliability rules to one

16

that has mandatory rules coupled with an enforcement mechanism backed by government. NERC and a broad coalition of industry supporters have been pursuing

legislation to achieve enforceable reliability rules.

Goals of Reliability Legislation

• Mandatory and enforceable reliability rules, for

• All operators and users of the bulk power system in North America

• Fairly developed and fairly applied, by

• Independent, industry self-regulatory organization

• Oversight within U.S. by FERC

• Must respect the international character of the interconnected North American

electric transmission system

• Regional entities will have a significant role in implementing and enforcing

compliance with these reliability standards, with delegated authority to develop

appropriate Regional reliability standards.

The self-regulatory organization model follows that of the securities industry,

where the National Association of Securities Dealers and the securities exchanges

act as self-regulators under SEC oversight.

Last year the Senate adopted the NERC legislation as S. 2071, but the bill died

in the House. Senator Smith reintroduced that legislation this year (S. 172). In addition, the NERC legislation (including provisions addressing the roles of the states

and coordination with regional transmission organizations) has been included in

both Senator Murkowski’s bill (S. 389) and Senator Bingaman’s bill (S. 597). NERC

strongly urges you to adopt legislation containing the reliability provisions in this

session of Congress. That will enable us to develop an organization and infrastructure to enforce the reliability rules and keep the grid secure.

Second, we need to remove the impediments to expansion of the transmission

grid. I would group the impediments into three major areas. The first has to do with

the certification and siting of new transmission facilities. Imagine a project to build

a mine-mouth generating plant in the Appalachians with a large, direct current line

to deliver the power to New York City and New England. Or a similar mine-mouth

plant in the Powder River Basin, with direct current links into Chicago and to California, so electricity could be delivered to where it was needed. Those lines would

cross many states, and under out current process some sort of separate certification

and siting procedure would be required for each one. Often, the relevant state laws

were enacted at a time when the public utility operated local generation to serve

local customer demand. In order to receive a certificate of need, the utility had to

demonstrate local benefits to justify the impact of building the transmission lines

it needed. Local opposition to transmission facilities can be daunting, especially

where there is no perception of local benefits. Yet these are really interstate facilities that affect a whole region or even many regions. If the proposed facilities cross

federal lands, then the Federal Land Management Policies Act is triggered, and

even more procedures are involved. Projects that would strengthen the grid are

today being delayed due to an inability to obtain certification and rights of way.

Other projects are not even attempted, as potential developers decide not to undertake the effort. We need to change how we do things.

A second major impediment to expanding the transmission grid has to do with

economics. The cost of transmission is a relatively small portion (6 to 8%) of the

overall cost of delivered electricity. Against the prices that prevail in the West

today, that number is even smaller. A robust transmission system would pay large

dividends by increasing our supply options and allowing us to move large blocks of

power from where it is available to where it is needed. Yet the regulated rates that

we allow transmission owners to charge may not compensate for the risk they take

on. Requiring that investment to be recovered over a period of thirty years may no

longer be practical. We need a rate paradigm that recognizes the value that transmission plays in our economy. As well we need a rate paradigm that allows those

who build new transmission to recover their investment. The way business is now

conducted on the grid, capacity that one transmission owner adds may well be consumed by the parallel flows of transactions of others who purchased a ‘‘contract

path’’ on other facilities.

Finally, there is the issue of how many different entities own pieces of the grid

and have various responsibilities for it. I earlier spoke about the changes occurring

from restructuring as the functions and responsibilities formerly handled by a vertically integrated utility are divided among different entities. Who has the responsibility and authority to build transmission is now less clear. We need to develop

mechanisms for assessing what additional facilities the network requires and clearly

assigning who has the responsibility and authority to build them.

17

There are models that point the way. One very promising model can be found

within the Electric Reliability Council of Texas. ERCOT uses an annual collaborative process of stakeholders to decide what facilities need to be added to the grid

to serve the expected load. Once the needed facilities are identified, the responsibility to build the facilities is assigned to one of the transmission owners within

ERCOT. A governmental authority (the Texas Public Utilities Commission) with jurisdiction as broad as the grid conducts the proceeding to determine whether to certificate the facilities and where to site them. The fact that the proposed facilities

are the outgrowth of the collaborative process carries significant weight in the state

proceeding. The costs of building the facilities are then allocated equitably to all

load served by the grid and to others who use the grid.

CONCLUSION

NERC commends the Committee for attending to the critical issue of enhancing

our transmission infrastructure. There is no magic bullet, no single thing to be done

that will solve the challenges we face. Instead, we must pursue a portfolio of actions. We are not likely to achieve everything we would wish for out of any of them,

but taken together, the portfolio approach provides the strongest opportunity for us

to make the improvements we need. First and foremost, we need legislation authorizing development of an industry self-regulatory reliability organization to set and

enforce mandatory reliability rules for all users of the bulk power system. That will

promote and maintain the reliable operation of the bulk power system that we do

have. Further, we need to expand demand-side measures and develop additional

generation (both central station and distributed). Finally, we need to expand the

transmission grid, by both building new lines and exploiting new technologies to get

more capacity out of the existing grid and carry more energy over existing rightsof-way.

Operating around limitations and foregoing economic opportunities because we

can’t find a way to expand our energy infrastructure is a not a sound or responsible

strategy. Our nation, its citizens, and its businesses deserve a robust electricity supply system that allows us to realize our full potential. Thank you.

The CHAIRMAN. Mr. Halvorsen, good morning.

STATEMENT OF JERALD V. HALVORSEN, PRESIDENT,

INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA

Mr. HALVORSEN. Good morning, Mr. Chairman. My name is

Jerry Halvorsen. I am president of the Interstate Natural Gas Association of America, and I am here to testify this morning regarding the need for natural gas pipeline infrastructure.

The Department of Energy’s Energy Information Administration

estimates that the use of natural gas will increase from slightly

over 22 trillion cubic feet per year today to somewhere around 30

trillion cubic feet somewhere around 2010. This is a 32 percent increase in gas demand.

Mr. Chairman, before I discuss the natural gas pipeline infrastructure, I want to emphasize, as we have before, the need to continue to develop natural gas supply. INGAA continues to encourage

the administration and Congress to open Federal lands, both onshore and offshore, for exploration and production of natural gas.

Mr. Chairman, 40 percent of the natural gas reserves in this country are offshore, and we absolutely have to get to those reserves if

we are going to meet future needs.

We also, as you know, strongly encourage the development of at

least one natural gas pipeline from Alaska. North Slope producers

report that 6 to 8 BCF per day of natural gas is currently being

reinjected in the Alaska North Slope. This gas, coupled with 1.2

BCF per day estimated to come from the Mackenzie Delta, is expected to comprise 10 percent of the natural gas supply for North

America by 2015. I cannot underscore, Mr. Chairman, the urVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
18

gency—and I know you are a strong advocate of this—of getting

this natural gas to market in the lower 48 States.

The current natural gas pipeline infrastructure will not support

a 30 Tcf market. There simply is not enough pipeline capacity from

the supply basins that will supply this additional gas or address

demand growth in certain areas.

A recent INGAA study estimated our industry would need to invest about $34 billion in interstate pipeline and storage infrastructure development over the next 10 years just to keep up with

where the market is going. An average of approximately 2,000 to

2,100 miles of new natural gas transmission pipeline will be needed

each year, and we estimate that the expenditures for new pipeline

construction will vary between $2.2 billion and $2.5 billion per

year.

Mr. Chairman, we brought a Merrill Lynch map which we have

propped up over here, which shows the proposed projects at the

FERC as of September 2000. The blue lines are the existing interstate pipeline infrastructure, while the arrows describe the proposed addition to the pipeline network.

Currently there are 24 major natural gas pipeline projects pending at FERC, and the list of these projects is attached to our testimony.

I do want to commend Chairman He ́bert and the FERC staff

working to move many of these projects along. FERC approved the

Kern River expansion to California in what we believe is a record,

21 days. FERC is also examining, under Chairman He ́bert’s leadership, how they can further streamline the process, and we think

they are headed in the right direction. Again, we commend Chairman He ́bert for the great job that he is doing.

INGAA still supports having the Council on Environmental Quality, or CEQ, with FERC as the lead agency, forming an interagency

task force to develop an interagency memorandum of understanding to expedite the environmental reviews and permitting of interstate natural gas pipelines. Delays, Mr. Chairman, are not at the

FERC per se, but with the other agencies that are involved in

bringing all these people together. And we think CEQ can help on

this, and we intend to follow up to see what we can do to get their

attention on this.

One impediment that we encounter from time to time is opposition to new or expanded natural gas pipeline facilities by local distribution companies. The last attachment to my testimony shows

the California utilities, mainly Sempra, have protested new interstate pipeline expansions to California. Again, I think everybody in

the gas industry needs to work together if we are going to get the

new capacity built and on line.

In closing, I would like to say that in response to an increasingly

competitive environment, natural gas pipelines have reduced operating costs aggressively over the past decade in response to competition. From 1996 to 1999, pipeline operating costs have fallen by

an average of almost 27 percent. And we have a study on this, Mr.

Chairman, we would be happy to provide for the record.

These decreased operating costs are being passed on to the consumers in the form of lower charges for pipeline transportation.

19

Mr. Chairman, in closing, I would like to assure you that INGAA

and the natural gas pipeline industry are working to meet the increase we foresee in natural gas demand by building the necessary

infrastructure we are going to need for the coming decade.

Thank you very much for this chance to appear.

[The prepared statement of Mr. Halvorsen follows:]

PREPARED STATEMENT OF JERALD V. HALVORSEN, PRESIDENT, INTERSTATE NATURAL

GAS ASSOCIATION OF AMERICA

Mr. Chairman and members of the committee, my name is Jerry Halvorsen. I am

President of the Interstate Natural Gas Association of America (INGAA) and am

here to testify regarding the need for natural gas pipeline infrastructure.

The Interstate Natural Gas Association of America is the trade association that

represents virtually all of the interstate natural gas transmission companies operating in the United States, as well as natural gas transmission companies in Canada

and Mexico. INGAA’s member companies transport over 90 percent of the natural

gas consumed in the United States through over 280,000 miles of interstate pipeline.

The Department of Energy’s Energy Information Administration (EIA) estimates

that use of natural gas will increase from 22.7 Tcf today to 30 Tcf sometime around

2010 (a 32 percent increase in gas demand). Other experts forecast a similar growth

in gas use.

Before I discuss natural gas pipeline infrastructure, I want to emphasis the need

to continue to develop natural gas supply. As we have in the past, INGAA continues

to encourage the Administration and the Congress to open federal lands, both onshore and offshore, to exploration and development of natural gas. The National Petroleum Council has estimated that there are 137 Tcf off limits to develop in the

Rocky Mountain area and another 76 Tcf offshore the continental United States.

We also strongly encourage development of at least one natural gas pipeline from

Alaska. North Slope producers report that 6 to 8 BCF/d of natural gas is currently

being reinjected in the Alaska North Slope. This gas, coupled with the 1.2 Bcf/d estimated to come from the Mackenzie Delta, is expected to comprise 10 percent of the

natural gas supply for North America by 2015. I cannot underscore the urgency of

getting this natural gas to market into the lower 48 states at the earliest possible

date.

The largest area of growth in natural gas demand is expected in electric generation, which currently uses natural gas to fuel 16 percent of electric generation, followed by the industrial sector. The primary reasons for the large growth in the gas

segment of the power generation market are the relatively low capital costs of gasfired generation, the low air emission characteristics of those facilities, and the reduced timeframe it takes to permit and build those facilities. It is estimated that

delivered natural gas prices must stay below approximately $4 per MMBtu for gas

to beat out a new highly efficient coal plant for new power generation. Following

is a chart that shows the benefits that accrue from using natural gas in a 300 Megawatt electric power plant.

COMPARATIVE EMISSION LEVELS FROM A 300-MEGAWATT POWER PLANT

Existing

coal boiler

New coal

boiler

New gasfired combined-cycle

NOX Emissions ......................................................... 0.50 0.18 0.04

(lb/MMBtu).

SO2 Emissions .......................................................... 1.20 0.42 0.00058

Particulate Matter ................................................... 0.11 0.04 0.0029

(lb/MMBtu).

CO2 Emissions .......................................................... 205 205 125

(lb/MMBtu).

The INGAA Foundation has received projections that natural gas use for electric

power generation should be about 6.5 Tcf by approximately 2010. If this projection

is reduced to a lower case of 4.8 Tcf with coal replacing the remainder of the capacity, it is estimated in Implications of Reduced Gas Use on Emissions from Power

Generation, prepared by Energy and Environmental Analysis, Inc., that emissions

of mercury and uncapped nitrogen oxides emissions would increase by 10 percent

20

* Attachments to this statement have been retained in committee files.

and carbon dioxide emissions would increase by 4 percent. The 111,730 million ton

increase in NOX emission is comparable to the NOX emissions from 4 million cars.

The 108 million ton increase in CO2 emissions is comparable to the CO2 emissions

from 28 million cars.

The current natural gas pipeline infrastructure will not support a 30 Tcf market.

There simply is not enough pipeline capacity from the supply basins that will supply

this additional gas or to address growth in certain markets. Energy and Environmental Analysis, Inc. prepared a study for the INGAA Foundation in 1999 called

Pipeline and Storage Infrastructure Requirements for a 30 Tcf U.S. Gas Market. The

INGAA Foundation plans to release an update of this study showing natural gas

demand and capacity needs by region early this summer. The 30 Tcf study estimated that our industry would need to invest about $34 billion in interstate pipeline and storage infrastructure development between 1999 and

2010 just to keep up with where the market is going. An average of approximately

2,000 to 2,100 miles of new gas transmission pipeline will be needed each year. Expenditures for new pipelines and pipeline expansions were $2.2 billion in 1999 and

$2.5 billion in 2000. Three new pipelines, as well as many pipeline expansions, were

brought on line last year—the Alliance Pipeline brings natural gas to the Chicago

area from Alberta, Canada, Vector Pipeline delivers natural gas from Chicago to Indiana and Michigan and ends in the storage fields of Dawn, Ontario and the

Maritimes Northeast Pipeline delivers natural gas from Sable Island, off the East

Coast of Canada, through Maine and into the Boston area.

The Merrill Lynch map that is behind me, and enclosed with this testimony,

shows the now proposed projects at Federal Energy Regulatory Commission (FERC)

as of September 2000. The blue lines are the existing interstate natural gas pipeline

infrastructure while the arrows describe the proposed additions to the pipeline network.

Currently, there are 24 major natural gas pipeline projects pending at the FERC.

(A list is attached to my testimony.) Projects determined to be major are those that

deliver approximately 100 MMcf/day or more. These projects are proposed in almost

every region of the country. If approved, they would add an additional 8,598 MMcf/

day; expand the pipeline system 2,389 miles and cost $9 billion. There are numerous

other filings for pipeline expansions that are well less than 100 MMcf/day also pending at FERC. A number of our companies are also holding ‘‘open seasons’’ to determine where there may be need for additional pipeline capacity. The current rules

at FERC are working. All of our INGAA companies are working to meet the additional demand for natural gas that they see in their own market areas and elsewhere.

The following chart from the Energy Information Administration’s report U.S.

Natural Gas Markets: Recent Trends and Prospects for the Future depicts the proposed natural gas pipeline projects as of March 2001 by region of the country.*

I want to commend Chairman He ́bert and the FERC staff for working to move

many of these projects along. FERC approved a Kern River proposed expansion of

135 MMcf/day to California in what I believe is a record, 21 days. By adding compression to Kern River, this increased supply of natural gas from the Rocky Mountain area should reach the California border by late July of this year. FERC has

also approved conversion of Line 2000 (formerly part of the All American crude oil

pipeline) to natural gas to boost deliverability into California by as much as 230

MMcf/d. This project is scheduled to come on line by the end of August.

FERC is reexamining its process of pipeline construction approval. FERC is considering seeking volunteers on selected new pipeline proposals to begin to work with

FERC on the Environmental Impact Statement prior to completing the application

to file so that the National Environmental Policy Act (NEPA) process can be expedited. It is anticipated that this could reduce the timeframe of certificate processing

for those projects by six to eight months.

This is an important step. Many new natural gas-fired electric facilities can be

built in a year or less from the time they commit to a natural gas supply. However,

if additional pipeline capacity needs to be built, this process, in the best case, could

take over two years to prepare, file and obtain approval.

INGAA members are also building new storage facilities and reopening liquefied

natural gas (LNG) facilities that had been mothballed for many years. (A map of

these existing facilities is attached to my testimony.) These facilities provide supplementary supply. CMS is currently receiving LNG at their Lake Charles facility and

has recently received final approval from FERC to expand their peak send-out capacity. Williams and Southern Natural are restoring facilities at Cove Point, Maryland, and Elba Island, Georgia, respectively. Our member companies are also conVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
21

sidering building new LNG facilities close to growing markets. We project that LNG

will not add substantially to our natural gas resources over the next ten years but

it will provide a niche supply in key areas.

INGAA still supports having the Council on Environmental Quality (CEQ), with

FERC as the lead agency, forming an interagency task force to develop an interagency memorandum of understanding to expedite the environmental review and

permitting of interstate natural gas pipelines. If the affected agencies can work on

their specific approvals concurrently as opposed to sequentially and use a common

file of pipeline information, this can help reduce the time it takes for the NEPA

process and obtaining permits while assuring that all the requirements of NEPA are

met. We hope they will take a lead effort in facilitating the same discussions with

state and local agencies.

One impediment we encounter from time to time is opposition to new or expanded

natural gas pipeline facilities by local distribution companies. For example, one

large east coast pipeline proposal was opposed, at least at some point, by four local

distribution companies. As the last attachment to my testimony shows, California

utilities, mainly Sempra, also have protested new interstate pipeline expansions to

California.

Before closing, I want to point out to the Committee that, in response to the increasingly competitive environment, pipelines have reduced operating costs aggressively over the past decade. Technology, including advanced remote control and telemetering technology, has been a major driver of these lower costs. From 1996 to

1999, pipeline-operating costs have fallen by an average of almost 27 percent.

These decreased operating costs are being passed on to consumers in the form of

lower charges for pipeline transportation. The only exceptions to this pattern are

pipeline systems that have added new facilities to increase capacity.

Mr. Chairman, I want to assure you that INGAA and the natural gas pipeline

industry are working to meet the increase we foresee in natural gas demand by

building the necessary infrastructure to deliver natural gas and storage to end-use

markets. INGAA’s goal is to have a flexible, safe and transparent transportation

grid that will provide clean natural gas to America at a reasonable cost.

The CHAIRMAN. Thank you, Mr. Halvorsen.

Mr. Stan Szwed. Good morning.

STATEMENT OF STANLEY F. SZWED, VICE PRESIDENT,

TRANSMISSION, FIRSTENERGY CORP., AKRON, OH

Mr. SZWED. Mr. Chairman and members of the committee, thank

you for the opportunity to testify here today on impediments to

transmission siting and building new transmission infrastructure.

I am Stan Szwed, vice president of Transmission for FirstEnergy

Corp. of Akron, Ohio. We are the Nation’s tenth largest electric

utility, serving some 2.2 million customers in northern Ohio and

western Pennsylvania, and when we complete our merger with the

New Jersey-based GPU, we will be the Nation’s fourth largest electric utility.

I would like to focus on electric transmission today and specifically the following three points: one, the need for Federal authority

regarding transmission siting; two, the creation of a brand new

electric transmission industry and its need to match supply to demand, that is, to build more transmission infrastructure; and three,

the needs of the new transmission industry that Congress should

address to get more transmission built.

Simply stated, the country needs more transmission. No one is

building transmission lines and now is the very time we need to

dramatically enhance transmission infrastructure. We need to

transform a network of what are now local roads into an interstate

highway system. If we focus on wires and get electric transmission

right, a major ingredient to successful competitive markets will

have been addressed.

22

The transmission principles that you and Senator Craig articulated last year provide the right framework for a market-driven

and business-oriented resolution to transmission issues.

A key impediment to increasing transmission capacity is siting.

Having a siting problem, however, means we have something to

site.

There are other barriers to building transmission lines that need

to be addressed, including the need for new investment, disincentives in the tax code, the Holding Company Act, and the potential

for new Federal regulatory authority. Let me first turn to your priority of today, siting.

With wholesale electric competition, transmission today is much

more interstate, certainly more than in 1935 when the Federal

Power Act was adopted. By contrast, gas pipelines were considered

interstate when Congress passed the Natural Gas Act in 1938.

Congress gave the then Federal Power Commission authority to

issue a certificate of public convenience and necessity for construction of interstate gas pipelines and authorized the certificate holder, if necessary, to exercise eminent domain authority in court.

That is what we need now for electric transmission. We recommend granting the Federal Energy Regulatory Commission the

authority to site electric transmission facilities, consistent with its

authority under the Natural Gas Act. We also endorse your siting

provision, Mr. Chairman, included in your legislation in the 106th

Congress.

But again, there has to be something to site. With a regulated

service such as transmission, setting out the right business proposition depends very heavily on Congress and Federal regulators establishing the right Federal policies.

In addition to the siting recommendations that I just made, the

following is what we believe the Federal Government must do.

First, with regard to transmission rate reform, Congress should

reform transmission ratemaking to reflect the risks and uncertainty in the new transmission industry. Put yourselves in the

shoes of an ordinary investor. Assume that this regulated transmission industry has been newly reconfigured, supply and demand

patterns are in flux, the regulatory environment is uncertain, and

the company may have limited future flexibility on how to position,

acquire, and dispose of assets. Are you going to invest? The answer

is no. But somebody has to or we will be headed for trouble.

Providing for innovative transmission rates is an absolute must

to afford the transmission business the opportunity to earn a competitive rate of return, and that is what is needed to attract new

investment.

On taxes, Congress should enact tax reform to remove disincentives to formation of regional transmission organizations and to

provide incentives for new investment. Specifically, we need to

allow for tax-deferred sales and tax-free spinoffs of transmission

property. In addition, we need to accelerate depreciation periods for

transmission property.

On the Holding Company Act, Congress should repeal the act or

at least exempt from its requirements steps taken to form a regional transmission organization or a regional transmission comVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
23

pany. The Holding Company Act stifles investment and makes it

harder to form transmission companies and regional organizations.

On FERC’s authority over dispositions of utility property, Congress should repeal or streamline section 203 of the Federal Power

Act. FERC’s reviews under 203 take far too long and are duplicative reviews conducted by other agencies.

On regional transmission organization formation, Congress

should avoid giving FERC authority to mandate RTO structure.

The voluntary approach of FERC Order 2000 is working as some

98 percent of investor-owned transmission assets are being committed to regional organizations.

Mr. Chairman, I have touched on a lot of issues. Let me just take

a minute to summarize by simply saying it this way. Very personally for nearly the last 4 years, myself and other transmission executives across the country have been working nonstop to launch

the much-needed new transmission industry. And all of the issues

I have raised here today from siting to rate reform and all the rest,

including the Holding Company Act, stand in our way. They frustrate our efforts and stunt the growth of this new business. But

more important from your perspective, these legal and regulatory

impediments deny your constituents the smart, switchable electric

transmission network our country needs for reliable, robustly competitive and high quality electric service. That electric service is the

kind of service you must have for the 21st century and to propel

our growth.

Thank you for holding this hearing and calling attention to our

Nation’s need for more and better energy delivery structure.

[The prepared statement of Mr. Szwed follows:]

PREPARED STATEMENT OF STANLEY F. SZWED, VICE PRESIDENT, TRANSMISSION,

FIRSTENERGY CORP., AKRON, OH

Thank you for the opportunity to testify before the committee today. I am Stan

Szwed, Vice President, Transmission for FirstEnergy Corp. FirstEnergy is a diversified energy services company headquartered in Akron, Ohio, and is the nation’s 10th

largest electric utility. We serve 2.2 million customers in Northern Ohio and Western Pennsylvania. We are in the final stages of our proposed merger with New Jersey-based GPU. GPU serves 2.1 million customers in Pennsylvania and New Jersey.

When our merger is completed, FirstEnergy will be the 4th largest electric utility

in the nation based on customers served.

FirstEnergy has been an industry leader on electric transmission issues, and we

have worked diligently with other industry leaders and with state and federal regulators on groundbreaking work that will result in the development of transmission

organizations for the electric industry of the future. During the course of our work,

we have tried to help policy makers set the right course for transmission. I hope

that my experience on these two efforts—the development of a for-profit regional

transmission organization (RTO) called the Alliance RTO, and the promotion of

proper federal policy on transmission with a group known as the informal coalition—will be of value for the Committee.

My testimony will focus on the following four areas: (1) the importance of federal

authority to site new transmission facilities; (2) the creation of a brand new electric

transmission industry and its need to grow and improve—that is, match supply to

demand with more and better transmission infrastructure; (3) other important

needs of the new transmission industry that Congress must address to get more

transmission capacity; and (4) lessons from my work with the Alliance RTO and a

policy-oriented group called the informal coalition.

Simply stated, what the transmission industry needs today is more and better infrastructure. The growth or addition of transmission miles to the interconnected network has been so dismal that it makes the growth of electric generation look wild

in comparison. As some commentators have put it, there is a ‘‘transmission investment gap.’’ Senators, no one is building transmission lines and it is happening (or

24

1 Ron Scherer, ‘‘The Other Electricity Crisis: Transmission Lines,’’ February 20, 2001, at 3 (citing Edison Electric Institute).

not happening) at the very time we need to dramatically enhance our transmission

infrastructure. What is needed is the steady transformation of a network of what

are now local roads into an interstate highway system. Focus on the wires and get

transmission right, and a major ingredient to successful competitive markets will

have been added.

Mr. Chairman, the principles you and Senator Craig articulated last year provide

the right framework for resolving this critical issue. Those are: a market-driven and

business-oriented resolution to transmission issues; the voluntary development of

transmission institutions; the continued flexibility of the market to determine the

structure of RTOs; and encouragement for expansion of transmission investment.

As the Committee has identified in holding this hearing, one of the key impediments to increasing transmission capacity is the problem of siting new lines, particularly lines that are designed to facilitate interstate or interutility power transactions. Since one must first have a line to site before it is time to consider the

siting process, it is important to discuss other critical impediments to increased capacity. These include the need for new investment, disincentives in the tax code, the

Public Utility Holding Company Act (PUHCA), and the potential for new federal

regulatory authority. Let me first discuss siting.

REFORM TRANSMISSION SITING

Transmission siting is a significant impediment to reliable and competitive electric service. If it is not addressed, constraints we have in the system today are going

to get worse. Transmission systems are being asked to function in ways they were

never designed to function. The combination of increased demand for electricity and

new types and patterns of transactions is causing transmission traffic jams. In the

last 5 years, the annual number of transactions between regions has increased from

25,000 to 2 million.1 The transmission systems have handled this increase reasonably well, but the number of occasions on which transmission curtailments must

occur is increasing.

Moreover, without the proper financial incentives for transmission expansion, bottlenecks will proliferate. Attached to my testimony are two charts that illustrate the

problem. One shows that between 1995 and 1999 the number and complexity of

wholesale transactions have grown enormously, resulting in increased use of transmission systems. The other is even more sobering, showing that annual transmission investments, in constant inflation-adjusted dollars have been declining for

almost 25 years—at an average rate of $115 million per year.

Consistent with the recent development of wholesale electric competition, transmission has become much more of an interstate business than it was ever thought

it would be. Certainly, it is a far cry from what it was in 1935 when the Federal

Power Act was adopted. Congress chose not to provide the Federal Power Commission (FPC), the predecessor to the Federal Energy Regulatory Commission (FERC

or the Commission), with eminent domain authority in 1935, given that electric

service was generally local in nature. When Congress passed the Natural Gas Act

in 1938, it gave the FPC authority to issue a certificate of public convenience and

necessity for construction of gas pipelines, and gave the holder of such a certificate

the ability to go to court to exercise eminent domain authority, if necessary, to build

transmission facilities. That grant of authority reflected the interstate nature of the

gas business, where the commodity was being transported across State lines. The

same is now true of the electric industry.

Utilities have been as hesitant as many in Congress to suggest that the Commission ought to have authority for transmission siting. For many in Congress, it has

been a matter of principle that land use decisions ought to remain at the local level.

For utilities, it has not only been a matter of principle, but a matter of political sensitivity. We need to rely to a great extent on the judgment of State utility commissioners and other officials in our business. While we prefer deference to traditional

State prerogatives, the increasingly interstate nature of transmission is undeniable,

and the importance of constructing new facilities to facilitate interstate, if not interregional transactions, speaks to adopting a more streamlined process with a role for

the federal government.

A State through which a utility line must pass may be reluctant to authorize its

construction if there is no direct local benefit, regardless of the benefit to interstate

commerce. In the new competitive marketplace, this is a potential recipe for disrupting the supply chain. New lines are going to benefit the entire network, and help

ensure a large, robust competitive marketplace. Not having new lines also has an

25

effect on the entire network. Some entity with responsibility for this larger area

needs to be accountable for these decisions.

We endorse Chairman Murkowski’s siting provision included in S. 2098 from the

106th Congress. We hope that this provision can be included in legislation in this

Congress.

Alternatively, FirstEnergy recommends granting the Commission the authority to

site electric transmission facilities similar to the authority contained in the Natural

Gas Act. Under Section 7(c) of the Natural Gas Act, a certificate of public convenience and necessity is required before a natural gas company can undertake the construction, operation, extension or acquisition of facilities used in the interstate

transportation or sale of natural gas.

Depending on the type of facilities being proposed in an application for a certificate of public convenience and necessity for a gas pipeline, the FERC requires detailed information concerning the proposed facilities including, among other things,

the proposed route, the environmental impact of the proposed facilities, identification of affected landowners and steps taken to address any concerns affected landowners might have with respect to the proposed facilities and documented compliance with various Federal laws.

Once FERC has granted a certificate of public convenience and necessity with respect to the facilities, if the holder of the certificate cannot acquire the rights-ofway necessary to construct and operate its proposed facilities, it can acquire the

same by exercise of the power of eminent domain in the District Court of the United

States for the district in which the facilities are located.

I endorse federal siting authority, even though in Ohio we have a comparatively

good siting process. Each State handles transmission siting differently. In Ohio,

prior to about 25 years ago, we had a process much like many other States where

an applicant for a transmission line would have to gain approval from a variety of

State regulators at the State Public Utility Commission, the Environmental Protection Agency, and other agencies who administered statutes that might be affected

by a proposed facility. In addition, a utility would have to get approvals from local

governments. What a utility might find is that local governments would pass ordinances to block proposed facilities. What we have nationally now is a situation

somewhat analogous to what most states used to have, with utilities needing to gain

a variety of approvals to build the network to support interstate commerce.

In the early 1970s, Ohio adopted a law modeled after one in New York State that

established a transmission siting board. Today in Ohio if you propose a transmission

facility, the application need only be approved by the State siting board. The applicant must demonstrate a need in Ohio for the facility, and must demonstrate that

environmental considerations are given due regard. Once those thresholds are met,

the board issues a certificate of environmental compatibility and public need. I am

told that thirty-nine states follow this model, but there are still a number that do

not.

Siting more transmission is a means to achieving reliable, cost-effective electric

service in the new electric marketplace. However, siting is only one challenge, and

it is necessary to provide details on some of the other critical problems. As difficult

as transmission siting has been, it is of less importance in my view to the future

of the transmission industry and electric service generally, than letting this brand

new transmission business be a business that people are willing to grow.

ENABLE THE INDEPENDENT TRANSMISSION BUSINESS TO FORM AND GROW

The new transmission business must be able to make a case for itself. It must

be able to demonstrate to investors, employees, customers, regulators, suppliers, and

others that it can perform and grow—that it can be a stand-alone enterprise. For

a stand-alone transmission company operating independently of affiliated generators, distribution companies or other market participants, this means it must demonstrate that it can attract investment, recruit and keep highly talented, highly motivated people, and pay a just and reasonable return to its owners. Investors need

to know that investing in the new transmission industry has commensurate opportunity for reward as investments of similar risk.

This point bears emphasis: federal and state regulatory policies are separating the

generation, transmission, and distribution components of an industry on which so

many conveniences and necessities of modern life are dependent—light, heat, refrigeration, water, sound, transportation, safety and medical services, to name a few.

The objective of these policies is to promote competition for electric service within

wholesale and retail markets by permitting both retail customers and generators access to the transmission system on a nondiscriminatory basis. In particular, the

FERC, by promoting the formation of Regional Transmission Organizations, is reVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
26

quiring transmission service to be furnished by large multi-state organizations independent of transmission owners. This policy requires the transmission business to

stand on its own in providing reliable transmission service, expending its facilities

to support growing competition for electric service, and providing reasonable compensation to stockholders. Since reliable and readily available transmission service

is one of the keys to effective competition, a regulatory environment must be created

that gives this new transmission business the opportunity not simply to survive, but

to thrive.

The new transmission industry might look to the naked eye a lot like part of the

old utility, with the same power lines, the same people running the facilities, regulated returns and so on. However, lest anyone think that electric restructuring is

just a simple asset shuffle, California demonstrates that we cannot overlook the direct relationship between investing to keep up with changing demands and electric

reliability.

Open access to transmission facilities, which FERC required in Order No. 888,

means that transmission lines once solely used for the vertically integrated company

that owned the line, are now part of an interstate transmission highway that could

be used by anyone. The problem is that as a whole, the systems were not built to

serve as an interstate highway. They were built to deliver electricity from a specific

power plant to a specific load center within the regulated service area of a single

utility or utility system. The separation of transmission from the traditional utility

and the transfer of control over transmission service to RTOs introduces new requirements and dictates a new approach to ensuring reliability of transmission service.

Let me explain it this way. Open access is the equivalent of making Constitution

Avenue accessible for use for I-95 traffic. It has worked fine as a main artery for

local traffic all these years, but now it must facilitate through traffic. If it cannot

be upgraded to handle the interstate traffic, there could be serious consequences.

Separation and regionalization are the equivalent of saying that we are going to

turn over control of Constitution Avenue to a regional entity that will plan for its

expansion so the I-95 traffic can get through. However, the new interstate operating

entity has to have its own borrowing authority. In the real life of the new transmission industry, the operating entity is the private sector, and we need to compete

with others in the private sector to attract investment to tackle the project. I might

add with respect to siting that the local authorities might not be too keen on building an interstate highway through the heart of town.

Don’t just take my word for how important it is to get the new transmission industry right. Look at the findings of the January, 2001, report of the PA Consulting

group, ‘‘The Future of Electric Transmission in the United States.’’ This report argues that ‘‘the inability of the restructuring process to adequately address as yet the

needs of the transmission sector is jeopardizing the health of both the sector and

of the entire electric power industry, which it supports . . . . [The] lack of additional incentives in the face of new risks lies at the heart of many of the problems

now facing the transmission sector.’’ Or look at the possible scenarios envisioned by

Cambridge Energy Research Associates in its Autumn, 2000, report, ‘‘High Tension:

The Future of Power Transmission in North America.’’ It concludes that with the

proper incentives, the transmission sector will function appropriately, but without

the proper incentives, the resulting inadequate, unreliable transmission system will

force a government takeover of transmission or a patchwork of distributed generation as customers avoid crumbling transmission networks altogether.

Enabling large regional transmission businesses to become operational is a significant technical challenge requiring millions of dollars of investment in new equipment and systems. The new technology needs to keep pace with the end uses of electricity. There are increasingly end use applications of computers and computerbased control equipment where not only the quantity but the quality of electric service is fundamental to enabling everything to work. At times, even the smallest disturbance can cause a malfunction of this sensitive equipment. New technologies are

required to improve power quality, and that takes investment.

In a regulated service such as transmission, setting out the right business proposition depends very heavily on Congress and federal regulators establishing the

right federal policies. In addition to the siting prescriptions I recommended above,

the following is what we believe the federal government must do.

REFORM TRANSMISSION RATES

Congress should reform transmission rate making to reflect the risks and uncertainties in the brand new transmission industry. FERC has a legal obligation to set

rates that simultaneously protect consumers’ interests in having reasonable rates

27

and investors’ interests in a reasonable return on investment. However, transmission rate reform, which many parties acknowledge is needed, has been too long

in coming. The best thing for consumers is a robust, growing transmission network,

and it will require some different regulation to bring that about.

Put yourself in the shoes of an ordinary investor. The stock broker calls with the

opportunity to invest in a company that provides a regulated service, which typically

has a comparatively low risk and a commensurate return. However, this regulated

industry has been newly reconfigured, supply and demand patterns are in flux, the

regulatory environment is uncertain, and the company may have limited future

flexibility on how to position, acquire and dispose of assets.

This is an investment I do not want to have to make, because it is a vision of

the future of this new transmission industry I do not have and our country should

not have. Instead, I want to bring this brand new industry to investors full of hope

that a well-run transmission business will gain customers and be able to keep some

of the rewards for providing good efficient service and improving customer satisfaction. This is the essential task for the industry, Congress, and FERC.

We support transmission rate reform so that returns on transmission assets are

in line with assets in industries having commensurate risk. We also support innovative rate treatments, such as allowing transmission owners to share with customers

some of the financial benefits of providing more cost-effective service. FERC is moving in the right direction on issues like these, but encouragement from Congress,

especially in the form of legislative language directing FERC to consider the need

for transmission investment and expansion when setting rates, is very important.

REMOVE TAX BARRIERS

Congress should enact tax reform to remove disincentives to formation of regional

transmission organizations and to provide incentives for new investment. Specifically, we need to allow for tax-deferred sales and tax-free spinoffs of transmission

property, as called for in Chairman Murkowski’s bill, S. 389. This language resulted

from an agreement between the Edison Electric Institute, the American Public

Power Association, and the Large Public Power Council. In addition, we need to accelerate depreciation periods for transmission property, as called for in S. 596, introduced by Senator Bingaman.

Forming a for-profit transmission company or transco, which is what my company

and many if not most other utilities are doing to comply with Order No. 2000, is

extremely difficult, and is complicated by the tax laws. To meet the Order’s independence requirement, many utilities prefer to find a way to divest transmission assets, especially if they are forming transcos. In other cases where government action

results in a taxable event that would not otherwise have occurred, the tax code prevents incursion of tax penalties. If utilities sell transmission property and reinvest

the proceeds into other utility property, taxes should be deferred until a taxable

event involving the property occurs. If utilities spin off transmission property, this

should not be considered a taxable event.

As for depreciation of transmission assets, the depreciation period should be

brought into line with periods for property in other industries, given the changed

circumstances under which the industry must attract capital. We thank Senator

Bingaman for his foresight on this point.

REMOVE PUHCA BARRIERS

Congress should repeal the Public Utility Holding Company Act, or at the very

least, exempt newly-formed electric transmission companies qualified as RTOs from

its provisions. When the Senate Banking Committee held a hearing on S. 306, the

Public Utility Holding Company Act of 2001 (which has now been adopted by that

committee by a 19-1 vote), Cindy Marlette, FERC’s Deputy General Counsel, testified to the impact of PUHCA on RTO formation, stating:

PUHCA may cause unnecessary regulatory burdens to utilities who, in compliance with Commission policy and regulations, seek to form or join regional transmission organizations (RTOs). . . . Under PUHCA, any entity

that owns or controls facilities used for the transmission of electric energy—

such as an RTO—falls within the definition of public utility company, and

any owner of ten percent or more of such a company would be a holding

company and potentially could be required to become a registered holding

company. This could serve as a significant disincentive for investments in

independent for-profit transcos that qualify as RTOs.

Put simply, the Holding Company Act stifles investment in the emerging independent transmission industry.

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REPEAL OR REFORM SECTION 203 OF THE FEDERAL POWER ACT

Congress should repeal or streamline the review of dispositions of utility property

by the FERC under section 203 of the Federal Power Act. Among other things, this

review is a barrier to consolidation of transmission networks and formation of RTOs.

Section 203 of the Federal Power Act is currently a ‘‘one size fits all’’ provision

that applies to the disposition of all jurisdictional assets with a value of $50,000 or

more. It applies to everything from a simple sale of a transmission substation to

the most complicated utility. FERC reviews of dispositions of property under section

203 take far too long and are often duplicative of reviews conducted by other agencies. For some transactions, review is required by FERC, the Department of Justice,

the Federal Trade Commission, the Securities and Exchange Commission, the Nuclear Regulatory Commission, and each affected State. Utility transactions should

be reviewed by the government, commensurate with the way transactions involving

other industries are reviewed. There are important societal and governmental interests to be protected. However, the massive, time-consuming, duplicative review specific to the electric utility industry is contrary to consumer interests because it

delays companies’ ability to respond to market needs and needlessly increases transaction costs.

The industry is positioning itself to dispose of transmission property because

FERC determined to have RTO formation. Recently when FirstEnergy established

a transmission subsidiary within our own family of companies, the federal review,

including SEC approval, took over a year. Although the FERC acted promptly by

comparison—that is, within 7 months—reforming or eliminating the property disposition review at the Commission would be a positive step.

AVOID MARKET STRUCTURING AUTHORITY

Congress should avoid giving FERC new authority to restructure the industry. As

noted above, RTOs are forming. They are doing so according to what the experts

in this industry have judged to be in the long-term interests of transmission service

and transmission customers. This process is already subject to intense FERC review

and approval.

Now is certainly not the time to add market structuring authority, with 98 percent of investor-owned transmission assets being committed to RTOs. The industry

is demonstrating that many proposals in the last Congress for additional RTO authority were unnecessary. Many also have proposed giving FERC market power authority. We believe this would have a chilling effect on the investment and industry

consolidations needed to capture the efficiencies of competition and ensure adequate

supply and reliability of delivered power. Antitrust agencies already have ample authority to ensure industry compliance with antitrust laws. FERC was designed as

an economic regulatory agency. Market structuring functions should remain primarily elsewhere.

Furthermore, if the federal government focuses the transmission debate on the

authority of the Commission to restructure the industry, it conditions the industry

to be concerned with regulation, and not with improving transmission systems. The

businessmen will be regulatory experts, not transmission experts. Lately my colleagues and I have spent a lot of time negotiating our way through regulatory

changes and policy debates, when what we need to do most is run this critical business and focus even more intently on customer satisfaction.

ADOPT MANDATORY RELIABILITY STANDARDS

We support the adoption of mandatory reliability standards to provide for proper

enforcement of the rules of the road. We support the reliability language of the

North American Electric Reliability Council (NERC), as modified to address concerns about its interplay with the reliability requirements for RTOs contained in

Order No. 2000.

In the 106th Congress, Congressmen Tom Sawyer and Richard Burr introduced

H.R. 2786, legislation which addresses many of the transmission problems I have

just mentioned. Key portions of that legislation were adopted by the House Subcommittee on Energy and Power in the last Congress as part of H.R. 2944. It is also

my understanding that Vice President Cheney’s Energy Task Force report may be

headed in the same direction.

I would now like to turn my attention to some of the work FirstEnergy has been

doing to form a regional transmission organization and to promote appropriate federal transmission policy.

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THE ALLIANCE RTO

FirstEnergy is one of the leaders in forming the Alliance Transmission Company

LLC, which we anticipate will be qualified as the Alliance RTO. This entity, now

substantially approved by FERC, will be a for-profit transmission company. The

business of the company will be to provide transmission service. The companies who

now own the assets that comprise the Alliance will become its customers, along with

other generators and utilities.

For the past two years, the major portion of my daily activity and the people I

work with has been focused on forming the Alliance RTO. The model we built has

attracted five more members to the Alliance, which will now be able to provide

transmission service roughly from the Gateway Arch in St. Louis to Kitty Hawk.

It will link large load centers such as Chicago, Detroit, Cleveland, and Northern

Virginia.

There are business and human challenges that must be overcome. On the business side, we are focused on crafting and executing the business and financial arrangements necessary to establish electric transmission institutions that can serve

growing competitive markets for electricity. This is the cutting edge of financial restructuring.

On the human side, the new transco will need experienced and highly trained,

highly motivated personnel. It takes experienced people to run these systems. The

system operators are the finest people around. The last thing they want to happen

is to reduce load or have a blackout. They take pride in making sure that we effectively balance resources and load, and they work day and night—literally 24 hours

a day, seven days a week, 365 days a year—to keep the lights on. We must keep

these operators. However, without the right business proposition, and without some

certainty about the direction and promise of this emerging industry, how will we

keep them?

THE INFORMAL COALITION

In July 1999, FirstEnergy and five other companies launched the informal coalition, which to my knowledge has been the only transmission-specific policy oriented

group in Washington. The group’s members today are DTE Energy, Duke Energy

Corporation, FirstEnergy Corp., Northeast Utilities System, Public Service Electric

& Gas Company, and Southern Company. The companies in the group recognize the

importance of expanding transmission capacity and adhere to the principles I have

mentioned that you and Senator Craig espoused last year. As a practical matter,

these principles translate into the kind of agenda items I have discussed. While the

group has not yet endorsed a specific transmission siting proposal, we recognize that

the increasingly interstate nature of transmission argues for a federal role.

In the past two years, we have held somewhere near 200 meetings with Senators,

Congressmen, the Administration and staff. Many key federal decision makers are

relying upon our expertise, and we are grateful to have earned their trust.

Looking at where we have come from, I am very proud of this group’s efforts. In

less than two years, transmission has gone from an issue that most policy makers

were not discussing—or if they were discussing it, an issue that centered around

more authority for FERC to structure the market and other issues either harmful

to the future of the new transmission industry or off the track of what is really critical to its success—to one of the central issues in the restructuring debate. It seems

that most people now agree on the need for the appropriate investment picture as

an integral feature of transmission policy.

CONCLUSION

Thank you for holding this hearing and calling attention to our nation’s need for

more and better energy delivery infrastructure. I am grateful for the opportunity to

offer my perspective on the need for reform of electric transmission siting laws and

to support the policy direction you have charted, Mr. Chairman. Equally, if not more

important, I hope you will consider my recommendations for wider ranging reforms

that are needed to free industry to launch the independent electric transmission

businesses of the future and close the transmission investment gap.

The CHAIRMAN. Thank you very much, Mr. Szwed. I would like

to compliment the panel on the excellent testimony.

I think, unfortunately, we do not seem to be making the impression that is necessary in the American people, and it is unfortuVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
30

nate. I really wonder if the crisis is going to simply have to get

worse before people come to grips with the reality.

I am embarrassed that I do not have some of my colleagues on

the other side. I know we had a conflict with the Committee on Finance that came up and it is a lengthy hearing, but half the witnesses were chosen on the other side and half were chosen on this

side. I think out of courtesy it is unfortunate that we do not have

any members here from the other side, and I want it noted because

I think it does represent a reality that we have got an important

topic here that is vital to relief relative to decision making. We

have the responsibility for the decision.

Gentlemen, we have heard a lot about conservation. I think we

are all in agreement that conservation has to be a significant part

of the overall energy policy, but does anyone believe that we can

get there through conservation alone? Yes or no.

Mr. HALVORSEN. No, sir.

Mr. NUGENT. No.

Mr. COOK. No.

Mr. SZWED. No.

The CHAIRMAN. All right. I appreciate that.

I am also inclined to address some of the questions relative to

what I see are not signs of realism in recognition of the realities

that we are facing today but still a continued NIMBY attitude, not

in my back yard, towards relief. Mr. Cook, for example, a few

weeks ago Connecticut rejected a new high voltage transmission

line connecting Long Island to the New England power grid out of

concern for the oysters. And I am very fond of oysters.

[Laughter.]

The CHAIRMAN. But nevertheless, they did not want it in their

back yard.

In California, there has been opposition to building new powerplants, but even the relief of starting an existing powerplant at

Huntington Beach, California, for 450 megawatts, which can be

turned on tomorrow, is opposed not because it is in violation of any

air or water quality. It is the heating/cooling process evidently creates algae and there is opposition from those who have boats

around the area. If you have a boat, you have a generator, you do

not need a long extension cord. Another NIMBY.

Yesterday in the Los Angeles Times, there is a growing opposition to the construction of a new high voltage transmission line by

San Diego Gas and Electric. Well, if the transmission lines are not

built and the power lines are not built, yet the consumer wants

reasonable and reliable electricity, how are we going to get through

not just to California, but to the rest of the public that we have

got a crisis here and a significant portion of the relief is new and

expanded facilities?

Mr. COOK. It is exactly circumstances like those that you mentioned, Mr. Chairman—I think those in the industry could probably

catalog others as well—that are one of the factors why this is not

happening. It is why we believe that we need to change how we

are doing things if we are going to be able to get the kind of infrastructure in place that we need to have to move forward.

The CHAIRMAN. It is certainly frustrating. We are talking about

complaints of the price of natural gas at the border in California

31

is too high. I think this would go to Mr. Halvorsen. Am I not correct that the California Commission, as well as local gas distribution companies, have consistently fought against new pipelines?

Mr. HALVORSEN. Yes, sir, that is true. That is why we attached

the chart to my testimony.

The CHAIRMAN. For example, did not Sempra, the parent company of Southern California Gas, file at FERC an opposition to the

recent Kern River pipeline expansion?

Mr. HALVORSEN. As well as the transwestern expansion, yes, sir.

The CHAIRMAN. Am I also not correct the State of California has

steadfastly insisted that all interstate pipelines end at the border

of California with the intrastate pipelines inside the border being

subject to State jurisdiction?

Mr. HALVORSEN. Yes, sir, that is correct.

The CHAIRMAN. Is not the net effect of this to deny California

consumers the benefit of FERC’s open access transportation program which has saved consumers elsewhere in the United States

billions of dollars?

Mr. HALVORSEN. Well said, Mr. Chairman. That is exactly the

right answer.

The CHAIRMAN. Well, if I am giving you the right answer and you

are agreeing with me, what is the relief? Logic dictates reality. But

is the shoe not pinching enough?

Mr. HALVORSEN. Well, we tend to speak a different language I

think sometimes. We have been trying, and particularly I think it

is unfortunate that some of the local distribution companies that

need the gas have been opposing the pipeline projects. So, again,

we are doing our best to communicate that we all ought to work

together on this.

The CHAIRMAN. There was a proposal out of San Jose near the

Cisco plant to put in a facility, and that was objected to. If they

are going to object to everything, I assume they simply are going

to be satisfied to buy their power, as much as they can, outside the

State, if they can.

Well, Mr. Nugent, your association represents State public utility

commissioners. As you know, we have an energy bill in. A number

of members are sponsors of that. We are being criticized because

our bill did not include eminent domain for electric transmission

lines. We talked and thought a lot about it when we discussed it

in the makeup of the bill. We thought, since we have eminent domain on pipelines, that maybe the States would address it as far

as their responsibility was concerned of ensuring their constituents

have access. So, we did not put it in. We have been severely criticized for that. We can put it in. It may be in the task force report.

I am inclined to think it is, although I do not know that for a fact.

But many States are protesting. Here is States protest Bush’s

plan for siting power lines. I am sure you saw that in the Wall

Street Journal.

The reason that we have to do it federally, even though I am opposed to it in theory, because I think the States ought to meet the

obligation, is that States are incapable of coming to grips and allowing access. Now, you are in the business, Mr. Nugent.

32

Mr. NUGENT. Mr. Chairman, I reject the characterization that

States are incapable. First of all, different States react in different

ways.

The CHAIRMAN. Well, let us say the States that I mentioned

clearly are not together in relieving themselves of their own problem.

Mr. NUGENT. What I think is developing, as you mentioned a moment ago, the shoe is pinching. I think that may serve as part of

an educative process. I think what you are finding is that States

are gravitating towards a view that they have to work together to

develop a regional solution and do it in concert with the FERC. It

may be that you should repose some authority within the FERC

that ought to be exercised in conjunction with the people who are

very close to the local situation to develop those solutions for the

local area.

The CHAIRMAN. I believe in that in theory and I concur with you.

The only problem I have is some of those folks that really are in

charge of making things work are not in charge of the political realities associated with the decision.

Mr. NUGENT. I led off in the testimony here telling you that the

FERC siting process for natural gas pipelines worked fine in our

experience. It may be that you would find a model there. I do not

think you ought to ignore the very substantial input that you get

from people who are working every day in the region.

The CHAIRMAN. I agree with you totally.

My last question is to Mr. Halvorsen. You made reference to gas

coming down from Alaska. This proposal ultimately would go into

the Midwest market. It would involve a 48-inch pipeline 3,600

miles long. It would cost somewhere between $10 billion and $15

billion depending on some of the circumstances, but the $15 billion

is closer in the sense of moving it in the Midwest. That would take

about 3,600 miles of X80 pipe, very little of which we make in this

country.

Do you think that it could stimulate the steel industry and the

steel industry could be competitive with the industry in Japan and

Korea relative to an order of this magnitude? It is my understanding it would keep the steel mills in Korea and Japan busy for 2

years.

Mr. HALVORSEN. Senator, we have the steel companies members

of our INGAA foundation.

The CHAIRMAN. I know you have.

Mr. HALVORSEN. As you know, we are completing a study on how

we can get the infrastructure in place down here to meet that Alaska gas when it hits the border so we can make sure we get it

around.

The steel people I talked to here are gearing up for the challenge.

They are literally licking their chops at what they see as some

great opportunities, and I think you are going to see an industry

here that is going to be very competitive.

The CHAIRMAN. Well, I hope so because it is a great opportunity

for the American steel industry, and I hope the industry and the

unions get behind the reality that we do have an energy crisis in

this country and we are not going to conserve our way out alone.

Senator Craig.

33

Senator CRAIG. Let us pursue the eminent domain and FERC’s

role a little more. Mr. Cook, you spent a good number of years at

the FERC.

Mr. COOK. Yes, I did, sir.

Senator CRAIG. We are looking at what FERC is trying to do

with regional transmission organizations and in that, they have attempted to address siting concerns to some extent. Spend some

time with us, if you would, talking about regional transmission authorities and the role they could play here—and any of the rest of

you who would wish to speak to that—and what we might do or

what FERC might do to increase that process or authority.

Obviously, Mr. Nugent is pleased with the way FERC handled

gas transmission.

Mr. Szwed, you have talked about, in your testimony, the role

that Ohio played in adopting model law, and at the same time, you

used the analogy that we are moving from local roads to interstate

systems for transmission. Is the RTO the best route to do, and if

it is, what need we do more to strengthen it if it in fact needs to

be strengthened?

Mr. COOK. I think, Senator Craig, the way the RTO’s are developing around the country is quite varied. The ownership of the

transmission is still split among lots of owners. Some RTO’s have

more authority and responsibility with respect to transmission

planning than others do. It is a very mixed picture.

I think what is important is that there be a central place, a central forum, where those issues can get worked out. The RTO may

be that kind of place if it is coupled with some sort of central

forum, single forum, where the real authority for going ahead and

siting and constructing is happening. That may be possible on a regional basis.

My guess is you would need to couple it in some fashion with

some Federal authority, but it may be able to be done in conjunction with a regional grouping of State authorities.

We need a central sort of single forum for looking at these kinds

of issues.

Senator CRAIG. At FERC?

Mr. COOK. It could be the FERC. It could be FERC in conjunction

with groups of States, but as long as whatever that body was had

the authority to really make the decision and move forward, rather

than having to then go back to individual States and deal with

Federal resource agencies as well on a piecemeal basis.

Senator CRAIG. Eastern States have a little different setup or a

little different landscape than we do in the West as it relates to the

Federal authorities and large expanses of Federal land where that

can be an increased complication.

Mr. COOK. Yes.

Senator CRAIG. Do any of the rest of you wish to speak specifically to that issue of the RTO and authority?

Mr. SZWED. Yes, Senator Craig, I do have a few comments I

would like to make.

First of all, with regard to regional transmission organizations,

a comment. What I believe that a regional transmission organization ought to be is a regional independent transmission company,

a company whose sole business is to provide transmission service.

34

It is an owner and operator of assets separate from existing utility

companies today. In that kind of a context, that is an entity that

owns and operates assets and seeks to make investments in assets

to provide for transmission service to customers.

I see that being regional in nature, and as you know, regional

in nature because since 1992 we have had a great deal of wholesale

competition in the electric business and more recently, particularly

in my part of the country, a great deal of move to retail competition. So, the regular franchised service territories that we saw as

electric utilities are now dramatically different and more regionalized.

I think that is really important as we step back and think about

what kind of infrastructure from a transmission standpoint we

need to be able to provide for a robust, competitive marketplace.

Obviously, I went through a number of points regarding the

needs for rate reform and so forth, about attracting investment

that is so important from a Wall Street perspective. It is so important ultimately from a customer perspective.

But turning the attention to siting—you mentioned Ohio a few

minutes ago. This is real tough for me because I feel like I am between a rock and a hard place with regard to siting. I really do appreciate and understand many of the aspects associated with local

concerns regarding siting. In Ohio, way back when, we actually had

a situation where local communities and so forth got involved in

the siting process. But as times changed, we centralized the siting

review process in the Ohio Power Siting Board so that we would,

from a State perspective, have a single organization that would review environmental, review the need, review all the aspects of putting together siting. Now, we are moving to more of a regional,

even broader than regional, transmission network that may involve

the siting of more than one State jurisdiction.

I think from a transmission owner/operator standpoint what I

am involved in in my business today, in order to try to build this

infrastructure, I think it is important that there is a way to

streamline that process, to get the certifications that are necessary,

and move forward with building transmission projects. I just think

that has to happen in some way, shape, or form. But like I said,

it is a difficult situation, and what we have proposed here is a

move toward more of what is done on the natural gas side from

FERC’s standpoint in the hopes that that infrastructure can be

built more readily.

Senator CRAIG. Anyone else? Yes, Mr. Nugent.

Mr. NUGENT. Mr. Craig, I would say that the commissioners, the

regulators from really Maryland to Maine, an area that is very

much into the retail competition model, are not yet at the point of

moving towards independent transmission companies. 2 years ago,

we convened a meeting of people interested in this matter that led

to agreements among the ISO’s in the PJM area, New York and

New England, to cooperate on removing the seams between them.

They have five task forces that are working to make them function

better in markets, transmission business practices, and so on. The

commissions from Maryland to Maine have set up an oversight

structure to monitor what they are doing and drive that process.

To the extent we can, we are trying to achieve improvements in

35

that fashion. To the extent inabilities to site transmission come, we

would presumably move to attack that problem.

Mr. COOK. Senator Craig, one other comment on the RTO’s is

really a question of scope. The limitations that we saw in Eastern

Interconnection last year that we will see again this year really cut

across the country through Tennessee, Kentucky, and restrict the

movement of power from the northern tier States down to the

south.

Senator CRAIG. Those resulted in those spikes. Is that what you

are suggesting?

Mr. COOK. Well, there are actually limitations on the transmission system. We had to cut transactions because the systems

were overloaded. Those really are falling in the seams of RTO’s. So,

the problem, in addition to sort of a regional transmission organization not necessarily having authority to deal with situations

within its own territory, you then get the additional problem of

having to cross those seams between RTO’s.

Senator CRAIG. My time is probably up, Mr. Chairman. One last

question. Do you envision regional transmission companies? If so,

are they in the concept of the interstate in which they would actually own the toll lines by which the marketplace would access to

move its power?

Mr. COOK. That is certainly one model, and I think it is more

conceptual at this point. The American Transmission Company is

one company that is just a transmission only company.

Transenergy is the one trying the build the line across Long Island

Sound. That will be sort of a standalone transmission company. Depending on how some of these issues that we are talking about this

morning get worked out, you may see more of that, and certainly

that is one direction it can go.

Mr. SZWED. Senator, I do see regional independent transmission

companies, and they, being in the transmission business, regulated

by FERC with a perhaps lighter-handed regulation by FERC, with

a for-profit motive. They would have a tariff approved and put in

place by the company through the approval of FERC, and all customers would have open and nondiscriminatory access to the system per the requirements of the tariff.

But I think going after your question about perhaps interacting

with neighbors and so forth, I see that company being in that kind

of a business to want to make sure that investments are made and

services provided to relieve congestion as appropriate, as economically appropriate as well.

Senator CRAIG. Thank you, gentlemen.

The CHAIRMAN. Senator Thomas.

Senator THOMAS. Thank you, Mr. Chairman.

Mr. Nugent, you have defended, and properly, the State activities. Has the National Association of Regulatory Utility Commissioners put together any sort of plan that deals with interstate

movement?

Mr. NUGENT. NARUC does not do that because we do not do a

plan for our member States. We try to enable them to become—— Senator THOMAS. That we are not going to operate as independent States forever is pretty clear. You are going to have to move

interstate. There is going to be a national transmission grid, and

36

if you are going to be there in the State, it looks to me like you

have to look beyond what you are doing in your State.

Mr. NUGENT. And that is absolutely true, and I do not think you

would find any State further down that path—— Senator THOMAS. Well, have you got a plan? Have you talked

about a plan?

Mr. NUGENT. We have not done it through NARUC. We are actively doing it in the regions and developing it.

Senator THOMAS. Well, it is not all regions either, I do not think.

Where do you get your fuel for generation?

Mr. NUGENT. The fuel for generation comes from largely outside

our region.

Senator THOMAS. What are you using?

Mr. NUGENT. Well, at the moment the fuel in the margin is natural gas, and it comes from Atlantic Canada and Western Canada,

and the third source would be the gulf.

Senator THOMAS. Yes. Well, it may not always be that in the energy business that gas is going to be the preferred fuel. So, you

may find that instead of moving gas, you may be wanting to move

coal-fired electricity that goes beyond perhaps your region. It does

not seem to me that we can be quite as parochial as you seem to

be with regard to your State.

Mr. NUGENT. I am not suggesting that we are parochial. On the

other hand, State commissions operate within State authority, and

what we are trying to do is to get State authorities to align and

to work in a coordinated fashion throughout a region. We cannot

tap into Federal authority. That is yours. You have got it.

Senator THOMAS. I am not talking about authority, Mr. Nugent.

I am talking about plans. I am thinking ahead. I am talking about

using your expertise to deal with the problem. I think it is important that we do that.

What do you do, Stan, with regard to—I mean, we have had

transmission for a very long time. It is not a new idea. How do we

move towards a third party operator? I think there is a good deal

of support for that idea as far as an interstate grid is concerned.

Mr. SZWED. I think that is a very good question. Just to step

back for a moment, today’s power system and the way it was built

to provide for regulated utilities and to bring generation to load in

franchised areas, the Eastern Interconnection, when you steps back

and think about it, is just one of the most fantastic synchronous

machines ever constructed by man. And it works.

But today we have introduced a great deal of wholesale competition. There are different sources of generation now on line or

maybe some generation that is not on line anymore, for whatever

reason. We are using that system so much differently. And places

where congestion might never have occurred are now occurring.

Senator THOMAS. I understand. Where you have generation and

distribution aligned, why, of course. But why has there not been

transmission? There has been obviously a need for it. Why has

there not been investment?

Mr. SZWED. A couple of things. I think in many respects with regard to the regulation of the asset, the rates of return that have

been authorized and the utilities have received for returns on these

investments have not really kept up with other competitive investVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
37

ments in that regard. In many respects, because of that—I hate to

use this word, but in many utilities it has been a stepchild to other

investments that were necessary in other parts of the system.

I think today what I have been working on with other utilities

in my region is to create a separate business for transmission, like

I said before, a company that would own and operate.

Senator THOMAS. Where would you get the capital investment?

Mr. SZWED. Well, that is a good question. I was just in New York

yesterday talking to a couple of colleagues on the investment banking front. I think there are people who are willing to invest in this

kind of a business because it would be a regulated business, it

would have cash flows. There is a place for that in an investor’s

portfolio.

The point is, however, in order to get utilities to think about divesting these assets, selling them to a third party to create that

business, it requires the more regulatory certainty with regard to

the kind of prices that could be charged, the regulatory environment that it would operate in, and so on. We need some of those

things done. We need some of those other hurdles I talked about

removed in terms of quicker reviews of utility disposition of property, those willing to divest those assets. We need some of those

fixes to make that work.

Senator THOMAS. Mr. Cook, just very briefly, what is your notion

of the changes in reliability rules?

Mr. COOK. Principally, sir, we need to move to enforceable rules.

Right now NERC sets operating policies for how the grid is run,

but there is no enforcement mechanism. It is just a matter of peer

pressure. The legislation that is pending here now in the Congress

would establish a system through an industry self-regulatory organization to set and enforce those rules with Government oversight.

Senator THOMAS. If you do not have an adequate transmission

system, how are you going to be reliable?

Mr. COOK. Well, what we are doing now with those rules and

what we would do is to make sure that the existing system, as the

existing physical system, is operated in a manner that it stays secure so that you do not have cascading outages such as occurred

in——

Senator THOMAS. So, what we hear—and I do not mean to interrupt, but I have to move along. We hear all the time, well, there

has not been any transmission, so there is not enough capacity.

You are saying if you operated it differently, there would be—is

there enough capacity?

Mr. COOK. No, there is not enough capacity. What we are saying

is that because the capacity is limited, the operating rules will

place limits on how much trade can take place on the grid, and

that is not wise for the economy.

Senator THOMAS. What I guess I am really seeking from any of

you—and I will not take any more time—is we all know the things

we are talking about here that have to be done, but they are longterm things. We are not going to have a national transmission system for 5 years or whatever. But some of the things that we could

do—for instance, do something to make the capacity of the current

system work better or be able to do some things. I do not know

whether it is new source on generating plants or whatever, whethVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
38

er we can change regulations. We can do some things to have some

fairly soon changes. We talk about all this stuff we talk about, and

it is great but it ain’t going to happen in the next few years. We

have to get started on it.

Mr. COOK. That is exactly my point. Some of these things will

take some time, but we need to begin.

Senator THOMAS. We need to also think of some things that

might have some impact in the next 6 months, and there are some

things, regulatory things. There are some things about generators.

There is some generation that could be going on that is not going

on currently because of rules and regulations. Some of these things

can be done. I cannot understand why a distributor for gas would

be opposed to increasing the volume of fuel he has to distribute.

At any rate, I have taken enough time. Thank you, sir.

The CHAIRMAN. Did you want an answer to that?

Senator THOMAS. No. I do not think there is an answer to that.

The CHAIRMAN. You left a hanging participle or something my

English teacher told me somewhere sometime.

[Laughter.]

The CHAIRMAN. Senator Domenici, perhaps you can enlighten us.

Senator DOMENICI. First, thank you very much for calling this

hearing. It is a very important issue, and I hope we learn from it.

Let me just talk a little bit about natural gas with any of you

who are experts on natural gas and then talk to what kind of mix

America is going to have, when we finally solve this problem, as

to the resource we use.

Our staff’s information would indicate that the Energy Information Administration projects that we need 393 gigawatts, translating into 1,300 new powerplants. That is 300 megawatts each.

Now, could I ask, in your expertise, whatever your respective endeavors are, would you generally agree that they are probably right

in terms of just new additional resources needed for electric generating, for those who use electricity over the next 20 years, as they

have said here? Do you agree, Jerry?

Mr. HALVORSEN. Yes, sir.

Senator DOMENICI. Why do you agree with that? Is this arithmetic, just adding up a percent of growth each year, or how is it

arrived at?

Mr. HALVORSEN. Yes, and I think they have probably as close a

finger on that, Senator, as anybody around. That is why we think

they are an excellent source of data. So, they are pretty credible.

Senator DOMENICI. Now, I wonder, is there a group that you are

aware of, aside from those who want to use a different mix, including conservation, which I will speak to in a minute, that says to

live our current lifestyle and grow in a modest manner as projected

for us to succeed over time—is there some group that says this

number is way too high that any of you are aware of? Mr. Nugent,

do you as a regulator believe that nationally we need about this

much over the next 20 years?

Mr. NUGENT. I think it is a plausible number. Whether the number is there or it is modestly lower, I am not going to take issue

with it.

Senator DOMENICI. So, it is plausible.

Mr. NUGENT. Yes, sure.

39

Senator DOMENICI. What about the rest of you?

Mr. NUGENT. Even if you do not get all the way there, even if

you want to only go halfway there, you have got a lot of work to

do.

Senator DOMENICI. That is my point I am going to get to very

shortly.

Mr. SZWED. When you think about how everything in our economy today is so dependent on electricity, and quality electricity,

given the types of sophisticated control and computer equipment

we have, and just to move to electrify so many things, from my

standpoint I find continued growth to be credible. Frankly, we see

that in our service territories today. We see growth. We see load

growing, and we need to accommodate for that.

Senator DOMENICI. It would seem to me the logic of all of this

would be if 1,300 is a plausible number of 300 megawatts each,

that we then ought to ask those who think conservation should

play a big role—and I think most of us are in that category—and

just ask how much conservation can we expect and let somebody

give us that number. I would assume there is a realistic number

of some sort that somebody will say we can conserve X amount if

we change our ways, change some standards, do some other things,

we can save X amount. Does everybody agree that that is doable,

that there are people out there who can give us those kind of answers?

Mr. NUGENT. There are people who claim to, yes.

Senator DOMENICI. Would it not seem logical, unless the answers

are totally implausible, that what we ought to do is say, okay, we

agree. Now, let us subtract the conservation number from the

1,300, the 300, and what does that leave left over? And it is going

to be a very big number. Then it seems like, regardless of where

you come down, we ought to get started building those. To me that

seems very logical. It may be 1,000. It may be 1,100, but it seems

like if you just draw a big graph and say how much do you conserve, and off the 1,300 times 300, and we would be left with an

amount.

Now, let me ask. We are down to that amount that we are going

to have to do in new electric generating capacity. I am not ignoring

conservation. I am down to that amount. The Energy Information

Administration projects that most of that new capacity is going to

be natural gas, in fact, a very large percentage. I think they say

92 percent of that new capacity will be natural gas.

Now, I do not know how they would get that number, but do any

of you have any ideas that it need not be that kind of mix, that

it might be a different mix than that?

Let us talk, before you answer, on what the current mix is. I understand it is 52 percent coal. Right? 22 percent nuclear, and it

looks like many more of those are going to be relicensed than we

thought. So, as a matter of fact, we will take that off the 1,300 new

powerplants in some arithmetic manner because we are going to

need less because we are going to have more nuclear on board. But

nuclear is only 22 percent, and all the rest is made up by the other

sources, with wind and solar being less than 1 percent, as I understand it, if you were to draw a picture.

40

Now, let me ask, do any of you have any doubt that, as a matter

of capacity, the United States of America, if it sets its will to this,

can build this many powerplants to get on a line towards solution?

Do you think we can, Mr. Nugent, based upon your experience with

the industry, with American will——

Mr. NUGENT. I think the capability is there. Sure, if the signals

are sent and that is the direction you want to go on it. We have

demonstrated extraordinary productive capacity in the past, and

with the proper will and signals called, of course, you could do that.

Senator DOMENICI. I just wanted to ask if any of you remember

a point in history when we were producing 1,300 powerplants over

a period of that amount. I think there were a number of periods

when annually we were producing equivalent of one-twentieth of

1,300. Is that not correct? Mr. Cook, do you know?

Mr. COOK. I have not done that kind of math, Senator, but certainly there is the capability, assuming the conditions are right and

we make the right policy choices to move forward.

Mr. SZWED. Certainly, Senator, also I am just speaking from my

own company’s experience. Over the past couple of years, we identified a need for the load that we are responsible for serving, and

over the last 3 or 4 years, we as a company ourselves put in 500

to 600 megawatts of natural gas fired peaking type capacity, which

we were able to successfully do in a couple of years. So, I think you

can. I think we can get those kind of things done. We do have the

wherewithal to do that.

Senator DOMENICI. Now, let me ask another question. There is

going to be some objection to this many powerplants because some

are going to say it will dramatically impact the ambient air. It will

make our air dirtier. Now, as a matter of fact, that is not necessarily so, is it? If we add 1,300—it will not be that many, but let

us use that number, less whatever we do not have to build. We

build that many 300 megawatt plants. Do we have to damage the

ambient air from its current status? I note, Mr. Halvorsen, you are

saying no.

Mr. HALVORSEN. I think the other factor, Senator, is I was in the

nuclear business for 12 years. You absolutely have to have nuclear

power. I think it has taken a bum rap in the last few years, but

I think it is very important for Congress to set the working with

the industry not only to push the relicensing of existing plants, but

to figure out a framework where you can begin to build new plants

and gain the public confidence back. I think that has been the

missing link here recently.

Senator DOMENICI. Yes, sir.

Mr. NUGENT. I was just responding to the question on the ambient air. I think any new facility you put in is certainly going to

have a marginal impact on air. The question will be, over time,

whether the retirement of other dirtier facilities may not offset that

impact. It is a complex equation.

Senator DOMENICI. However, it cannot happen, but your answer

would be incorrect if you were using all nuclear power because

there would be no addition to the ambient air. We are not talking

about——

Mr. NUGENT. I was not talking about that.

41

Senator DOMENICI. I am talking about a number of them being

that, however.

Mr. NUGENT. That is fair.

Senator DOMENICI. Now, let me just close by asking with reference to natural gas, do any of you know—follow this chain with

me. We are over in New Mexico. Believe it or not, we are on

Vermejo Ranch owned by Mr. Turner, sold as far as the mineral

rights to somebody else, with Mr. Turner having some of the mineral rights privately owned, and they are finding natural gas there

in a beautiful, beautiful pristine area. We will soon be able to take

you all up there and show you how you can drill new wells in a

pristine area and leave the smallest, smallest footprint you can

imagine.

The CHAIRMAN. We can help you with that.

Senator DOMENICI. You can come and see this. It is in reality.

The CHAIRMAN. Well, we have on in reality.

Senator THOMAS. There is no ice there in New Mexico.

[Laughter.]

Senator DOMENICI. But I want to just assume for a moment gas

is coming out of that new field, maybe 1,000 new wells more, and

it is heading toward—pick a market. California. What happens to

the price from the wellhead price to the delivery? My constituents

who are drilling the natural gas wells are not getting the kind of

price that is being charged at the other end when it is delivered

to a utility to burn. Where are the stop-overs that cost money, that

push that price up from what my people are getting the field for

their gas versus the delivery point? Do any of you happen to know?

[No response.]

Senator THOMAS. I think the answer is no.

Senator BURNS. The silence was deafening.

Senator DOMENICI. It would be interesting to find out, not to find

that out to be a negative toward anyone, but it would be good to

know.

My last question of any of you is with reference to the infrastructure aside from the plant itself—we have all been discussing pipelines and the like—is there any question in your minds that as far

as America having the capacity to build that infrastructure in a

timely manner, that we can do that, that that is on the side of doable over the period of time that is being discussed? Mr. Nugent,

can we do it?

Mr. NUGENT. I think you can do it. I think the question is figuring out the right plan, the right design, and one that meets what

is now becoming a much more competitive market than it has ever

been before.

Senator DOMENICI. Do any of the rest of you have a thought on

that?

Mr. SZWED. I would say so, and I think I would add to the list

that he said, relative to making sure that the right economic incentives and framework are there to make those investments attractive.

Senator DOMENICI. I think you know that nuclear powerplants

are being bought and sold today in the United States. Companies

are buying them, selling them, trading them because they are genVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
42

erating electricity at the cheapest price of all generating facilities

in the United States.

Do any of you, who have experience in this area, have an opinion

as to whether or not we should seriously pursue some new nuclear

powerplants in this mix over the next 20 years? Mr. Halvorsen, do

you have a view?

Mr. HALVORSEN. Senator, I have got a view. It goes back to how

the industry was founded. There was a joint congressional committee on atomic energy many years ago that helped the industry

build the first plant. I believe it was in Shippingport, Pennsylvania.

I think there has been a lot of very good research done by the Department of Energy on nuclear technology, on how they can be

safer, and so forth.

I think it is up to this committee, to some extent, to provide the

leadership to bring the industry and Government together to say,

let us take the risk, let us dive in, the country needs these plants,

and get it done. And I think you can do it.

Senator DOMENICI. Mr. Szwed.

Mr. SZWED. Yes, I would agree with that. I think another consideration that should be taken into account here is there are probably several plants that were either put on hold or just not completed. Maybe someone needs to go back and take a look at what

it would take to get those done and bring those on line.

Senator DOMENICI. Thank you very much. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Domenici.

Senator Burns.

Senator BURNS. I hear a phrase that I used a year ago that before we can really go headlong into electrical deregulation that we

have to have a national grid that was similar to the interstate

highway system. We have to be able to shift great blocks of power

in a fairly efficient manner to any section of the country. I say that

my retail folks in Montana should have access to Florida power if

they so want to buy Florida power, but that takes a national grid,

and we do not have that today. Is that correct?

Mr. COOK. That is correct. We have got pieces, but at some pretty critical points, it is like we have got an interstate system that

is joined up by some country roads.

Senator BURNS. Have we identified where those ties are that

need redoing in order to put the interstate system together? Have

those areas been identified?

Mr. COOK. There are particular places that have been congested

on a regular basis. You have heard of Path 15 in California. There

is an interface between Minnesota and Wisconsin that shows up on

a lot of days as congested. There are several places where we sort

of know where the current areas of congestion are. That is not the

same as building a more robust transmission system to allow further trade.

Senator BURNS. What we have got to think of is the people who

finally use this product, and of course, they depend on it. I would

say right now that the generators and the transmission people still,

for the most part, have a credibility problem.

I have mentioned this before. I was rather taken aback way back

in January when I picked up the Los Angeles Times. In a recent

43

poll that was taken in California, 54 percent of the Californians

still believe that they have no shortage of power, that they are

being subject to gouging and a little bit of greed. Jerry, we can sit

and shake our head on that, but that was the poll, and that tells

me we have got a credibility problem with the people.

I am still going back to this situation of the interstate system,

how we can shift blocks of power in order to address a shortage.

Now, let us face it. I do not think our growth in the industrial

area, as far as demand on electricity, has increased a lot. But more

homes have computers now. And do you know what we do? We go

off and leave them on. Now, if you want to know what will drive

conservation, it is price that will drive it more than anything else.

I think a lot of us are becoming a lot more aware. We go around

the house and turn things off now when we leave in the morning,

where we were not doing that maybe a year or 2 ago.

I am interested in how important is it that we revisit the EPA’s

rule on new source, on upgrading the efficiency of coal-fired plants.

Would you want to comment on that? As you know, right now if

you redo a coal-fired plant to increase its efficiency and output, it

makes the plant subject to total review by the rule of the EPA on

new source. How important is it that we revisit that?

Mr. NUGENT. This has implications, it seems to me, for the installation of new equipment too.

Senator BURNS. That is correct.

Mr. NUGENT. When I am talking about new equipment, I am

talking about a totally separate generator which may have a much

cleaner profile.

Senator BURNS. Well, I say to upgrade both——

Mr. NUGENT. I understand. You have an upgrade over here and

you have a new generator over here which may be markedly cleaner, and if this new one is able to achieve much greater cleanliness

in output, the question is, do you want to undercut its position to

do it? It is clearly a matter of what the economics are in the two

situations.

Senator BURNS. But if we upgrade the old plant, if we put new

equipment in to increase its output and efficiency.

Mr. NUGENT. Its output, efficiency, and cleanliness, it seems to

me come in tandem. Why should you see it in isolation?

Senator BURNS. But why they’re not upgrading is they have become subject to that review.

Mr. NUGENT. Because of how stringent the standard is. I understand that.

Senator BURNS. How important is that, that we revisit that? Mr.

Szwed.

Mr. SZWED. I have to say I am a transmission executive, so I deal

mostly with the wires instead of our powerplants. But from our

standpoint, as we look at either upgrading plants or making modifications to plants, it is pretty important to know what the rules

of the road are and whether there is some upgrade that triggers

some new source standard or not. So, it is important to us to be

clear as to what those rules are and what rules we are operating

under so that we can make effective decisions about how to operate

and modify our facilities.

44

Senator BURNS. I was interested in your figures on how much we

are going to have to build in order to keep up with demand in the

future. We know that is going to be a lot higher than a lot of us

have really thought to this point.

To the chairman, I still think that eminent domain has to be a

part of national legislation and that power is vested in FERC if we

are to build this interstate highway. And the States I think will

definitely have a role to play.

We in Montana can provide pretty economic power if we can

transmit it at mine-mouth type generation with coal. We have got

over 250 years of compliant coal, low in sulfur. We would like to

be a part of the answer here, part of the solution. But right now,

all the transmission lines out of Montana are at full capacity. So,

we know transmission is going to play a large role. If those people

who want to be NIMBY’s, then let them be and we will produce the

power for them and be a part of the solution, if we can get transmission. We are going to have to do something because of the demand.

These server farms are taking a lot of electricity, a lot more than

we really planned on in this new generation of how we make a living.

So, we thank you for your testimony. I appreciate that.

But the building of the interstate highway is very, very important to me. I think our ability to move blocks of power. But let us

think about the consumer here for a little bit and the end use of

this because I have got industry shut down in Montana because of

price and we have got an economy that can be brought to a standstill both in transportation and in our everyday life. We have got

farmers this year who will not be able to turn on irrigation pumps.

So, we have still got to feed and clothe this country and it takes

power to do it.

Thank you very much for your testimony today.

The CHAIRMAN. Thank you, Senator Burns.

Senator Bingaman.

Senator BINGAMAN. Mr. Chairman, I think Senator Landrieu

ought to go ahead. She was here ahead of me.

The CHAIRMAN. Correct. Senator Landrieu.

Senator LANDRIEU. Thank you, Senator Bingaman, for that courtesy. I will be brief.

I want to thank the chairman for holding this hearing because

I think the testimony has been very helpful in keeping us focused

on this very important problem facing our Nation. It truly is a crisis that needs to be dealt with as soon as possible. The challenging

thing is that no matter what we would do in the next week or

months or years, it is not going to be fixed in a short period of

time. But I think it is important for us to lay the right groundwork.

So, I am looking forward to working with my ranking member and

chairman in developing the framework of a solution.

Let me first follow up on the comments from the Senator from

Montana and agree with him that one of the most important things

that needs to be in any piece of legislation that ultimately passes

is a sophisticated and effective approach in creating this national

highway system. As a producer State myself—although Montana

produces coal, Louisiana produces a great deal, as you know, of

45

natural gas—we can produce all day long, but unless we can transmit it, unless we can transport it, unless we can get it to other

parts of the Nation, all the production in the world, while it does

us obviously some good in terms of jobs generated from the production, is not going to contribute to the overall solution.

So, building that highway I think, Mr. Chairman and our ranking member, needs to be our real primary focus. We have the supply and I think we have the potential for a good mix of supply. But

focusing our efforts on building this grid I think is important.

I think the Senator from Montana was also very astute at trying

to help us to find out where the gridlock is, where we can identify

in the Nation today where the traffic is backed up, to try to open

those avenues, as well as where the need is going to be to create

new avenues so we can get this flow of power moving.

In addition, let me also make a comment to the panel that while

our State is very proud of our efforts to produce natural gas in

abundance, we consider it a good fuel supply. It can meet a lot of

environmental standards. I want this committee and the panelists

also to know that our State is concerned about an over-reliance on

natural gas, which would drive the price too high, therefore putting

many of our industries at a considerable disadvantage when the

price of natural gas is too high. The way to compensate or deal

with that is to create multiple sources of supply.

So, Senator Domenici’s point about increasing nuclear, making

sure, of course, that it is environmentally safe, but promoting policies that increase nuclear energy in this Nation I think are important, as well as looking and revisiting the environmental rules and

regulations that help us to have coal as part of that mix. But for

it to be as clean as possible and as compliant is very important because while Louisiana is a producer of natural gas, we are also a

great consumer of natural gas to run our chemical industries and

our powerplants, our agriculture, and agribusiness industry. So, I

want to just make that point for the record.

Then I want to also go on the record as saying that I do think

that the Federal Government is going to have to be as strong as

possible in this whole issue of eminent domain, respecting the

States and respecting the regional needs. There needs to be, at a

minimum, a Federal backstop to make sure that States and regions

have adequate time to make the decision, but if those decisions are

not made or if the decisions are being hampered or if too much

time is being taken, then I do think whether it is FERC or some

other agency should step in for the siting of plants, transmission

power lines so that this Nation can grow.

Finally, Mr. Chairman, I have heard you say this, but it is very

important. If we do not make the right decisions in the next couple

of months, the economic vitality of this Nation could be and is

being seriously hampered by this situation. This is not a small

matter, and we are going to have to really put aside the old conservative/liberal Democrat/Republican views and try to forge ahead

with a robust—creating new ground because if we do not, the economic vitality of this Nation is going to suffer and for no reason

because we have the supply. We just need the political will.

So, I want to be put down on the record as being for a strong

Federal presence to make sure that this issue is dealt with and to

46

be respectful to States and respectful to regions. But the Federal

Government most certainly has a role to play for the benefit of all

the States and all the thousands and millions of individual and

companies that are reliant on us getting a source of reliable, steady

electricity to continue to give prosperity to this Nation so that more

places can grow and expand. And that is a very important issue for

this committee and before the Congress.

I thank you for your testimony this morning.

The CHAIRMAN. Senator Bingaman has questions and statements. I am going to have to excuse myself, gentlemen.

Senator BINGAMAN [presiding]. Thank you, Mr. Chairman.

Gentlemen, let me first apologize for not being here during your

testimony. The Senate Finance Committee scheduled a markup of

this tax bill after we had scheduled this hearing, and unfortunately

that required me to be there for some period this morning.

Let me ask a couple of questions. One issue that I am particularly interested in trying to get your thoughts on is where the authority should be vested or located to make decisions on siting of

power plants and transmission lines.

Now, in the case of natural gas, gas pipelines, FERC has the authority. As I understand it, that has not worked as well as some

would like it to perhaps. It has not been a totally problem free solution to the problem.

In the case of electricity, many people are saying that the choice

is between authorities at the State level or at the Federal level.

What I have been interested in trying to explore and pursue is

getting more authority at the regional level where I think it makes

more sense to have the authority located. We have, of course, significant authority already at the regional level for regional transmission organizations, but we do not have real authority at the regional level for making any decisions on siting. I do not know how

practical you think it is for us to pursue that. I would be interested

in any thoughts any of you have. Mr. Nugent, did you have any

thoughts on this?

Mr. NUGENT. Yes, sir. This is an area that commissions really

from Maryland to Maine have been working actively in. We are

working on, in a broad sense, to encourage the closer cooperation

of the three ISO’s that cover the area, PJM, New York, and New

England. The commissions from the mid-Atlantic and New England

have a memorandum of understanding between them which would

govern how we would monitor the development in that regional

venture. The attempt here is to see if we cannot produce, short of

an RTO, something that would function as well in all respects,

such as facilitating transmission between the regions, and markets

that would function as well as a regional transmission organization. I would venture to say, though no one has concluded that,

that if we find that it falls short of meeting the standards for regional transmission operations adequately, that we would probably

take the next step with regard to how the circumstance ought to

be resolved.

One of the difficulties in the middle of this, of course, is that the

New York Public Service Commission has more power, to some extent, more authority than the rest of us because its ISO falls enVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
47

tirely within its jurisdiction as opposed to the other States where

it does not. And we rely on the FERC authority.

Now, in addition, there is no area in the country where commissions have worked more closely together than in New England,

where the New England Conference of Public Utilities Commissioners has served as a common ground for the meeting of the New

England commissions. We are looking for governance just within

New England of ISO, New England, and operations of the regional

grid, we have as New England commissioners proposed that there

be an independent regional markets board in order for what might

be a New England only RTO to be a truly independent structure,

that there also be a market monitoring and mitigation unit independent from the ISO and market participants to ensure the proper functioning of that market. My commission has gone beyond

that and said that we also ought to oversee the operations or advise the FERC on the operations of the ISO in New England.

Now, we are not asking for the establishment of a direct authority. We believe that the FERC has and, if not, ought to have the

authority to rely upon a regional group that would examine issues

from a regional perspective, try to devise solutions that meet the

regional needs, and serve those up and make a decision on it. If,

over time, the FERC was satisfied with the quality of decisions

that was coming forward and was repeatedly endorsing those decisions or not disturbing them, that would grant a degree of credibility to that regional oversight mechanism, and that regional oversight mechanism could be expected to give solutions that met local

circumstances and to give them far more promptly than if you have

to cycle them through Washington.

Senator BINGAMAN. So, is it fair to say you think FERC should

have some kind of backstop authority to put in place and enforce

what the regional group comes up with, but not the sort of national

siting authority that they have got in the case of gas pipelines?

Mr. NUGENT. I think it ought to be a backstop authority. I may

come to regret this some day if they do not agree with me, but the

point is you have to have solutions that are consistent with a national model and national principles. But that does not mean that

you cannot devise solutions in New England that are somehow different from California that meet each region’s immediate needs but

are still consistent with a national model.

Senator BINGAMAN. Mr. Cook, did you have any thoughts on

that?

Mr. COOK. Yes, sir. I think it is important to develop a single

forum where those issues can get worked out, and the scope of the

authority of that forum ought to be to have a geographic reach sufficient to deal with the issues that it is trying to grapple with. And

a regional model may fit that kind of thing, but there will be seams

between regions.

One of the matters we discussed earlier today was the siting of

a transmission line across Long Island Sound to move power from

New England onto Long Island. That is a situation where you really have two regions abutting each other, and it is a common jurisdiction between them. Some of the other issues that we have talked

about deal with lines that could cross two or three regions, and

48

there will need to be a mechanism to deal with those kinds of

things.

In Texas, they have got a pretty good handle on things because

the Texas commission has authority for virtually the whole grid

within Texas and they can make decisions that take account of

those issues and then implement them. We do not have that luxury

in the rest of the United States. The grid really crosses State

boundaries, crosses regional boundaries, and we need an effective

way to deal with those issues.

Senator BINGAMAN. Mr. Halvorsen, did you have a thought on

this or Mr. Szwed?

Mr. SZWED. I guess I would just like to say a couple things. Our

testimony today recommends that with regard to electric transmission siting, that it has a Federal presence. There is the Federal

Energy Regulatory Commission Authority that would parallel that

what is in the gas industry today. As I said before, I think we need

to look at that more broadly because of the broader nature of markets.

I do not know if that is the solution. I really recognize the sensitivity between local and regional issues relative to siting issues

and so forth. But I am also concerned about making sure that if

someone has the ability to build a transmission line or is ready to

build a transmission line, that we have a process in place that can

be streamlined, if you will, to get through the permitting side and

get to the point where the construction can begin. I would be concerned about creating too much in the way of a great deal of bureaucracy around it, but clearly knowing what agency that you can

go to ultimately to get that siting approval.

Senator BINGAMAN. And that should be FERC.

Mr. SZWED. In our estimation that should be FERC. We also in

our testimony indicated that I think in Chairman Murkowski’s bill

from last year there was a provision that had FERC as a backstop

if after certain conditions were not met from the States, that FERC

would step in. But, yes, we are advocating that there be Federal

authority on this to help move the ability to get these lines or other

facilities in place.

Senator BINGAMAN. Is the setting of generation reserve margins

something that should be done on a regional basis?

Mr. COOK. I think that is typically done State by State. Some regions now set those kinds of things, and that really needs to take

account of, the way the system is designed, the kinds of resources

that are available on the system. I do not expect a single national

standard would be set.

Senator BINGAMAN. But if, in fact, we wind up with a de facto

set of regions that we are trying to oversee and manage, then

something like setting generation reserve margins should be done

at that level too rather than just at the State level.

Mr. COOK. I think those things need to take account of the interconnected nature of the system, and going State by State does not

do that.

Senator BINGAMAN. Did you have a thought on that?

Mr. NUGENT. We currently are doing it on a regional basis. It is

done through ISO New England. We are currently somewhere

around 18 percent, if you include the tie line from Hydro-Quebec.

49

But off the top of my head, I think it would be useful to have some

sort of minimum standard that extended more broadly. Take the

situation, for example, if we have an 18 percent standard and New

York and PJM had only a 5 percent standard, you might find the

excess capacity that we have and are counting on to carry us

through the next period might be drained away by people in adjacent areas. So, I think you probably want to have some minimum

standards that are set there, and that question requires a much

more careful and thoughtful response than I have been able to give

you. But you do have to have some consistency of approach.

Mr. SZWED. I would characterize some of the reserve margins you

are talking about in two categories. There is an operating reserve

margin which is specifications that NERC and many of the regional

councils associated with NERC specify that needs to be on to meet

any contingencies on a real-time basis. So, for example, in my part

of the country, we are required to carry, I believe it is, a 4 percent

reserve margin every hour of the day. So, in the event a generator

comes off line or if there is some other disturbance on the system,

the other components of the system could react to that and make

up——

Senator BINGAMAN. And where does that requirement come

from?

Mr. SZWED. That is an operating procedure and protocol that

comes from the North American Electric Reliability Council and

the associated regions of the country that have those. Every one of

these regions of the country have an operating protocol.

Then there is more of a planning reserve margin which is probably in the traditional way we used to plan generation. We would

look at the load. We would look at the long-run load projection. We

would look at the long-run supply, and we would look at the reserve level between those numbers. In many respects, they are

numbers like you heard before, 15 to 20 percent depending upon

the situation. I think that question has to be thought about in the

move to competitive markets and whether there should be a specified reserve margin or not. I think that may be a question for the

individual locales and the State of where things are in terms of the

move to retail competition.

Senator BINGAMAN. I guess an obvious question is, if you set a

reserve margin, then who would have the ultimate authority to enforce compliance with that reserve margin and take the steps necessary to do that?

Mr. NUGENT. Two comments, Mr. Bingaman. One is, it seems to

me, if you set a standard and you have a regional structure that

is linked or backstopped by the Federal one, it would be incumbent

on that regional structure to meet the standard that was set at the

Federal level, and if it failed to do so, the Federal entity might

move in.

One of the things you have to keep in mind is this is not just

an operating question, but it goes to the subject we discussed the

last time I was here, which is the functioning of markets. You have

to have adequate additional capacity in markets to support a fully

competitive market. So, you do want to encourage the existence of

certainly a substantial amount of extra capacity.

50

Senator BINGAMAN. Well, let me stop with that. I gather the

other members have given up. So, why do we not terminate the

hearing. Thank you all very much for being here and testifying.

[Whereupon, at 11:31 a.m., the hearing was recessed, to be reconvened on June 21, 2001.]

[Subsequent to the hearing, the following was received for the

record:]

SOUTHERN CALIFORNIA GAS COMPANY,

Los Angeles, CA, May 23, 2001.

Hon. FRANK MURKOWSKI,

Chairman, Senate Energy and Natural Resources Committee, Dirksen Senate Office

Bldg., Washington, DC.

DEAR SENATOR MURKOWSKI: At the May 15, 2001, Senate Energy Committee

hearing on Energy Infrastructure Siting, Jerald Halverson, President of the Interstate Natural Gas Association of America, in response to a question asked by Chairman Murkowski, suggested that Sempra Energy, the parent of Southern California

Gas Company (SoCalGas) has opposed critically needed pipeline expansions to California markets. In his prepared statement, Mr. Halverson appended a table documenting such opposition. This table is also an exhibit in the currently ongoing formal hearing at the Federal Energy Regulatory Commission (FERC), which is investigating the practices of an affiliate of an interstate pipeline. The exhibit lists six

interstate pipeline proposals, dating back to 1989, and purportedly shows that

SoCalGas has protested the proposed expansions.

Before I address the inaccuracies in this table, let me state SoCalGas’ general position on interstate pipeline expansions:

• SoCalGas supports construction of interstate and intrastate pipelines when necessary to meet the needs of its customers; and

• SoCalGas believes that construction should be coordinated to ensure regulators,

both state and federal, that proposed expansion facilities will meet the needs

of consumers.

We recognize that interstate pipeline capacity is necessary to provide natural gas

supplies to help fuel the economy. But sometimes ‘‘light handed regulation’’ over

interstate pipelines has produced volatility in commodity prices and has reduced the

rights of customers to existing interstate capacity.

Mr. Halverson’s table claims that in the Kern River 2001 Emergency Expansion,

‘‘SoCalGas protests degradation of service because it will not expand Wheeler Ridge

capacity.’’ It is important that you know exactly what SoCalGas said in this case.

‘‘SoCalGas supports expansions that will provide more reliable and usable

pipeline capacity. However, the expanded capacity needs to be rationalized

and it must be constructed to facilitate deliveries to targeted markets, e.g.,

electric generating loads. . . . the question presented by this filing is

whether it is appropriately tailored to serve the intended markets.’’

Our filing requested that FERC convene a comprehensive conference (within 15

to 20 days of the filing) to collaborate among the market participants and the state

and federal regulators. FERC denied this request and issued a license to build,

without making any determination as to whether this pipeline will actually serve

any electric generation needs, either now or in the future. Subsequent to this order,

FERC agreed to convene this conference on May 24, 2001. This is only one of the

inaccuracies included in this table.

A review of the applications listed on the table, including actually reviewing the

comments that SoCalGas has submitted over the years, reveals that we have opposed some of the projects. But it is critically important to understand the reason

for our opposition. For many years SoCalGas objected to pipeline construction or expansion projects that reduced the reliability of existing services. For example, the

Mojave pipeline necessitated expansion of the upstream pipeline system of El Paso

Natural Gas Company, on which SoCalGas had secured significant levels of transportation rights to serve customers in southern California. SoCalGas requested that

shippers on the El Paso expansion be granted rights to deliver gas into the Mojave

system (the purpose of the expansion project) but not to the delivery point of

SoCalGas (Topock) since SoCalGas had all rights to this point. FERC rejected this

request (effectively abrogating our contract rights) and allowed new shippers to have

the same level of service as SoCalGas at the Topock point. Any company opposition

51

has consistently been based upon the need for coordinated action, which federal regulators have steadfastly refused to provide, until now.

Local distribution companies in California, as well as the CPUC, opposed projects

that threaten the reliability or economic viability of consumers’ existing interstate

pipeline rights. Federal regulators have consistently refused to consider these issues

or concerns. California utilities and their consumers have endured substantial

stranded costs resulting from these policies, as well as a basic inability to utilize

services even when paying maximum rates. The poorly conceived nature of interstate pipeline construction in the 1990’s has exposed customers to hundreds of millions of dollars in stranded costs.

Mr. Chairman, we have a very difficult problem to solve. FERC has now finally

agreed to host a public forum for all stakeholders on this issue. We are hopeful that

a comprehensive discussion of western region natural gas infrastructure needs will

occur at this conference. It is our hope that this discussion will provide a clearer

understanding of what gas infrastructure will be needed to satisfy future natural

gas demand in California and the west.

Very truly yours,

LEE M. STEWART, President,

Energy Transportation Services,

Southern California Gas Company.

(53)

U.S. ENERGY TRENDS

THURSDAY, JUNE 21, 2001

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC.

The committee met, pursuant to notice, at 9:55 a.m. in room SD– 106, Dirksen Senate Office Building, Hon. Jeff Bingaman, chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN,

U.S. SENATOR FROM NEW MEXICO

The CHAIRMAN. I am informed that Senator Murkowski is on the

way, but wants us to go ahead and start, so we will do that. I am

also advised that Senator Wyden wanted to make a short statement because he has a conflict and needs to go to another committee, so I will defer to Senator Wyden to make his statement.

[The prepared statements of Senators Bingaman and Johnson

follow:]

PREPARED STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW MEXICO

The purpose of the hearing is to consider energy policy with respect to fuel specifications and infrastructure constraints and the impact on gasoline supply and price.

The Committee held the first part of this hearing on April 26. The administration

was still working on its energy policy then so that hearing focused on the refiners

and distribution networks. Today we are happy to have witnesses from the Department of Energy and the Environmental Protection Agency.

As we have all noted, gasoline prices have become increasingly volatile in recent

years. There are a number of factors that have contributed to an increasingly tight

and inflexible market.

1. Escalating consumption by light duty passenger vehicles, led by the growth in

the number of SUV’s, which EIA projects to increase over 2 million barrels a day

within the next ten years.

2. The Number of different fuel specifications that must be produced and distributed around the country, some metropolitan areas require their own specific formulation.

3. The difficulty of siting new facilities, whether due to environmental permitting

difficulties or just plain community opposition, refineries and pipelines are now operating virtually at capacity with little down time for repairs and maintenance.

As we know, U.S. Refinery capacity has not grown as fast as demand for fuels,

especially the highly sophisticated refineries needed to produce clean fuels. In addition, refining capacity is not evenly dispersed around the country. The Gulf Coast

refineries produce a large portion of the fuels used in the midwest and the east. The

need to transport those fuels hundreds of miles increases the opportunity for something to go wrong somewhere in the system, as we saw last summer in the midwest.

Another complication is the concern with groundwater contamination from MTBE.

California has banned MTBE effective in 2003, eleven other states are seeking to

do the same. Daniel Greenbaum, the Chair of EPA’s Blue Ribbon panel on

oxygenates, testified before this Committee in April that, due to changes in refining

capability, oxygenates are no longer needed to produce reformulated gasoline.

54

The Clean Air Act is not under the jurisdiction of this Committee, but how environmental regulations affect the availability of affordable fuels is of serious concern

to us. The administration’s recent decision to deny California’s request for a waiver

of the oxygenates raises some serious supply concerns. I hope the witnesses will be

able to clarify the administration’s position.

In the energy bill I introduced earlier this year with a number of my colleagues,

we proposed streamlining the number of fuel specifications. The administration’s national energy plan also recognized the need to create greater flexibility in the fuels

markets. I hope the administration witnesses can give us more detail.

I have serious concerns that without action soon to both limit demand growth and

to increase the flexibility in the system, we are going to see ever higher and more

volatile gasoline prices. The public expects us to develop policies to prevent that

from happening. I look forward to hearing testimony from the witnesses and to some

discussion about how we should proceed.

PREPARED STATEMENT OF HON. TIM JOHNSON, U.S. SENATOR FROM SOUTH DAKOTA

Mr. Chairman, very few items affect the American consumer more directly than

the price that they pay for gasoline. The recent volatility and increases in gas prices

have affected all of us and left us grasping to determine the reasons for the changes.

It is time that we get some answers on what is happening and look for solutions

that can stabilize the situation.

I think it is important that we take a broad view of the issues we are addressing

today. To me, this committee should be focusing in energy security and how we can

mitigate the boom-bust cycle with which we are constantly faced in the gasoline and

energy industries. While I think it is important that we consider issues such as reformulated gasoline and its effect on prices, we must also look as the makeup of

our supply and how we can improve the energy security of the nation.

There are many different types of gasoline on the market. Most of the differences

in the makeup of gasoline have been largely driven by environmental concerns. The

changes to the Clean Air Act in 1990 required oxygenate standards in gasoline in

areas of the country that have poor air pollution. Using RFG has been largely successful in those areas and in other areas that have opted into the program. The federal standard for RFG is fairly clear and uniform—RFG must contain at least 2%

oxygen by weight. Federal RFG has a very strict recipe for sulfur, oxygen, toxics

and vapor pressure that are the same everywhere. Some states have chosen to set

up additional requirements to meet emission standards, increasing the use of socalled boutique fuels. This appears to have caused a greater variance in prices than

the federal RFG standard.

But, as we all know, MTBE, the main additive used to meet the oxygenate standard is being phased out because of water contamination concerns. California applied

for a waiver from the oxygenate standard because it is phasing out MTBE by 2002.

However, the EPA has denied the waiver, correctly pointing out that California did

not meet the requirements for a waiver under the Clean Air Act.

If MTBE is phased out, ethanol is the main additive that would be used to meet

the oxygenate requirement. Concerns have been raised about the ability to meet the

oxygenate standard with ethanol. The chief concern appears to be the ability to

meet the capacity in California. The California gasoline market is approximately 14

billion gallons per year. The total amount of ethanol that would be required to replace MTBE is about 600 million gallons per year—less volume than required by

MTBE. The ethanol industry is currently producing 2 billion gallons per year and

growing, so there is enough capacity. Moreover, California state agencies concluded

last year that if ethanol were substituted for MTBE, there would be benefits for

water quality and no substantial adverse effects on air pollution.

Concerns have been raised that gas prices will go up in California with ethanol

use. But EPA Administrator Whitman pointed out recently that if the oxygenate requirement were waived, this would only increase the amount of gasoline that would

be used to replace the oxygenates, further straining gas supplies and potentially

causing prices to go up.

The California issue is important and how it is addressed can go a long way to

determining how we balance gas supplies and the environment. However, when considering gasoline composition, energy-related factors are not driving the debate. All

of the formulations of gasoline are the result of controlling properties that effect

emissions. These are important issues that must be considered when debating energy policy. But the current requirements set a very thin line of error and are quite

varied, causing some confusion in the market.

55

I have introduced legislation with my colleague on the committee, Senator Hagel,

that would help to alleviate some of these constraints and focus the issue on energy

concerns. Our bill, the Renewable Fuels for Energy Security Act of 2001, would require that all transportation fuel produced in the United States to contain a percentage of Renewable fuel. This includes ethanol, biodiesel and other biomass fuels.

Unlike the current scheme which aims at particular areas in order to produce results, our legislation would ensure that an energy benefit would accrue to everyone

nationwide while providing important environmental benefits.

The debate that is before us today presents us with a unique opportunity to address these issues. There are many different types of gasoline out there. We must

consider the environmental impact but also consider energy concerns. Bringing all

parties together to find comprehensive national solutions that mitigate the difficulties that we face in our gasoline supplies would go a long way towards increasing

the energy security needs of the nation. Ethanol and renewable fuels can and should

be a vital part of this solution.

Thank you, Mr. Chairman, and I look forward to the testimony.

STATEMENT OF HON. RON WYDEN, U.S. SENATOR

FROM OREGON

Senator WYDEN. Mr. Chairman, than you, and I very much appreciate your thoughtfulness, and I will be brief.

As this country struggles with the high cost of gasoline at the

pump, the oil industry has claimed that a lack of refinery capacity

and restrictive environmental standards are the causes of the current supply shortages and high prices. Documents that I released

last week raise questions about the credibility of the industry’s arguments.

These documents show that just a few years ago the industry

was concerned that there was too much refinery capacity. Internal

industry documents reveal that the industry wanted to reduce capacity and supply in order to boost their profit margins. Casting

further doubt and relevant especially to today’s discussion, is the

fact that there were no requests made to the Environmental Protection Agency by any refinery for a determination of whether a

new source review was required under the Clean Air Act during

the past 10 years. These applicability determinations are the first

step in determining whether these Clean Air Act requirements

apply to changes in refinery operations.

In my opinion, it is hard for the industry to claim that the clean

air standards prevented refineries from making changes to expand

capacity when the oil companies never even asked the Environmental Protection Agency if they were covered. It is my view, Mr.

Chairman, and I will conclude with this, that the industry’s own

documents and their failure to take even the first step towards getting EPA clean air approvals raise serious doubts about the oil industry’s efforts to blame environmental requirements for supply

shortages and high prices.

I, like you, Mr. Chairman, have a hectic morning, and I hope to

be able to come back and ask some questions of Linda Fisher, who

we know from years past, and appreciate her involvement. I thank

you very much for this chance to make this brief statement about

the concerns I have.

The CHAIRMAN. Thank you very much. Let me make some general statements about the committee’s agenda at this point and

then make a few statements about this morning’s hearing.

Two weeks ago, when I became chair, I indicated that I thought

it made sense for us to look at the possibility of a short-term enVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00059 Fmt 6601 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
56

ergy bill that would focus on a couple of significant issues. The

ones that were crying out for attention most were: 1) the dysfunctional energy market in California, in the West, which we have all

spent a lot of time focused on; and 2) the need for in creased funding for the LIHEAP, the low income home energy assistance program. It seemed to me that both of those were near-term problems.

They required some urgent attention and we thought we would

pursue a markup this next week on those issues.

We have now, of course, seen a new order out of FERC with regard to the problems in California and the West generally. Senators Feinstein and Smith have observed that in their view we

should postpone any further consideration of legislation in this

area until we see how well that FERC order works. I think that

is wise.

In addition, the President has reversed his position on the

LIHEAP funding and has requested additional funds in that area

as part of this urgent supplemental appropriation bill. I understand the President has requested $150 million of additional funds

as part of that bill. The House has indicated a higher figure, $300

million, and we are trying to get an even higher figure agreed to

here in the Senate, but clearly there is action taking place and

there is an opportunity in the supplemental appropriation for us to

deal with that.

In light of those changes, it is my thought that we should move

on to the longer term issues that were the subject of the bills that

were produced earlier this year. Senator Murkowski introduced a

bill and I introduced a bill with many Democratic cosponsors. I believe there is a lot of common ground between those two bills. We

have a summary document that our staff has prepared that I will

distribute today to members of the committee and to anyone interested. The document tries to identify the common ground between

our two approaches on a long-term bill. It contains over 30 specific

provisions that we seem to have pretty good agreement on. I would

ask that all members of the committee look at that and come back

and give us a sense before the recess next weekend, or whenever

we do go into recess, about whether they would feel comfortable including those and having those provisions as the beginning for a

chairman’s markup on a long-term bill.

My own view is that this list of sections by itself does not add

up to a balanced and comprehensive energy bill. There are other

topics in both bills that might be fairly noncontroversial that are

not on this list because one side thought of them and the other did

not. The research and development provisions of the democratic bill

are one example of that. There are also some very controversial

issues that we need to do further looking into before I think we can

come to closure on what we should include in a comprehensive bill.

Examples in that area would be electricity restructuring, vehicle

fuel efficiency and global climate change. We need to determine

what provisions or accommodations can be made in this comprehensive bill to deal with those issues and, I am sure, others as

well.

I hope that before we leave next week, or before we leave for the

July 4 recess, if we are fortunate enough to finish our work and

be able to leave, I hope that by then we can identify a tentative

57

schedule of hearings that we will pursue in July, leading to a

markup. I welcome suggestions on what that should include.

I know Senator Murkowski has indicated that there have been

a great many hearings in the committee. That is true. We have had

15 hearings on various aspects of oil and gas production, for example, in the last Congress and in this Congress. I do think, though,

there are some gaps in the record and I would like to see us fill

those gaps. We have yet to really focus on energy efficiency. I hope

we can do that in the hearings coming up. There are some other

hearings as well. Obviously, we have a very thin record on the

issue of global climate change. That is another issue.

This next Tuesday, I believe Senator Murkowski has agreed to

the suggestion that we go ahead and have the hearing on the PriceAnderson reauthorization, as well as some of the nuclear incentive

provisions in the Republican energy bill. We had a number of potential witnesses who came to an earlier hearing to address those

issues, but due to the fact that both parties were having special

caucuses that particular morning, we were not able to really have

that hearing. Therefore, there are a couple of important issues related to Price-Anderson that we need to air if we are to have credibility in putting forward a comprehensive energy package, so I

hope we can identify a subject that we can agree to pursue next

Thursday in the hearing before we go into recess.

I wanted to make those general statements. Let me now go on

to a statement regarding this particular hearing this morning. I

think it is a very important hearing and I was commenting to Bob

Simon this morning that I think this is an issue that may be a little bit over the horizon, in that a lot of people here in official Washington have not yet recognized the importance of it and the impact

that it is going to have on gas prices and gas availability in various

parts of the country. I think it is very important and I think it is

a topic that we need to focus on, and very soon.

The subject, of course, is fuel specifications, infrastructure constraints and their impact on gasoline supply and price. We had a

first hearing on this issue April 26. The administration was still

working on its energy policy at that time, so we were not able to

hear their testimony. Today we are happy to have witnesses from

both the Department of Energy and the Environmental Protection

Agency.

As we have all noted, gasoline prices have become increasingly

volatile in recent years. There are a number of factors that have

contributed to the increasingly tight and inflexible market. Let me

mention a couple of those. Escalating consumption by light duty

passenger vehicles is one. It is led by the growth in the number of

SUV’s, which the Energy Information Agency projects to increase

over 2 million barrels a day within the next 10 years.

The number of different fuel specifications is another factor that

has added to this tight and inflexible market. These are really the

subject of this hearing.

Third, the difficulty of siting new facilities, whether due to environmental permitting difficulties or just plain community opposition. Refineries and pipelines are now operating virtually at capacity, with little down time for repairs and maintenance. U.S. refining capacity has not grown as fast as the demand for fuels has

58

grown, especially the highly sophisticated refineries needed to

produce clean fuels.

In addition, refining capacity is not evenly dispersed around the

country. The gulf coast refineries produce a great portion of the

fuels used in the Midwest and in the East. The need to transport

those fuels hundreds of miles increases the opportunity for something to go wrong somewhere in the system, as we saw last summer in the Midwest.

Another complication is the concern with groundwater contamination from MTBE. California has banned MTBE effective in 2003.

Eleven other States are pursuing efforts to do the same thing. Daniel Greenbaum, who is the chair of EPA’s blue ribbon panel on

oxygenates, testified before this committee at the April hearing

that due to changes in refining capacity, oxygenates are no longer

needed to produce reformulated gasoline. The Clean Air Act is obviously not under the jurisdiction of this committee, but clearly the

administration’s recent decision to deny California’s request for a

waiver of the oxygenate requirement does raise some serious supply concerns. I hope the witnesses will be able to clarify the administration’s position and the anticipated effect that they see from

that decision.

In the energy bill that I introduced earlier this year, with a number of colleagues, we proposed streamlining the number of fuel

specifications. The administration’s energy plan also recognizes the

need to create greater flexibility in the fuels market, so I hope that

the administration’s witnesses can give us more detail about how

the administration believes we should proceed to do this.

I have serious concerns that unless we act to both limit demand

growth and to increase the flexibility of the system—and that is

what we need to figure out how to do—we are going to see even

higher and more volatile gasoline prices. The public expects us to

develop policies to prevent that from happening and I look forward

to hearing testimony from the witnesses about how we should proceed.

Let me defer to Senator Murkowski for any statement he has before we hear from the witnesses.

STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR

FROM ALASKA

Senator MURKOWSKI. Thank you, Mr. Chairman. I listened with

interest to your announcement that you would not seek a shortterm bill, and I think that is an appropriate procedure, recognizing

the reality of the calendar we are on. As you know, we had anticipated previously to have an energy bill out of the committee prior

to the July 4 recess, but as a consequence of the turnover of the

Congress, why, obviously that process went awry.

In any event, it would have been very difficult, I think, to try

and move significant legislation, recognizing that the patient’s bill

of rights will be before us for an unknown period of time, and we

have not had any advice from the leadership relative to when they

intend to take up energy on the floor, and I have, as you know,

asked the Leader to identify a time on the calendar.

I think it is most appropriate, recognizing that, on the polls at

least, energy has surpassed education as the number 1 issue in the

59

minds of the public, so the fact that you have seen fit to indicate

your willingness to circulate some 30 topics that we can begin hearings on, or review hearings that have already been held, I think

is noteworthy, and I want to assure you of my support in that regard.

As indicated to you in my conversation, it would have been very

difficult to try and keep any short-term fix, so to speak, clean and

free of amendments. I know members on my side are supportive of

a comprehensive bill, would have amended any short-term effort in

the committee, and certainly would have offered amendments on

the floor, and I think we would have had kind of a runaway comprehensive bill, as opposed to something that would have been

more representative of the prevailing attitudes on the committee as

a consequence of the orderly hearing process.

So be assured of my support in moving towards hopefully the development of something you and I can agree on, a chairman’s

mark, and take up the items that we cannot agree on and resolve

them by a vote within the committee and through the process on

the floor as well.

As you indicated, this is the second of our Energy Committee

hearings looking at gasoline specifications and infrastructures, and

the impact they have on the energy supply and price. We had a

hearing in April. We had Gary Heminger of Marathon Ashland Petroleum, we had Tom Roberts of National Convenience Stores, Daniel Greenbaum, Health Effects Institute, Don Dagle, Exxon Mobil

Refining Company, and Craig Moyer, Western Independent Refiners Association.

One of the issues, of course, is the necessity of having so many

different types of reformulated gasoline, is it necessary. It was kind

of interesting to be reminded of where the responsibility lay.

We were advised by the expert witnesses that we were the ones

who passed the Clean Air Act of 1990 that required oxygenated

fuels, and we were the ones who ignored the warnings from those

who knew something about the business of making and delivering

affordable and clean fuels to America, and those warnings were not

adhered to, and as a consequence, when we got in trouble in this

area, we began to accuse the industry of some sinister plot to make

some witches’ brews of 13 to 15 different types of reformulated gasoline.

In any event, I think we have found ourselves to blame as opposed to lashing out at EPA or other agencies, which we, by law,

directed them to execute, so I hope in your testimony you do not

hesitate to remind us that any time Congress attempts to mess

around in the recipe business and we do not know what we are

doing, why, God help the public.

Now, in the last hearing, I asked our witnesses to provide the

committee with specific recommendations on how to change the

law, if necessary, to reduce balkanization of fuel supply, and in

what may have been a first for this committee, there was near-unanimity that removing the oxygenate standard Congress issued in

the 1990 Clean Air Act would help greatly.

If we look at the problem—of course, California is the best current example—it is my understanding that oxygenates now make

up at least 8 percent of California’s gasoline supply. By banning

60

MTBE, as California decided to do, 2 years ago, California will at

least need 8 percent of something, something to replace it, when

the ban takes effect in 2002, otherwise it will be a reduction of 8

percent in supply of gasoline.

Ethanol is an additive, of course, that would help, but it is difficult to transport. California wants to be exempt, as you know,

from the ethanol as well. Well, that was not possible. We are seeing requests from the Northeast States as well.

The fact is, gasoline refinery capacity is not adequate to make up

for the shortfall in California if they do not use oxygenate, that is

MTBE, or ethanol, and price spikes could result.

These problems, of course, are not easy to resolve, but I want to

relate in my concluding reference, during the last hearing I asked

specifically what we could do to add more flexibility into the fuel

system, which is what the previous witnesses requested. Unanimously they responded that, quote, ‘‘the refiners’ flexibilities are

enhanced when they are allowed to meet emission reduction goals

in the form of performance standards rather than product specifications.’’ In other words, they asked us to tell them what want them to

make, and let them determine the best recipe. Well, obviously, that

has to meet the Clean Air Act, but I think one of our witnesses,

Daniel Greenbaum, probably stated it the best, and I quote.

He said, ‘‘we have two paths we can follow for clean fuels to continue clean-burning fuels with legislated mandated fuel additive requirements and risk potential market distortions and increases in

price, or to keep the strong clean air performance requirements for

these fuels, but to free the market to make them in the most costeffective way possible with a minimum of specific fuel-additive requirements.’’ To achieve these, the witnesses offered two potential solutions.

One is to keep the clean air standard in place, and delete the oxygen mandate, and the second was to keep the clean air standard

in place and give States the ability to weigh the oxygenate mandate. They all believe they could meet the clean air standard with

either of these solutions, and I recognize that our witnesses today

may have different views, and I look forward to those views, but

to sum up the testimony, and this is from the gentleman representing Exxon-Mobil, Don Dagle, but the other group, I am told, agreed

with this statement, additionally, new scientific data that became

available after the 1990 Clean Air Act amendment demonstrates

that oxygenates are not needed—not needed—not needed to provide the requisite environmental benefits of reformulated gasoline.

Further, technological advancements in newer vehicles obviate

any earlier justification for mandating oxygenates in reformulated

gasoline in order to address environmental concerns. I would certainly appreciate your evaluation and comments relative to that

statement, because if there is another alternative than ethanol and

MTBE, this appears to be that alternative, and whether it is suitable, practical, is what obviously we are interested in.

Thank you.

The CHAIRMAN. All right. Why don’t we start with Ms. Fisher.

We appreciate you being here. We understand this is your first testimony and we are anxious to hear it, so jump right in. Thank you.

61

STATEMENT OF LINDA FISHER, DEPUTY ADMINISTRATOR,

U.S. ENVIRONMENTAL PROTECTION AGENCY, ACCOMPANIED BY ROBERT D. BRENNER, ACTING DIRECTOR OF AIR

AND RADIATION PROGRAM

Ms. FISHER. Thank you very much, Mr. Chairman. I appreciate

the opportunity to be with you today, and I am joined today by Rob

Brenner, who is our Acting Assistant Administrator for the Air and

Radiation Program at EPA.

I appreciate the opportunity to discuss with you this morning the

vital role cleaner-burning gasoline plays in America’s air quality,

and to comment on an initiative related to the boutique fuels program that is contained in the national energy plan.

I also want to explain to you EPA’s recent decision regarding the

State of California’s request for a waiver of the oxygen content requirement in reformulated gas.

First and foremost, Mr. Chairman, EPA is concerned that consumers receive the air quality benefits of cleaner burning gasoline

at a reasonable price. When Congress passed the Clean Air Act

amendments of 1990, it established a number of successful programs to achieve cleaner motor vehicles and cleaner fuels. The

RFG program was designed to serve several of these goals. These

included improving air quality and extending the gasoline supply

through the use of oxygenates.

The Federal RFG program is required by Congress in 10 metropolitan areas which have the most serious air pollution levels.

Other areas have chosen to opt in to the RFG program as a relatively cost-effective measure to help combat air pollution problems. Today, roughly 35 percent of this country’s gasoline consumption is cleaner-burning reformulated gas.

The Clean Air Act amendments also require RFG contain a 2-

percent minimum oxygen content by weight. Both ethanol and

MTBE are used in the RFG program, with fuel providers choosing

to use MTBE in about 87 percent of the reformulated gas. Ethanol

is used in 100 percent of reformulated gas sold in Chicago and Milwaukee. These are areas that are much closer to ethanol-producing

centers.

The Clean Air Act requires States to regulate fuels through State

implementation plans if the EPA finds such regulations are necessary to achieve a national air quality standard. This has resulted

in a number of different formulations being required by States

which are often referred to as boutique fuels.

EPA understands the challenges that State and local boutique

fuel requirements place on production and distribution of gasoline

in the United States, particularly if any disruption in supply occurs. If the number of special fuels could be limited, while maintaining needed air quality benefits, greater flexibility within the

distribution system could possibly result. It is important to note

that these State clean fuel programs are providing significant air

pollution reductions.

The national energy policy that was issued in May directs the

EPA to study the opportunities in consultation with DOE and

USDA and other agencies to maintain or improve the environmental benefits of State and local boutique fuel programs while exploring ways to increase the flexibility of the fuel distribution sysVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00065 Fmt 6601 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
62

tem. We have begun that boutique fuel assessment. We are consulting various stakeholders, including the States and the refiners,

and we expect to make recommendations later this year that we

will share with this committee.

I would now like to talk about the decision that was recently

made by Administrator Whitman to deny the State of California’s

request for a waiver of the oxygen requirement in reformulated

gas. That decision was a very difficult one, but it was the only one

we felt we could make, given the information that was before us.

I also would like to take the opportunity to acknowledge that our

communication of that decision to Governor Davis and other California officials had not gone the way we planned. Unfortunately,

they turned out to hear about it in the press, rather than from us

personally, and we regret that that had to happen.

The criteria for granting a waiver such as that requested by California is clearly set forth in the Clean Air Act. The Statutory language states that the Administrator may waive in whole or in part

the oxygen requirement upon determination by the Administrator

that compliance with that requirement would prevent or interfere

with attainment by the area of the national primary ambient air

quality standard.

Our decision regarding California’s request for a waiver was

therefore limited to only one criteria that the statute provides, and

that is, California’s request could only be granted if EPA had determined that compliance with the oxygen content requirement would

actually interfere with its ability to attain an air quality standard.

Congress set a very high hurdle for granting such waivers. It

does not allow the agency to consider the risks of MTBE in drinking water in California. It does not allow the agency to consider the

effect on gasoline prices or on energy supplies that the oxygenate

requirement and the California ban on MTBE might have.

After extensive analysis of the information that California provided, the agency concluded that there was significant uncertainty

over the change in motor vehicle emissions that would result from

a waiver of the oxygen mandate. California had not clearly demonstrated to us what the impact of a waiver would be on the formulation of smog.

It seems to be well-known that, late in 2000, EPA staff presented

to agency management at that time a proposal to grant the California waiver in partial. The previous administrator, however, chose

not to sign this proposed partial waiver before she left office.

In the initial briefings of Administrator Whitman and our staff,

EPA technical staff were further asked to evaluate issues relating

to the uncertainty of any of the assumptions and estimations that

would be needed to reach a decision on the waiver. One of the

major uncertainties results from the significantly increased evaporation of gasoline vapors due to commingling. Commingling refers

to the mixing in the vehicle fuel tanks of ethanol-blended gasolines

and gasolines without ethanol, a situation that would occur if we

had granted the waiver.

The possibility of commingling arises because, as both EPA and

California’s analysis showed, a significant portion of gasoline in

California would be blended with ethanol, even if they were not required to use the oxygenates.

63

In its technical submissions, California acknowledged the uncertainty of the actual occurrences of commingling, and it was a result

of the analysis around this that demonstrated the high degree of

certainty in the overall emission effects, depending on which assumption one makes about commingling.

As a result of this uncertainty, we believe California did not

clearly demonstrate the impact on vehicle emissions that would

occur from a waiver of the oxygen mandate. Administrator Whitman could not grant the waiver, since there was no clear evidence

that a waiver would help California reduce harmful levels of air

pollutants.

As I stated earlier, our evaluation of California’s request for a

waiver can only be based on a demonstration that the oxygen requirement would prevent or interfere with the attainment of an air

quality standard. We therefore did not, and could not under the

Clean Air Act, consider the effects of the oxygen requirements on

the energy supply or the price of gasoline.

Mr. Chairman, and members of the committee, the clean fuels

program that I have talked about today are critical to our Nation’s

efforts to reduce the harmful effects of air pollution. They are also

important to the production and distribution of gasoline at a fair

price to consumers, but we have learned an awful lot about cleanburning fuels since 1990, when the Clean Air Act was first passed.

We now know that MTBE, if leaked or spilled, can contaminate

water supplies far more readily than other components of gasoline.

We know that a number of States have exercised the authority

granted to them by the Clean Air Act to establish different fuel formulations that are now called the boutique fuels. A proliferation in

the number of boutique fuels has created challenges to fuel producers and distributors and, through the process I described, EPA will

develop some recommendations to address this issue.

In 1990, the RFG oxygen requirement was established by Congress to meet multiple goals. One was to improve air quality, a second was to enhance energy security, and a third was to encourage

the use of renewable fuels. We now know that some refiners can

produce clean fuels without the use of oxygenates. Thus, there may

be better, more flexible ways to achieve all three of these goals.

As I have stated earlier in my testimony, our authority to address many of these issues is limited. We are committed to working

with the Congress to explore ways to maintain or enhance the environmental benefits of clean fuel programs while increasing the

flexibility of the fuel distribution system. This concludes my oral

statement, Mr. Chairman, and I would appreciate it if you would

put in the record my full statement, and I would be pleased to answer any questions that you might have.

[The prepared statement of Ms. Fisher follows:]

PREPARED STATEMENT OF LINDA FISHER, DEPUTY ADMINISTRATOR, U.S. ENVIRONMENTAL PROTECTION AGENCY

Thank you, Mr. Chairman and Members of the Committee, for the invitation to

appear here today. I appreciate the opportunity to discuss the vital role cleaner

burning gasoline plays in improving America’s air quality and to comment on an

initiative related to ‘‘boutique fuels’’ contained in the National Energy Policy. I also

will explain the Environmental Protection Agency’’s decision regarding the state of

California’s request for a waiver of the oxygen content requirement in reformulated

gasoline (RFG).

64

Mr. Chairman, first and foremost, the Environmental Protection Agency is concerned that consumers receive the air quality benefits of cleaner burning gasoline

(also called RFG) at a reasonable price. Before discussing other gasoline issues, I

will review the history and development of the RFG program, and document the air

quality benefits derived from the program. I will also discuss our on-going actions

to address water contamination resulting from leaks or spills of the gasoline additive MTBE.

Let me begin with a history of the RFG program.

HISTORY OF RFG

When Congress passed the Clean Air Act Amendments of 1990, it established a

number of programs to achieve cleaner motor vehicles and cleaner fuels. These programs have been highly successful in protecting public health by reducing harmful

exhaust from the tailpipes of motor vehicles. In the 1990 Amendments, Congress

struck a balance between vehicle and fuel emission control programs after extensive

deliberation. The RFG program was designed to serve several goals. These include

improving air quality and extending the gasoline supply through the use of

oxygenates.

Congress established the overall requirements of the RFG program by identifying

the specific cities in which the fuel would be required, the specific performance

standards, and an oxygenate requirement. The oil industry, states, oxygenate producers and other stakeholders were involved in a successful regulatory negotiation

that resulted in the development of the RFG regulations in 1991. EPA published

the final regulations establishing the detailed requirements of the two-phase program in early 1994. Thus, the oil companies and other fuel providers had six years

to prepare for the performance requirements of the second phase of the program

that began last year. In addition, the oil industry has been involved in an EPA RFG

implementation advisory workgroup since 1997.

The first phase of the federal reformulated gasoline program introduced cleaner

gasoline in January 1995 primarily to help reduce vehicle emissions that cause

ozone (smog) and toxic pollution in our cities. Unhealthy smog levels are a significant concern in this country, with over 53 million people living in counties with air

quality above the 1-hour ozone standard.

The federal RFG program is required by Congress in ten metropolitan areas

which have the most serious air pollution levels. Although not required to participate, some areas in the Northeast, in Kentucky, Texas and Missouri have elected

to join, or ‘‘opt-in,’’ to the RFG program as a relatively cost-effective measure to help

combat their air pollution problems. Today, roughly 35 percent of this country’s gasoline consumption is cleaner-burning reformulated gasoline. The Clean Air Act

Amendments of 1990 also required that RFG contain 2.0 percent minimum oxygen

content by weight. Neither the Clean Air Act nor EPA requires the use of any specific oxygenate. Both ethanol and MTBE are used in the RFG program, with fuel

providers choosing to use MTBE in about 87 percent of the RFG. Ethanol is used

in 100 percent of RFG in Chicago and Milwaukee, which are closer to major ethanol

production centers.

BENEFITS OF RFG

Ambient monitoring data from the first year of the RFG program (1995) indicated

that RFG had a positive impact on reducing toxic emissions. RFG areas showed significant decreases in vehicle-related tailpipe emissions. One of the air toxics controlled by RFG is benzene, a known human carcinogen. The benzene level at air

monitors in 1995, in RFG areas, showed the most dramatic declines, with a median

reduction of 38 percent from the previous year. The emission reductions which can

be attributed to the RFG program are equivalent to taking 16 million cars off the

road. About 75 million people are breathing cleaner air because of RFG. Since the

RFG program began six and one-half years ago, we estimate that it has resulted

in annual reductions of VOC and NOX combined of at least 105,000 tons, and at

least 24,000 tons of toxic air pollutants.

As required by the Clean Air Act, the first phase of the RFG program began in

1995 and the second phase began in January of last year. As an example of the benefits, in Chicago, EPA estimates that the Phase II RFG program results in annual

reductions of 8,000 tons of VOC and NOX combined and 2,000 tons of toxic vehicle

emissions, benefitting almost 8 million citizens.

BOUTIQUE FUELS

The Clean Air Act authorizes states to regulate fuels through state implementation plans if EPA finds such regulations necessary to achieve a national air quality

65

standard. This has resulted in a number of different formulations being required by

states which are often referred to as boutique fuels. EPA understands the challenge

that state and local ‘‘boutique fuel’’ requirements place on the production and distribution of gasoline in the U.S. These state fuel programs could limit flexibility in

the fuel distribution system, particularly if a disruption occurs. If the number of

special fuels could be limited, while maintaining needed air quality benefits, greater

fungibility within the distribution system could possibly result.

The National Energy Policy report issued on May 17, 2001 includes a recommendation that directs EPA to study opportunities, in consultation with DOE,

USDA and other agencies, to maintain or improve the environmental benefits of

state and local ‘‘boutique’’ fuel programs while exploring ways to increase the flexibility and fungibility of the fuels distribution infrastructure, and provide added gasoline market liquidity. We have begun our boutique fuel assessment; we are consulting various stakeholders, including the states, and expect to make recommendations

later this year.

REDUCING THE USE OF MTBE

There is significant concern about contamination of drinking water in many areas

of the country. Current data on MTBE in ground and surface waters indicate widespread and numerous detections of MTBE at low levels. Data from the U.S. Geological Survey indicates a strong relationship between MTBE use as a fuel additive in

an area and finding detections of low levels of MTBE. A number of states have

taken action to ban MTBE. Accordingly, EPA published last year an Advance Notice

of Proposed Rulemaking requesting comments on a phase down or phase out of

MTBE from gasoline under Section 6 of the Toxic Substances Control Act (TSCA).

EPA believes that TSCA is the best regulatory process available for limiting or

eliminating the use of MTBE. TSCA gives EPA authority to ban, phase out, limit

or control the manufacture of any chemical substance deemed to pose an unreasonable risk to public health or the environment. We expect to have a proposal prepared for inter-agency review later this summer. Actions taken by a growing number of states to ban the use of MTBE as a gasoline additive is the single biggest

factor that threatens to proliferate boutique fuel requirements around the country.

Eleven states have banned MTBE, one as early as the end of 2002. At least a dozen

more states are considering similar bans.

PRODUCTION COSTS FOR RFG AND THE PRICE OF GASOLINE

There are many factors that contribute to the price of gasoline. These include: the

cost of crude oil; refining costs and profits; refining capacity utilization; distribution

and marketing costs; the size of inventories; the size of demand for gasoline and

other petroleum products; the balance between this demand and readily available

supplies; and the availability of alternative supplies in tight markets.

Most of the factors that affected prices last year have been again at work this

year: relatively tight crude oil markets; relatively tight spring gasoline supply/demand balance, compounded by extensive refinery maintenance and unplanned outages; high refinery capacity utilization; unique regional and seasonal products,

many of which are referred to as ‘‘boutique fuels′′; and dependence on distant supplies. I would also like to highlight a few specific points to amplify on this list:

• Fuel demand continues to increase as Americans continue to travel more. Although recently there have been signs of slowing, vehicle miles traveled (VMT)

have been increasing. Over the past twenty years, as the economy has grown,

VMT has increased by 114% while population has only grown by 24%.

• In addition, the fuel economy of the vehicle fleet is the lowest in 20 years and

is declining, as Americans have purchased many more pickup trucks, minivans

and sport utility vehicles. By 2000, nearly half of the new vehicles purchased

in the U.S. fit into these categories.

• Finally, it is worth noting that prices this spring rose in areas that do not use

clean fuels as well as those that do.

Against this backdrop, the manufacturing cost of RFG II has contributed relatively little to the overall price of gasoline. EPA has estimated that the incremental

manufacturing costs of RFG II are four to eight cents per gallon.

As I stated earlier, EPA is concerned that consumers receive the benefits of the

RFG program at a reasonable price. Across the country, hundreds of communities

are benefitting from RFG II for pennies per gallon. Since prices peaked in mid-May,

wholesale prices have fallen by about 30 cents per gallon. Retail prices at the pump

are also easing. Most analysts are predicting no further rise this summer, barring

unforeseen problems.

66

CALIFORNIA’S REQUEST FOR A WAIVER FROM THE OXYGEN REQUIREMENT

I would like to turn now to EPA’s recent action concerning the state of California’s

request to waive the federal oxygen requirement for RFG. In March 1999, Governor

Davis signed an executive order banning the use of MTBE beginning in 2003. In

April 1999, California requested a waiver from the oxygen requirement. California’s

waiver request was based on the assertion that additional oxides of nitrogen (NOX)

reductions are needed in California in order to attain the National Ambient Air

Quality Standards (NAAQS) for ozone and particulate matter. California claimed

that without the oxygen requirement, greater NOX reductions would be achieved

with their California RFG Phase 3 (CaRFG3) fuel. Last week Administrator Christie

Whitman announced that EPA could not approve California’s request.

The criteria for granting such a waiver is established in the Clean Air Act, and

is the only basis that EPA has for such actions. The statutory language states:

The oxygen content of the gasoline shall equal or exceed 2.0 percent by

weight . . . except as otherwise required by this Act. The Administrator

may waive, in whole or in part, the application of this subparagraph upon

a determination by the Administrator that compliance with such requirement would prevent or interfere with attainment by the area of a national

primary ambient air quality standard.

Our decision regarding California’s request for a waiver was therefore limited to

the one criterion that the statute provides. That is, California’s request could be

granted only if EPA had determined that compliance with the oxygen content requirement would interfere with attainment of a primary National Ambient Air

Quality Standard (NAAQS). Congress set a high hurdle for granting such waivers.

It does not allow the Agency to consider the effects of MTBE in drinking water in

California and other states. It also does not allow the Agency to consider the effect

on gasoline prices or energy supplies that the oxygenate requirement and California’s ban on MTBE might have.

After an extensive analysis of the information that California provided, the Agency concluded that there is significant uncertainty over the change in motor vehicle

emissions that would result from a waiver of the oxygen mandate. California has

not clearly demonstrated what the impact of a waiver of the oxygen mandate would

be on the formation of smog.

EPA began its analysis in July 1999 upon receipt of California’s initial submissions of technical information in support of Governor Davis’ original letter of intent

which he had sent to EPA in April 1999. EPA responded to California in August

1999, asking for clarification on several issues. Between August and December of

1999, EPA and the California Air Resources Board (CARB) staff conducted several

meetings in which CARB presented new technical information.

In December 1999, two important developments occurred which significantly affected the course of EPA’s work to evaluate California’s request. First, on December

9, the California Energy Commission completed an analysis which presented information regarding how refineries in California might reformulate their gasolines in

order to meet CARB fuel standards if there were no federal oxygen requirement. Almost simultaneously, CARB adopted new California RFG3 standards. Shortly thereafter, on December 24, 1999, California submitted to EPA a major new analysis and

technical justification for its waiver request.

In January 2000, EPA staff traveled to California and met with CARB staff to

discuss the state’s new analysis. In response, in early February, CARB submitted

additional information to EPA. In a February 14, 2000 letter to California, EPA

stated that the application was complete and the State had submitted sufficient information for EPA to evaluate the waiver request.

In late spring of 2000, EPA staff concluded that further Agency analysis was

needed in order to fully evaluate California’s request. EPA performed an independent analysis of the effect of a waiver on gasoline properties and emissions in California. EPA’s analysis included refinery modeling performed by the same independent

refinery modelers utilized by the California Energy Commission in their December

analysis. This analysis compared the properties of California gasoline, with and

without a waiver of the oxygenate requirement, assuming a California MTBE ban.

EPA’s technical and legal staff then began to integrate the various results into a

complete and comprehensive analysis which we used to draft a proposed decision

on the California waiver request.

Late in 2000, when the various analyses were near completion, EPA technical and

legal staff presented the Agency management with a proposal to grant California

a partial waiver; that is, a waiver for a year-round oxygen level of 1.0 percent by

67

weight. The previous Administrator chose not to sign this proposed partial waiver

before she left office.

In this current Administration, we continued to examine the proposal that had

been prepared. In initial briefings of Administrator Whitman and her staff, EPA

technical staff were asked to further evaluate issues relating to the uncertainty of

any relevant assumptions and estimations that would be needed to reach a decision.

Although many aspects of our analysis required assumptions and estimations, one

of the major uncertainties results from significantly increased gasoline volatility

(that is, increased evaporation rate of gasoline) due to commingling. Commingling

refers to the mixing in vehicle fuel tanks of ethanol-blended gasolines and gasolines

without ethanol, a situation that would occur should a waiver be granted. In regard

to whether such a situation would exist if a waiver were granted, we note that every

analysis that we are aware of has shown that significant amounts—up to 65 percent—of California gasoline would contain ethanol even if a waiver were granted.

This is because only a limited number of refinery streams like ethanol are available

to make clean gasoline and maintain the octane performance properties needed.

In its technical submissions, California identified commingling as a factor that

must be considered in the design of its clean fuel program and acknowledged the

uncertainty of the actual occurrences of commingling. Upon the request of EPA

management, EPA staff conducted new analysis of other plausible scenarios of commingling. It was the results of this new analysis that demonstrated the high degree

of uncertainty in the overall emissions effects depending on the assumptions one

makes about commingling.

Under the new scenarios analyzed earlier this year by EPA, commingling would

result in increased VOC emissions. Depending on the level of the increase associated

with commingling, the total emissions of VOC associated with a waiver may increase or decrease, resulting in an uncertain impact on ozone. As a result of this

uncertainty, we believe California has not clearly demonstrated the impact on vehicle emissions that would occur from a waiver of the oxygen mandate. While we

agree with California that the waiver would likely result in a decrease in NOX emissions, we note that a waiver would increase emissions of carbon monoxide (CO). As

stated above, there is also significant uncertainty about whether ozone-forming

emissions of VOCs would increase or decrease if a waiver were to be granted.

As I stated earlier, our evaluation of California’s request for a waiver can only

be based on a demonstration that the oxygen requirement would prevent or interfere with attainment of a primary ozone NAAQS. We therefore did not and could

not under the Clean Air Act—consider the effects of the oxygen requirement on energy supplies or the price of gasoline. Our decision not to grant California’s request

for a waiver maintains the status quo with regard to federal RFG requirements.

CONCLUSION

Mr. Chairman and Members of the Committee, the clean fuel programs I have

talked about today are critical to our nation’s efforts to reduce the harmful effects

of air pollution. They are also important to the production and distribution of gasoline at a fair price to consumers. We have learned a great deal about cleaner burning fuels since 1990. We now know that MTBE, if leaked or spilled, can contaminate

water supplies more readily than other components of gasoline. We know that a

number of states have exercised the authority granted them by the Clean Air Act

to establish different fuel formulations that are now referred to as boutique fuels.

A proliferation in the number of boutique fuels create challenges to fuel producers

and distributors and, through the process I have described, EPA will develop recommendations to address this issue.

In 1990, the RFG oxygen requirement was established by Congress to meet multiple goals: improve air quality, enhance energy security, and encourage the use of

renewable fuels. We now know that some refiners can produce clean fuels without

the use of oxygenates. Thus, there may be better ways to achieve these goals.

As I have stated in my testimony, EPA’s authority to address many of these

issues is limited. We are committed to working with Congress to explore ways to

maintain or enhance environmental benefits of clean fuels programs while exploring

ways to increase the flexibility of the fuels distribution infrastructure, improve

fungibility, and provide added gasoline market liquidity.

This concludes my prepared statement. I would be pleased to answer any questions that you may have.

The CHAIRMAN. Thank you very much. We will include your full

statement in the record. Mr. Card, why don’t you go ahead with

your testimony before we ask questions.

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STATEMENT OF ROBERT CARD, UNDER SECRETARY,

DEPARTMENT OF ENERGY

Mr. CARD. Mr. Chairman, members of the committee, good morning. I would like to ask that my written testimony be submitted for

the record as well.

The CHAIRMAN. It will be included.

Mr. CARD. You have asked me to comment on the following three

topics. First, the ways of streamlining the array of fuels to reduce

price volatility while protecting environmental goals, second, the

implication for gasoline markets of the efforts to ban certain fuel

additives, and finally, the implications of EPA’s decision to deny

waivers of the Clean Air Act oxygen mandate.

Before addressing those specific items, let me say that we are encouraged by the recent gasoline price information that shows Nationwide prices 8 cents a gallon less than a year ago, and trending

down. California prices are also trending down, but less so due to

refinery operating difficulties in the State. We are hopeful that the

supply situation remains stable, which should support continued

price relief.

With regard to the committee’s first question, on fuel type

streamlining, DOE certainly supports this as an important objective. We look forward to working with EPA on the national energy

policy study on this subject. The study is still underway, but some

policy issues that would be important to us would include the following.

First, the equity of forcing higher fuel prices on a consumer

group to support fuel fungibility with a nearby fuel area, as compared with the commensurate benefits of a common fuel.

Second, the effective decisions on key fuel volume additives

which impact the total gasoline supply.

Third, the effect of market signaling of our intentions to refiners

and fuel additive produces to provide them clear investment parameters for capacity or quality adjustments.

Finally, the opportunity to take advantage of planned future vehicle and fuel standards to eventually move more toward a national

fuel specification.

With regard to the second question of the implications of banning

certain fuel additives, we share the environmental concerns regarding the reported effects of certain additives in the environment.

However, we would encourage the stakeholders to ensure their considering two issues in both the decision to ban and the timing of

the phaseout if the decision has to be made: First, these additives

currently make up 5 to 10 percent of our total fuel capacity, which

is beyond the reserve capacity currently available in the system;

and secondly, have all reasonable controls been imposed to keep

these additives and other gasoline constituents out of the environment?

Lastly, with regard to the implications of the waiver denial, we

note that the primary impact of the decision was the ban on the

additives. Once the decision to ban was made, the relative impact

of the waiver denial, while still of concern, is relatively minor.

However, with appropriate caveats, including implementation timing for market adjustments, we support EPA’s evaluation of both

69

MBTE’s environmental impacts, and the possible need for increased flexibility in the Clean Air Act standards.

Thank you.

[The prepared statement of Mr. Card follows:]

PREPARED STATEMENT OF ROBERT CARD, UNDER SECRETARY, DEPARTMENT OF ENERGY

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to present testimony addressing the important national energy policy topic of the impacts of fuel specifications and infrastructure constraints on energy supplies and prices. The Committee specifically asked that the

Department of Energy address questions relating to impacts on gasoline markets

from possible reductions in the number of different gasoline types, state actions to

limit the use of certain gasoline additives like methyl tertiary butyl ether (MTBE)

and the recent decision by the Environmental Protection Agency (EPA) to deny California’s request for a waiver of the reformulated gasoline oxygenate requirement

under the Clean Air Act. I will address each of the Committee’s concerns, but would

like to start with the broader National Energy Policy context, and recent energy

markets experience, as a framework for these issues.

The early focus of this Administration on the development of a comprehensive National Energy Policy was motivated to a significant degree by the rising concerns

over the adequacy and cost of energy supplies, not the least of which is gasoline and

other petroleum products on which much of our economic activity depends. We have

observed over the past few years a tightening of the supply/demand balance in the

petroleum product market in general and gasoline in particular. Recent events in

the world oil markets have contributed to the high and volatile prices we have experienced this summer and last year, and they need to be understood before trying

to come up with solutions. Dr. Cook of the Department’s Energy Information Administration addressed these near term issues in testimony before the House Committee

on Government Reform, Subcommittee on Energy Policy, Natural Resources and

Regulatory Affairs last week and I will not repeat that here. More relevant to this

Committee’s interests at this hearing are some of the underlying refinery capacity

and fuel specifications issues that have been developing for a much longer time.

These include:

• The poor investment climate throughout the 1990s associated with the refining

industry’s historic over capacity and competition from foreign refineries;

• The subsequent closure of uneconomic refineries some of which were also unable to meet new environmental requirements; and

• High investment requirements simply to maintain existing capacity due to the

imposition of a range of new clean fuel requirements starting with reformulated

gasoline in 1995 and continuing through at least 2006.

Having experienced a decade of poor returns, facing legal challenges related to

permitting on previous expansion, and having to comply with significant new requirements for cleaner fuels that will demand large stay-in-business investments,

it is not surprising that the financial decision making in the refining industry has

responded very cautiously to the recent strong growth in gasoline (and other transportation fuels) demand. We also believe that efforts to significantly improve vehicle

fuel economy and introduce or require use of non-petroleum fuels, while potentially

valid in and of themselves, further raise the financial risk associated with investment in additional capacity. Other parts of the petroleum product supply system,

including pipelines and terminals, have faced similar financial situations that have

discouraged investment and have left us with limited capacity.

Assuring adequate capacity to meet future demand in an environmentally responsible manner in the longer term is not an easy matter but we must take on this

challenge. In the short term, our choices are even fewer and any changes that have

been proposed must carefully consider impacts on price and supply. Under this

framework, I will take each of the three questions raised by the Committee in order.

STREAMLINING THE ARRAY OF GASOLINE SPECIFICATIONS

Concern has been expressed about the wide range of gasoline types used in the

United States and their impact on system flexibility. In response to the National

Energy Policy recommendations we are working with the Environmental Protection

Agency in an interagency effort to examine the current situation surrounding what

has come to be called ‘‘boutique fuels’’ and to explore possible alternatives. However,

I think it is important to understand that the current situation of using different

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fuels to meet the differing air quality needs of various urban areas has economic

benefits, at least at this time. Under this approach, areas that do not need the more

expensive clean fuel do not have to bear the cost of that fuel.

Problems arise with this localized fuel approach when there is an upset in the

supply system and fuel supplies need to be brought in from alternative sources that

may not normally store or make the particular fuel needed. In the past, such as last

summer in St. Louis, EPA and the Department have dealt with these supply disruption situations by considering fuel supplier or state government requests to allow

the sale of non-conforming gasoline (typically conventional gasoline) on an as-needed

basis. This system has worked well and continuing it is certainly one option. Other

approaches may be possible and will be considered as part of this NEP review of

the ‘‘boutique’’ fuels.

In the meantime, we need to be sure that what we do to attempt to ‘‘fix’’ the perceived problems doesn’t make the overall situation worse. For example, some stake

holders have proposed a near-term move to widespread use of federal reformulated

gasoline, or regional fuels, in lieu of the current mix of clean and conventional gasolines. While this might help make for a simpler distribution system, it would reduce

the total volume of gasoline that today’s refineries could produce and place significant additional investment requirements on refineries.

These changes and additional investments would have to be addressed at the

same time refineries are making investments to meet important new fuel quality

requirements for gasoline and diesel fuel. A loss of additional refining capacity is

an almost certain result of such a near-term change. Again, a longer term change

may be possible and will be considered in this NEP review.

STATE LIMITATIONS ON GASOLINE ADDITIVES

The Department has been involved for some time with EPA, other Federal agencies and state organizations like the Northeast States for Coordinated Air Use Management (NESCAUM) in addressing the issue of MTBE, an oxygenate used in clean

gasoline formulation, affecting water supplies. This problem arises primarily from

leaking underground gasoline storage tanks and there is an ongoing, federally-mandated effort to fix and upgrade most of these tanks. Individual states have made

additional efforts to address these leaking gasoline tanks and their potential impacts on water supplies. However, some states have made the choice to resolve the

problem by banning the use of MTBE in gasoline. This clearly is one option for addressing the problem and we can appreciate that some states, like California and

New York, believe that it is the best option. However, we believe addressing these

water quality concerns with near-term bans of gasoline additives represents a major

threat to the adequacy of gasoline supplies in those states and potentially on a more

widespread basis.

As refiners face additional requirements to meet even tighter clean fuel standards

for their gasoline, like the recently promulgated standards for Tier II low sulfur gasoline, and anti-backsliding toxic emission control requirements for conventional and

reformulated gasolines, and address commercial considerations like the Unocal patent, they will find oxygenates such as MTBE even more necessary and valuable to

increase volume, make up for lost octane and address other property changes such

as distillation characteristics. The availability of oxygenates also provides valuable

immediate gasoline blending flexibility to refiners trying to meet tight product specifications; the oxygenates are aromatic-free, high octane, virtually sulfur-free

blendstocks that can be put in almost any shipment of gasoline to offset performance shortfalls in other parts of the refinery. This is particularly true for MTBE

which can be blended at the refinery, shipped in pipelines and which has little negative impact on vapor pressure. The effect of being able to readily blend even small

amounts of MTBE into gasoline is to help assure product deliverability, reliable supplies and affordable gasoline prices to consumers.

If a sufficient number of States were to restrict use of MTBE, refiners and distributors might choose to remove MTBE from all gasoline to protect the fungibility

of the gasoline distribution system and avoid even more ‘‘boutique’’ fuels. MTBE’s

contribution to gasoline supplies nationally is equivalent to about 400,000 barrels

a day of gasoline production capacity or the gasoline output of four to five large refineries. Additionally, a loss of ability to use MTBE may also affect the ability of

the US gasoline market to draw gasoline supplies from Europe, the major source

of our price-sensitive gasoline imports, since those refiners widely use MTBE, albeit

typically at lower concentrations than in the U.S.

Alternatively, gasolines with and without MTBE could be produced but with less

flexibility and fewer exchange opportunities in the distribution system. In addition

to the ongoing supply problems one could expect from trying to produce both reforVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00074 Fmt 6601 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
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mulated and conventional gasolines without MTBE, regional refinery or distribution

supply problems could lead to additional short-term difficulties under state-by-state

bans. One would expect these situations to contribute to regional gasoline shortfalls

and longer periods of price volatility as markets struggle to re-balance on a stateby-state basis. In addition, for Northeast states, which depend heavily on imported

reformulated gasoline, MTBE bans and the subsequent need for special gasoline

blendstocks for ethanol blending could be even more problematic.

EPA’S DENIAL OF CALIFORNIA’S REQUEST FOR A REFORMULATED

GASOLINE OXYGENATE WAIVER

The first step in assessing the implications of the EPA decision to deny California’s waiver request is to understand the full range of factors affecting California’s

gasoline supply and price.

California, like the rest of the nation, has experienced strong growth in gasoline

demand.

This has come at the same time that clean fuel standards were tightened to meet

important air quality needs.

These product quality requirements as well as limitations on the emissions from

the refineries themselves have limited gasoline capacity and have contributed to closure of some of the economically weaker refineries.

Together with events in the broader world oil market, these factors have caused

a severe tightening of the supply/demand balance in the California gasoline market.

The unique nature of California’s clean gasoline requirements and its distance from,

and lack of ready access to, the major U.S. refining center in the Gulf Coast make

outside supply of gasoline to California very difficult, further contributing to the

higher and more volatile prices in that market.

It is against this background that California made its decision to eliminate MTBE

from gasoline at the end of 2002 and to increase use of ethanol and other gasoline

components produced outside the California refining system. With or without an oxygenate requirement for Federal reformulated gasoline in California, a very large

amount of ethanol and other outside components will have to be used to meet California’s quality and volume requirements. While an oxygenate waiver may have increased refinery flexibility at the margin, its affect would have been minor relative

to the basic decision to eliminate MTBE and the pre-existing, very tight supply/demand balance that has developed in California.

The Department of Energy remains very concerned about our current and longerterm energy supply situation. We will continue to work with EPA and others to better understand the energy supply implications of all our actions and look for additional ways to improve the current capacity situation. While we fully support the

various clean fuel requirements that are necessary to achieve our air quality goals

and we share a strong desire to protect the nation’s water quality, we believe that

it is important that these initiatives are implemented in a way that has the least

negative impact on fuel supplies. As we move forward, the National Energy Policy

provides important guidance and Executive Order 13211, ‘‘Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use,’’ will appropriately focus our attention on these impacts in future rule makings. Assuring adequate supplies of energy, gasoline in this case, in an environmentally responsible

way and at reasonable prices to support continued, strong economic growth is a key

goal of this Administration.

Mr. Chairman, that ends my testimony and I would be happy to answer any questions the Committee may have.

Thank you.

The CHAIRMAN. Well, thank you very much. Let me see if I can

understand better some of the testimony that we just heard. Ms.

Fisher, my impression is your position at EPA is you had no choice

but to go ahead and deny this waiver.

Ms. FISHER. That is correct, based on the information supplied

by California. We did not believe they met the threshold set in the

law.

The CHAIRMAN. And the threshold set in the law, as you see it,

is the requirement that in order for you to grant a waiver you have

got to show that it adds to the, or that it contributes—let us see,

what was the phrase you used there?

72

Ms. FISHER. It inhibits the ability of the State to meet the clean

air quality standards, so they would have to demonstrate that the

2-percent oxygenate requirement actually interfered with their

ability to meet the quality standard.

The CHAIRMAN. Okay, so you believe that you were legally obligated to go ahead and deny their request for a waiver. Now, is that

true with—I guess that is true with the other States. You did the

same thing in New Hampshire, is that right, I mean, the previous

administration did?

Ms. FISHER. Let me have Mr. Brenner answer that.

Mr. BRENNER. Mr. Chairman, New Hampshire is in the midst of

preparing an application for us. They are asking for the opportunity to develop an alternative to reformulated gasoline and to opt

out of the program before 2004, which would normally be the date

by which they could first opt out.

The CHAIRMAN. So theirs has not been ruled upon yet?

Mr. BRENNER. It has not been formally submitted to us, I do not

believe.

The CHAIRMAN. Okay.

Ms. FISHER. And Mr. Chairman, let me clarify something, because I know you have representatives from the State of California.

Their petition demonstrated that the oxygenate requirement would

interfere with their ability to meet the standard for NOX.

If we had granted the waiver, we were concerned that they would

increase levels of carbon monoxide, and the petition information

gave us great uncertainty as to whether, if we granted the waiver,

levels of ozone would increase or decrease, so it is a little bit complex, but for one of the air pollutants it actually would have improved the situation in California, for another air pollutant it made

it worse, and for a third, there was a lot of uncertainty about what

the relative impact was going to be, and it was all of that that led

us to the denial.

The CHAIRMAN. Now, is the administration proposing to Congress

that we change the law that has constricted you, or caused you to

make this decision?

Ms. FISHER. We are definitely looking at whether legislative fix

is needed. Based on what we know today, which is significantly different than where we were in 1990 when the Congress passed the

Clean Air Act, we know that refiners can produce very clean-burning fuel without the oxygenate requirement, and through the boutique fuel study and others, we are going to look at what kind of

legislative fixes you might need to make a program that is more

flexible, that still provides significant clean air benefits to us.

The CHAIRMAN. Mr. Card, you are a part of the administration.

You had a part of the administration that is not prohibited from

looking at energy supplies or price of gasoline and I am interested

in understanding better—I could not tell from your testimony

whether you believe that this decision, the combined decision, the

decision of California to ban MTBE and the decision of EPA to

deny their waiver application, whether those two decisions together

are going to cause supply problems or cause increases in prices of

gasoline in California or elsewhere in the country. Do you have a

judgment on that?

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Mr. CARD. Well, our position on that, as was pointed out earlier,

is that the supply and demand situation is very tight, and if you

take 5 to 10 percent of the supply out of the system suddenly, without a period for adjustment, it certainly could create a problem.

Whether the marketing signaling has been adequate in this instance to create additional capacity remains to be seen for us. We

cannot predict one way or the other.

The CHAIRMAN. Well, I guess the concern that I have is that

California, whether their decision was right or wrong on banning

MTBE in the beginning of 2003, they did give some lead time. They

sort of made the decision. They advised everybody of the decision.

I am concerned that in trying to meet the requirements of the

Clean Air Act, given the denial of the waiver request, we are going

to have real problems getting the ethanol in California at a reasonable price to do this without a dramatic increase in the price of gas.

Am I wrong about that?

Mr. CARD. Well, the way we would see it is, if you take MTBE

out, you have taken out 5 to 10 percent. You have got to put something back in, so in a way we would hope that the ethanol system

can respond and do that, otherwise you have to have a basic increase in refining capacity, so the issue here is less the fuel composition than the total quantity of fuel available, so even though

the refiners might be able to meet the standard without the oxygenate, they do not have the capacity right now today to do so. It

is a capacity issue.

The CHAIRMAN. You are saying you hope the ethanol can be provided to meet the need.

Mr. CARD. Yes. If nothing else, it will be needed for quantity.

The CHAIRMAN. Well, I guess my concern is that I do not know

if it is adequate for us to be sitting here saying we hope there will

be enough to meet the need. We have a chart around here that I

could show which demonstrates where the ethanol in the country

is produced and you can see that most of it is not produced in California. Most of it is produced in the Midwest and not only is there

a problem in producing enough, there is also a problem in transporting it to the West Coast and I do not know if any study has

been made of that, as to whether or not we have got enough tankers or whatever it is that is going to transport that.

You see, that chart there shows the production capacity for ethanol and you can see that almost all of it is in the Midwest. Have

you looked at that?

Mr. CARD. We have not studied it specifically, but at this time

we do not have conclusive evidence that the ethanol system cannot

rise to meet this demand. We would just point out that with already a sticky situation in California under the current system, we

are certainly imposing a whole series of new challenges, and a

large new infrastructure has to be put in place in a short period

of time, but I do not want to presuppose here that it cannot be

done.

The CHAIRMAN. I think if the standard is that we need conclusive

evidence that the system cannot respond, that is not the right

standard. We are going to be held to a higher standard than that,

those of us in Congress and, I think, the administration as well.

74

We are going to have to either be able to demonstrate with some

assurance that this is likely to be achievable at a reasonable price,

or we have got to move on to plan B, and I do not hear any plan

B being discussed or even thought about. Am I wrong on that?

Mr. CARD. I guess what I would like to do is submit an answer

for the record on that.

[The information referred to follows:]

California’s decision to ban the use of MTBE will significantly increase the difficulty and cost of producing adequate volumes of the gasoline required in California. Having to use ethanol as an oxygenate in that portion of California gasoline

covered by the Federal reformulated gasoline program may further increase the difficulty and cost because of ethanol’s price and the actions refiners have to take to

reduce gasoline volatility during the summer to accommodate ethanol’s impact on

vapor pressure. The Energy Information Administration’s Annual Energy Outlook

2001 estimated that the price increase in California gasoline, as a result of the

MTBE ban and retaining the oxygenate requirement, will be on the order of five

cents per gallon in constant 1999 dollars. This figure is consistent with estimates

of cost increases made by other analysts. However, higher prices are possible if

greater volumes of ethanol are used, ethanol supplies are inadequate or overall gasoline supplies are inadequate.

California has several options to address its fuel supply needs, if it views the current situation as unacceptable. Obviously, it can reconsider the timing and severity

of the limitations imposed on MTBE use. Alternative sources of gasoline, such as

the U.S. Gulf Coast and Asian refining centers, as well as alternative sources of ethanol (such as Brazil) can be engaged. Reducing demand for gasoline, such as we

have seen for electricity this summer, is possible.

The CHAIRMAN. Okay. That is good.

Senator Murkowski, did you have some questions?

Senator MURKOWSKI. Thank you. This is for Ms. Fisher. Can you

give us an idea why the previous administration chose not to sign

the waiver that would have cut the oxygenate standards in half for

California? It is my understanding that this waiver was on Ms.

Browner’s desk for sometime, and the Clinton administration, I

gather, at the end decided not to sign it, but EPA has had California’s waiver request for, good heavens, 2 years. That is an awful

long time for a State to have to wait for an answer.

Ms. FISHER. A couple of things, Senator. First of all, it is my understanding that the previous administrator, Administrator Browner, also had some concerns about the effect that granting the waiver would have on smog—ozone—which were the same areas of uncertainty that led to Administrator Whitman finally denying the

waiver. That was Administrator Browner’s primary area of uncertainty. It was ours as well.

With respect to why it took 2 years, we actually spent a lot of

that time working with California to get more information and to

run different various scenarios on what the impact of the waiver

would be.

Senator MURKOWSKI. But there was no time limit on it, is that

correct?

Ms. FISHER. There is not a time limit in terms of when we have

to make a decision to grant or deny a waiver? I do not believe there

is, no.

Senator MURKOWSKI. So you know, can you not just go on? You

have done it for 2 years now. California has had a waiver, and nobody’s acted on it. Now, you have acted on it, right?

Ms. FISHER. Correct.

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Senator MURKOWSKI. California was never granted the waiver.

They requested it, were never granted it, and you have denied it.

Ms. FISHER. Correct.

Senator MURKOWSKI. As a first order of business. I am curious,

you know, one administration lets it sit for 2 years, the next administration comes in and makes a decision, when there is no time,

evidently—it is not an issue that has to be done by a certain time

frame.

Ms. FISHER. Well, in some ways it was very ripe for decision, in

that we had, from our perspective, completed the analysis that

needed to be done, and secondly, California, in order to plan its

own fuel supply issues, did need to know whether they were going

to have the waiver granted or not.

Senator MURKOWSKI. Well, I agree with you, and I think it was

appropriate that you make a decision. I am just pointing out a contrast here. One administration for various reasons decides not to

make a decision. The next one, it is the first thing they do when

they come in.

I am concerned also about, you mentioned in your statement that

EPA is not allowed to consider any of the impacts on fuel supply

and price when deciding issues under the Clean Air Act.

Ms. FISHER. When deciding whether or not to grant a waiver of

oxygenate requirement.

Senator MURKOWSKI. Now, it is my understanding the President

issued an executive order requiring that an energy impact study be

done on agency decisions which affect energy supply and price. I

am wondering how you reconcile the limits placed on EPA by the

Clean Air Act, on the one hand, with the demands of the executive

order on the other.

Ms. FISHER. Well, the executive order directs us to understand

the impacts. It does not override the statutory requirement. Therefore, energy imports were not something that we could actually

take into account as we made the decision.

The CHAIRMAN. Now, Mr. Card, relative to your statement, I am

going to move into a general area of concern relative to refinery capacity. I met with some of the small refiners the other day and my

understanding is that the number of small refiners in this country

contribute about 5 percent of the total contribution of refined product, primarily diesel.

They are faced with an inability to comply financially with the

requirements of a retrofit that would address the removal of sulphur from diesel. You know, some refineries that cost $20 to $25

million are suddenly faced with $40 to $50 million in retrofit and

no way to meet that kind of a requirement. The reality is that if

they go out of business, we are going to have a further shrinkage

of refining capacity, which in the absence of eliminating MTBE and

the difficulty associated with more ethanol production suggests

that this crisis of inadequate supply could be with us for some

time. Do you have some comments on how the Department of Energy is looking at the dilemma that these small refiners are faced

with?

Mr. CARD. Well, I think that would have to be rolled over into

the overall evaluations as part of the national energy policy that

we are deliberating right now. Certainly, there is a delicate balVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00079 Fmt 6601 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
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ance, and we need to do what we can to keep all the refineries that

are able to perform according to the permit requirements in business.

Senator MURKOWSKI. Do they not have to conform by, what,

2004?

Mr. CARD. Linda would know much better, but I think it is 2005

or 2006, the sulphur standard implementation.

Senator MURKOWSKI. Maybe Mr. Brenner can help us. Senator

Bingaman and I have addressed this in our comprehensive general

considerations about what we do with the refiners, but we would

like you to highlight the significance of what it means if some relief

is not provided, either some kind of tax incentive, accelerated depreciation, something, because otherwise my understanding is they

are simply going to go out of business.

Mr. BRENNER. Senator Murkowski, the sulphur in gasoline requirement begins in 2004, and the sulphur in diesel fuel begins in

2006. We added some provisions to the rule to help refiners facing

financial hardship, and to give small refiners some additional time.

We did address relief to refiners in the rule.

Senator MURKOWSKI. How, again? The first part, how are you relieving them?

Mr. BRENNER. First, there is a waiver provision to help provide

additional time for those refiners that are facing a financial hardship. In fact, we just recently granted that extra time in the case

of the sulphur in gasoline requirement for a couple of refiners recently.

Senator MURKOWSKI. Is it not more of an economic reality,

though? I mean, you give more time, well, time, they are still faced

with the dilemma, unless there is new technology that comes along

and makes the process less expensive.

Mr. BRENNER. Well, the goal is that with more time, then they

have an opportunity to increase the capital they need to make the

investment through their profits. It gives them more time to accrue

the funds needed for the investment.

Senator MURKOWSKI. My last question—well, the staff indicated

concern over the problem associated with the small refiners being

one of overlapping requirements and timetables for compliance and

so forth. In my conversation yesterday, they appear to be grasping

straws to try and stay in business, recognizing that as they get an

extension of time, they still have to plan to comply, and the economics of their operation suggests that it is not in the cards to

comply, because the costs cannot be amortized based on the volume

that they are capable of producing.

Mr. BRENNER. Senator Murkowski, in the rule we did provide

them with up to 4 additional years, and we have committed to

monitor the implementation of this program.

Senator MURKOWSKI. What I am telling you is, the conversations

I had with some, time is not the issue. Granted, they can stay in

business for another 4 years, but their ability to meet the requirements based on the economics in the industry and the economics

if you do not expand that refinery.

My last question is relative to fuel standards which would simplify the distribution system. My question is, would it also reduce

the total volume of gasoline that today’s refineries could produce?

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In other words, how do you streamline fuel specifications to reduce

the total gasoline volume, and we have seen enough alleged price

spikes to know what the effects of a short supply can mean under

a regional fuel system, where price spikes become more likely, so

would it not be more responsible for regional fuel standard increased prices to be at the pump for consumers who do not live in

nonattainment areas?

Ms. FISHER. Senator Murkowski, we are looking at the impact

throughout the country of all of these different fuels on demand,

on supply, and on price, and we hope to come back to the Congress

in the early fall or late summer, with our report. The report will

better clarify both the impact the different fuels are having on

price and will also provide recommendations on how we can modify

our fuels program to reduce any disbenefits.

Senator MURKOWSKI. Finally, and I know my time is up, but the

question that was posed to you in my opening statement by Mr.

Dagle that oxygenates are not needed to provide the requisite environmental benefits for reformulated gasoline, do you concur with

that?

Ms. FISHER. Today, we can produce much cleaner fuels without

the use of oxygenates than we could when the Act was first passed.

We do not disagree with that.

Senator MURKOWSKI. Then why is that not a solution?

Ms. FISHER. The reformulated gas program was designed for several reasons.

Senator MURKOWSKI. I know.

Ms. FISHER. Eliminating that and not addressing the fuel supply

and the renewable fuels program leaves two of the goals of the reformulated gasoline program unaddressed.

Senator MURKOWSKI. Well, then, would you recommend to the

committee some specifics on how you would take the statement recommendation, which you concur with that they are not needed, to

provide us with an alternative that is other than the two that we

have, which are ethanol and MTBE, and we are throwing out

MTBE and putting more pressure on ethanol.

I have no problem with ethanol at all, other than it is very difficult to transport, and it is going to be tough to move out to the

west coast, and the east coast as well. Maybe a Senator over from

the farm State could figure that out, but we need an answer, or a

recommendation of changing laws or whatever, and still comply.

Thank you.

The CHAIRMAN. Senator Wyden.

Senator WYDEN. Thank you, Mr. Chairman.

I want to come back, Ms. Fisher, to this question I touched on

in my opening statement about the oil industry position, which is

that much of the problem today, the shortages and the high prices,

is due to the lack of refinery capacity and the restrictive environmental standards.

The documents that I have gotten and made public last week indicate that there were reductions in refinery capacity for the purpose of increasing profit, and they said that repeatedly, and then

there were reductions in the refinery capacity, and I want to ask

you now about the environmental aspect of this issue.

78

Under the new source review provisions of the Clean Air Act, a

refinery can ask your agency for an applicability determination

whether changes in operations that boost production would be subject to a permitting requirement. Given that there are no request

by refineries for applicability determinations by EPA during the

past 10 years, does this mean that there was either no intent to

expand refinery capacity, or else that folks were increasing output

without first getting a permit, in violation of the law?

Ms. FISHER. Well, as you know, Senator, we have brought several

cases against refiners because we are concerned that they may

have expanded capacity beyond what is anticipated without coming

in and asking us, applying for a new source review permit, so there

are a number—we have had a few settlements already. We have

had a number of other cases pending on this exact point.

Senator WYDEN. My understanding is that those lawsuits are

being reviewed right now, is that correct?

Ms. FISHER. As part of the national energy plan.

Senator WYDEN. There have been a lot of national news articles

with folks in your agency and elsewhere, veteran lawyers concerned about how those things are being handled.

Ms. FISHER. We settled one just a few weeks ago. The others are

being reviewed by the Justice Department, and we expect that review to be done shortly.

Senator WYDEN. Now, are you all going to be the lead agency

under the Bush energy effort with respect to evaluating the impact

of the new source review on refinery capacity?

Ms. FISHER. Yes, we are.

Senator WYDEN. How do you see your expertise with respect to

how you are going to be able to make decisions on this issue? Other

than asking the industry, how are you going to go about it?

Ms. FISHER. Well, let me tell you a little bit about our review.

EPA has invited the participation of other Federal agencies, DOE,

DOI, Justice Department and others, to participate in the study.

We are in the process of issuing a white paper on the new source

review program, which will serve as the basis for several public

stakeholder meetings that we intend to hold with people that are

affected by the new source review program.

We are going to go into communities that have a lot of these

plants in them. We are going to have one hearing in California, so

hopefully we want to provide an opportunity to get not only the

various affected industries’ involvement, but also communities that

live around these plants, as well as environmental and other

groups that are concerned.

After that, we will issue some recommendations for next steps.

As you probably know, the agency has done a lot to look at what

we can do to make the new source review program more flexible.

Through this review program we hope to be able to implement

some of those changes that we have already identified. It might be

at the end that we will need to come back to Congress and talk

about changes as well, but we do anticipate a very open process.

Senator WYDEN. Well, I hope that you will keep the committee,

and I just speak for myself, up on this, because I think it is a central question with respect to the whole debate about refinery capacity. We have got documents now on Mobil e-mail saying that a full

79

court press was warranted to keep a refinery down, a refinery that

is still down, for price reasons. Now, that is part of the equation,

and we are going to continue to explore that.

But the environmental issue is equally as important, and given

the fact there were not any requests by refineries for an applicability determination under this statute during the past 10 years, as

I read it, one of two things was happening. Either there was no intent to expand refinery capacity, which is certainly in line with the

documents that I have obtained, or else folks were doing it without

first getting permits.

So I am sure my colleagues have a lot of areas they want to explore, and I do not want to chew up any more time, Mr. Chairman,

but I would like to keep me posted on this personally.

Thank you.

The CHAIRMAN. Thank you.

Senator Kyl.

Senator KYL. Thank you, Mr. Chairman. It appears to me that

we have the makings for a bipartisan compromise here, because

you have essentially made the point that we need to act sooner

rather than later, and provide more flexibility in the statute. I

agree with that, and that appears to be a fundamental tenet of the

Bush administration recommendations generally with regard to the

fuel problem, more flexibility, fewer boutique requirements and so

on.

But I think time is of the essence here, and waiting until this

fall may not, frankly, work. Congress may move before the administration, if it does not move before then, because not only is there

a crisis now, as we are all well aware, but there are decisions and

investments being made which require some degree of certainty,

and therefore I would urge the administration to move forward

very quickly with recommendations.

If the statute is outmoded, if it puts too much of a straitjacket

on the EPA, for example, in its decisionmaking process, then that

ought to be removed immediately, and we can deal with other

issues later. We do not have to wait until we have a perfect solution for every problem and put it all in one great big bill. We can

begin to move, so I think we ought to move on that.

There are a couple of other issues. Given the fact that the denial

of this waiver, as well as other factors that have been alluded to

here, are going to significantly advance the ethanol market, I wonder whether the administration is also willing to reconsider the

ethanol subsidy. I understand it is at 54 cents a gallon right now.

Clearly, there is going to be a much stronger market for it. The

question that Mr. Card put to us is, are they even going to be able

to meet that demand, because we are not going to be able to expand refinery demand, and MTBE’s are not going to be able to

make up the difference in those States where they are not banned,

so the question is, will ethanol be able to fill that, what was it, 5

to 10 percent gap?

So it does not seem to me that a subsidy of that amount is required to cause people to produce something that presumably they

are going to try to produce as much of as they possibly can in order

to meet the demands of the market. Therefore, question, will the

administration reconsider the amount of the ethanol subsidy?

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* The article has been retained in committee files.

In that regard, I would like to put into the record, Mr. Chairman,

an article from the New York Times dated June 21, 2001, and read

a couple of paragraphs from it and ask for your response to it, both

Mr. Card and Ms. Fisher.*

The headline is ‘‘Administration Seeks to Retain Aid for Ethanol’’ and the first paragraph reads, ‘‘a report prepared for Congress by

the Bush administration recommends continuing Federal incentives for ethanol-fueled vehicles, but it does so despite finding that

the program has failed to live up to either of its goals, reducing

gasoline consumption, and substantially increasing the use of alternative fuels.’’ I am going to skip a couple of paragraphs and just read a couple

more here. ‘‘Because burning gasoline produces large quantities of carbon dioxide, a gas linked to global warming, the 1998—excuse me, 1988

law promoting ethanol use actually increased American emissions

of global warming gases by 1.46 million metric tons last year, the

report says. This meant that the rule accounted for about a tenth

of the increased output of such gases by American vehicles, which

have been the fastest-growing source of global warming gases.’’ It seems like maybe we are working at cross-purposes, Mr.

Chairman. We are promoting the use of something that is creating

something that we are trying to get rid of, and it seems to me that

the administration has got to come to grips with this, despite the

politics.

Regarding that, another bipartisan approach to this, it seems

that both political parties score by promoting the ethanol subsidy.

Let me quote further from the article. ‘‘The ethanol program has

bipartisan backing among corn State officials. Marlys Popma, the

executive director of the Republican Party of Iowa, said that supporting the broader use of ethanol was crucial to the electoral successes of any presidential candidate seeking votes in the State’s

caucus every 4 years, the first of each presidential campaign.’’ Quote, ‘‘ethanol is hugely important in Iowa, because it drives up

the cost of corn,’’ she said. But as I said, it is bipartisan. According

to the State’s Democratic Governor, Tom Vilsack, ethanol, and I am

quoting, ‘‘is a lifeline, and it is a real ray of hope to family farmers

that creates not only economic opportunity but preserves a way of

live that is important to preserve.’’

Mr. Chairman, I was born in Nebraska, grew up in Iowa, and I

understand that there is a real challenge to the family farms in

those regions, but the question is whether it ought to be government policy to promote the production of something and the use of

something which has deleterious side effects in terms of global

warming, and drives up the cost of gasoline, and makes it more difficult for people out West—you will note on that map we do not

have any ethanol production. It makes it more difficult for us to

drive.

Ethanol does not work in the hot climate of Arizona. That is one

reason that I am concerned about its required use here, which is

the effect of not granting the waiver. I read the law, too, and I

agree, I do not understand how you could have granted the waiver,

81

given the law, but that leads me to the conclusion that we need to

do something about the law.

Mr. Chairman, without making this point any further, I think it

is clear, I would like to get the response of the witnesses to what

I have just said, and urge the administration to very quickly review

these matters so that at least in those areas where there is some

bipartisan consensus, and we understand the need for greater flexibility, and because of the change in science, and capability here, we

now perhaps have the luxury of doing some things that we did not

have 13 years ago, that we need to move forward with alacrity.

Senator JOHNSON. Will the gentleman yield for just a brief question?

Senator KYL. Sure, but I would like the witnesses—— The CHAIRMAN. And then we will go, obviously, immediately to

the agencies.

Senator JOHNSON. Would you agree that the New York Times article, read in its entirety, does not suggest that the use of ethanol

contributes towards global warming? The problem is the lack of access to ethanol, is in the vehicles and our lower mileage standards

for vehicles that are dual use as a consequence of lack of access to

ethanol. That is the reason we are burning more fuel, gasoline than

was earlier projected, and again, contributes towards global warming and emissions.

Senator KYL. In responding to my colleague and, of course, we

can all read the article, I could quote here the comments from the

Sierra Club spokesman that is very critical of the continued use of

ethanol, and talks about the increase in price.

It is correct that part of the problem is lack of availability for

these dual use kind of vehicles, but it is also absolutely true that

the article points out the fact that this particular fuel produces

large quantities of carbon dioxide, which contributes to global

warming. That is absolutely clear from the article, and I do not

think it is a matter of scientific contention.

The CHAIRMAN. If the witnesses have any comment in response.

Senator KYL. And I would very much appreciate the comments.

We are here to hear the administration’s position, and I think we

need to hear it.

The CHAIRMAN. If the witnesses could go ahead and comment,

and then we will take other questions.

Ms. FISHER. All right. I will jump in first.

First of all, it is a DOT report that is in draft, and we really have

not had a chance to fully review it, so with that caveat, let me say

a couple of things. First of all, the report is talking about a specific

program that allows automobile manufacturers to get relief from

their fuel efficiency—CAFE standards—that making cars that use

ethanol and gasoline, to get some relief from so if they make these

dual-fuel cars, at the same time they can also sell other cars that

do not achieve high gas mileage.

It is that relief, and the fact that people have not been using as

much ethanol as originally expected in the duel fuel vehicles as

that the report attributed to an increased use of gasoline. Also, it

is that increased use of gasoline that contributes to global warming. Ethanol itself does not produce carbon dioxide at the same

level as gasoline, so the ethanol is not contributing to global warmVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
82

ing. The way this program is structured is why we are not getting

as much of a clean fuel benefit as originally expected. The report

is a little confusing on this issue.

The second thing, I just to be sure you understand, is that the

DOT report is focused on a separate program from what we are

talking about today regarding the California waiver. When I saw

the headline in the Times, I thought it was talking about the oxygen waiver that we are discussing here today. It really is a separate part of the Clean Air Act.

The CHAIRMAN. Did you have any comment, Mr. Card, before we

go to the next question?

Mr. CARD. I would just support EPA’s comments, and our position would be that all fuel sources should be considered, notwithstanding some legitimate concerns raised and, again, I want to reiterate in the short term we have a general capacity concern that

needs to be considered in whatever our policy would be.

The CHAIRMAN. Thank you very much.

Senator Landrieu.

Senator LANDRIEU. Thank you.

Ms. Fisher, you might be the one that could answer this. Kind

of following up, but in a little different vein than the Senator from

Oregon, would there be in your mind any reason for a refinery to

be in business, other than to make money?

Ms. FISHER. Probably that is the main reason to be in business.

Senator LANDRIEU. I thought so, so I was confused about the conversations about refineries making money. I mean, just like any

business, that is why they are in business, to make a profit, and

I would just like to say on the record that I hope not this administration or the previous administration would question a legitimate

business in the United States for making money, unless there is

some extraordinary circumstance to indicate that they are doing so

in an illegal fashion.

Secondly, I want to ask about how many, if, on this record, you

could put on this record, or maybe it has been put on our record

previously and, if so, I am not knowledgeable of it, but how many

refineries are currently under construction in California, if you

know that? How many have been permitted, but are not yet under

construction, and how many are in the pipeline in terms of how

many requests by the industry that have not yet been acted upon?

Does anybody know that?

Mr. BRENNER. We can provide that for the record.

There are no permits in or requests for permits for new refineries. There have been no requests for new refineries to be built anywhere in the country for a couple of decades now, however.

Senator LANDRIEU. So even in California today, there is not a

permit request to build a new refinery. How about permits for expanding existing refineries?

Mr. BRENNER. There are probably requests in for expanding existing ones. I know of at least one request to restart a refinery that

had been shut down.

Senator LANDRIEU. Are you aware of any requests that would

have come from Governor Davis’ office to the industry, since he has

a problem there—we all do, but particularly to try to increase this

capacity for the people of this State? Are you aware of any requests

83

that he either informally made to the industry to try to expand

their capacity, or those—are you aware of anything he might have

asked along those lines?

Mr. BRENNER. We are not aware of that, but perhaps some of the

panelists on the next panel may know about that.

Senator LANDRIEU. Well, let me ask about something that you all

might have some information about for the record. This transportation logistics problem, ethanol I believe is transported primarily

by rail car and barge, is that correct? Has California taken any

steps to determine if there is rail car capacity to move some of this

fuel into California if this change is made that we are talking

about, the supplanting change?

Mr. BRENNER. I know that the California Energy Commission

has done some work to look at potential ethanol supplies in the

State, but I do not know all the details of the analyses they have

done.

Senator LANDRIEU. Because we ship a lot of things out of Louisiana, as you know, and I asked—I do not know, Mr. Chairman, if

we ever put a graph up there of the pipelines in this Nation, but

I think we have got more pier square inch, or square foot than anybody in the country, because we can build them and permit the

pipelines, but ethanol cannot move through pipelines, I understand, because of the moisture content.

It has to move in a different way, and it cannot be moved like

other types of gasoline, or blended gasolines, and so California and

other places that need additional supplies should look at their own

rail situation and their own barge situation as well as their refineries, and then in addition, it is not just the transportation issues,

but it is the vehicles are not—not only that the vehicles maybe created, but the gas stations do not allow for these new vehicles to be

able to access a higher blend of ethanol, so it is not just the makeup of the fuels, but it is the transportation and the barging of the

fuels, and the capacity issue, and I just think this committee would

be all well-advised to stop trying to find out whose fault it is, and

just try to get down to getting a system where people can get the

gasoline they need, the power they need to get this economy off of

stall and into a fast motion, and we spend too much energy, I

think, trying to investigate or decide who got into a room and decided to get the price up. It is not that. It is a combination of

things, and so I just wanted to go on the record with that.

The last thing we need to do is worrying about people who are

in business to make money. That is why they are in business, and

it is not their fault that the rules and regulations that lie at the

feet of this Congress and this committee were written improperly

sometimes, or not without enough foresight, as well as what has

happened in California.

Thank you.

The CHAIRMAN. Thank you very much.

Senator Hagel.

Senator HAGEL. Mr. Chairman, thank you. I am pleased to note

my friend and colleague, Senator Kyl’s new-found interest in global

warming.

[Laughter.]

The CHAIRMAN. We liked his quoting the Sierra Club, too.

84

[Laughter.]

Senator HAGEL. He has found a new reference point, the Sierra

Club. I do not often hear him use the Sierra Club as a reference

for anything other than something that is draconian.

Senator DORGAN. Senator, I would ask you to yield on that point.

I actually made a note, global warming, Sierra Club, and New York

Times.

[Laughter.]

Senator DORGAN. It is a red letter day here in Washington, D.C.

Senator HAGEL. Well, he will be getting some cards and letters

here, I assure you. He has gone off the reservation completely, Senator. That is notwithstanding his grounding in his early days in

Nebraska and Iowa of shaping his normally good judgment on

these things and his sharp and precise intellect.

But nonetheless, I think they are important questions, and I

know we have witnesses following in the next panel that I am sure

will address these in some detail, but I wanted to ask a question,

but before I do that, there were some questions that came up and

probably will be more come up regarding ethanol, and one the Senator from Louisiana referenced, shipping.

I think one of the things we point out on ethanol, it is more flexible in its shipping capacity and potential, certainly more flexible

than MTBE, so we start with that as a plus, but a couple of other

issues I think need some clarification. Again, I will allow the next

panel of witnesses to get into this in more detail, but a question

about demand.

As is pointed out here in the paper that the chairman has distributed regarding the capacity, current capacity in ethanol, somewhere in the area of 2 billion gallons today, it is projected by the

industry and government that over the next year-and-a-half that

capacity will go to about 31⁄2 billion gallons, and the reason for

that, of course, is new ethanol plants now coming online. In my

State of Nebraska they are coming online. I suspect the Senator

from South Dakota will address this as well, so I think the capacity

issue, an appropriate question, a relevant question is going to be

dealt with as it is being handled now.

Second, the issue of the oxygenate properties of ethanol itself,

and the Deputy Administrator of EPA clarified one of those points

I think it needs again to be made, and that is that ethanol itself

is not a global warming gas, or property, but it has not been stated

yet, as far as I know, that ethanol has twice the oxygen content

of MTBE.

Now, that is important to point out, because refiners only need

to blend half as much ethanol to meet the oxygen requirement as

is the current situation with MTBE, and there are other dynamics

to this that I think will come out in the second panel, but those

are important points to make, and I think that leads me, then, into

my question, because as the Senator from Louisiana accurately

points out, we should be about finding solutions, and how do we

deal with the challenges that we have in this country on preserving

our environment, and the issue of reformulated transportation

fuels and why we are in the box that we are, or at least I think

we are in some box, and I suspect others do.

85

I have a document in front of me here that talks about 14 different types of gasoline, 42 when all three octane grades are considered. The U.S. fuel market has indeed become balkanized, and

that I suspect is much of the focus on your review, your interagency review.

I would like to get your sense, both from Energy and EPA, as to

timing. I know you have addressed some of the dynamics of that

review here this morning. When do you think it would be complete?

Are we talking about the possibility of less balkanization? How can

we do that? Where are we now? What do we know now?

I know that one of the problems we have that rarely gets mentioned is the fact that some States and cities opt out for their own

standards, and their own creative ways to deal with this, so we

should not be surprised that we have got this balkanization, and

I would hope that the Department of Energy and EPA under this

President will bring some sanity and some common sense to this,

so with that, have at it.

Ms. FISHER. First of all, Senator, you are correct, the benefits of

using clean fuels to assist cities to meet their air quality standards

is tremendous. It is one of the more cost-effective ways that cities

can actually achieve their air quality standards, and that is why

so many have come to us to ask for approval to go ahead and use

these kind of fuels, and it has created probably a lot more different

fuel blends than anybody ever anticipated.

For that reason, under the direction of the national energy plan

we have begun a study on the boutique fuel program, and I walked

in here this morning knowing that we would have a draft ready for

the Congress in September. Based on earlier discussions earlier

with the staff, however, the opening comments by the chairman, release in September is not necessarily going to be helpful given

when the Senate wants to act. We have been shoving notes back

and forth to each other up here trying to figure out what we can

do to speed that up and at least get a draft to you as quickly as

we can.

So what I would like to do is try to get back to the committee

with an accelerated schedule, with the understanding that an earlier release may not be quite as informative, or solid. I am respectful of your time demands, however, and the interest of the public

on this, so we will try to get it to you as soon as we can.

Senator HAGEL. Thank you.

Mr. Card.

Mr. CARD. Well, EPA is lead on the study, and I would just say

we look forward to working with them on it and supporting whatever schedule they think we can meet.

Senator HAGEL. Very precise.

That is, I guess, as good as we are going to get this morning.

Ms. FISHER. I need to find out more about the steps we need to

go through, whether it is putting more bodies and money on it, or

whether there is information that we are just not going to be able

to get, and get analyzed over a certain period of time, so that is

why I am hesitating.

Senator HAGEL. All right. Well, I know under the very able leadership of Chairman Bingaman you will not be without guidance

and counsel from this committee.

86

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Hagel.

Senator Johnson, did you have questions?

Senator JOHNSON. Yes. I am encouraged that there seems to be

a growing broadbased agreement, I think that is bipartisan in nature, that we need to move with some urgency with the administration relative to streamlining the multiplicity of gasoline formulations that are out there. I think there is a general agreement on

that, and that that would have some significant help.

I think Senator Bingaman has done some good work, along with

Senator Murkowski, on things that we might be able to do to facilitate greater refining capacity, and we need to look at that.

One of the areas, of course, of concern to me is with the utilization of ethanol. As the New York Times, my good friend from Arizona pointed out, noted in their article, virtually all vehicles can

utilize up to 10 percent blends of ethanol. That is not a problem.

The unique concern we have here is the Federal program where

auto companies are allowed lower CAFE standards in a certain

number of their vehicles if they manufacture dual use, dual-fuel

technology vehicles which can utilize 85 percent blend ethanol, or

E-85, as we refer to it in our part of the country.

They have produced over a million of these vehicles, then authorized them to produce more lower-CAFE-standard vehicles, pickups

and SUV’s and so on. Unfortunately, as the Times notes, only 101

of the 176,000 service stations in the United States sell E-85, and

not a single gas station in all of the State of California sells E-85,

so the problem has been the chicken-and-egg problem, I suppose,

in terms of coming up with a technology for vehicles that can have

this dual-fuel capability, and yet at the same time making sure

that there is access to that fuel. If there is not the access to the

fuel, then clearly the program is not going to work.

Again, this is a draft study, and we have already made some

comment about it, but it does concern me that if we are going to

be serious about E-85 and other kinds of alternative fuel utilization, we are going to have to work more closely than we have, obviously, with the gasoline distribution industry to see to it that, in

fact, it is in place.

I think that we are producing enough, and the production level

is going up, and so we have that issue to contend with, and any

comments, again, that you might have about how do we address

that other side of the equation in terms of making sure that ethanol, or biodiesel, for that matter, is available with the access that

ought to exist that it is really going to work, would be of interest

to me.

Also, if we now move quickly away from MTBE in California and,

in fact, an oxygenate is required, I am advised that is about a 600-

million gallon ethanol requirement. We have the ethanol. There

has been some question raised about transportation issues, and I

would be interested if the administration is doing anything to address how do you get the ethanol from what is primarily the Western Great Plains to the State of California in their particular case,

with the decision made not to grant a waiver?

Ms. Fisher, any comments that you might have?

87

Ms. FISHER. At EPA we have not really looked at the transportation challenges.

Senator JOHNSON. Right.

Mr. CARD. I am not aware of what we are doing, but I will be

glad to submit an answer for the record.

[The information referred to follows:]

If California implemented their MTBE phase-out plan, the infrastructure to transport, store, and handle ethanol for that market would need to be expanded, particularly if the oxygen requirement for reformulated gasoline (RFG) was retained. For

the bulk terminals that receive and blend ethanol, the infrastructure modification

costs are expected to be small. The costs of new tankage, blending system, piping

modifications, and adding a rail spur to a gasoline terminal are estimated to add

up to only a half-cent per gallon of ethanol shipped.

In order to minimize transportation costs, it is crucial to have good coordination

and planning among the ethanol distribution industry, state governments, refiners,

ethanol producers, and others in order to minimize potential supply and price impacts. For those states that are relatively distant from the Midwest producers, such

as California, good coordination among the various involved parties will greatly diminish the potential for supply difficulties associated with long transportation distances. However, even in these markets, distribution is not expected to be a ‘‘make

or break’’ issue. Ethanol would likely be delivered to California by a combination

of water and rail shipments. A 1999 industry survey of fuel distribution companies

found that most gasoline distribution terminals could add ethanol storage capability

in six months or less and that the transportation costs would be 18 cents per gallon

of ethanol. Factors used in determining the cost of blending ethanol in California

RFG include addressing the loss of low vapor pressure gasoline blending components and the cost of the ethanol itself. Since each gallon of California RFG would

contain 5.7 percent ethanol by volume, the transportation costs alone would be one

cent per gallon of RFG. Since this survey was conducted, the industry has begun

activities aimed at augmenting the distribution infrastructure for California. For example, Williams Energy announced on June 14, 2001, it has entered into an ethanol

storage agreement which will come on line by the fourth quarter of 2001.

Senator JOHNSON. Any feedback on that would be helpful, and I

would appreciate it. Some of this is more apt for the second panel

coming up. I am going to have to excuse myself here very quickly

to go to an appropriations markup, and I am going to miss valuable

discussion at that point, but both of those points are somewhat the

same in terms of, how do you get it from the Midwest affordably

to other parts of the country, and then secondly, how do you get

more stations to actually carry these fuels, whether it is an ethanol

blend or otherwise?

I have been working with my good friend, Senator Hagel from

Nebraska, on legislation which would go beyond the oxygen additions with our Renewable Fuels for Energy Security Act of 2001.

As you say, there are multiple goals we are trying to accomplish

here. Certainly, clean air is a very dominant issue, but we are also

trying to make some strides in terms of energy security in this

country, and I would say that while there is a tax break available

for ethanol, our friends in the oil industry are not without their

particular tax benefits as well, and we need to keep that in mind.

This may be more a comment than a question, but it does seem

to me that the thrust of the hearings here today need to be what

we can do relative to implementing common sense environmental

standards in this country, but we also need to keep in mind that

there is an energy security issue in play here, and to the degree

that we can displace petroleum, which we now import at a higher

level even than we did during the 1970 shortages, we all gain from

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that, and we want to work with your agency to see that we can arrive at that point.

Senator KYL. Mr. Chairman, would my colleague from South Dakota just yield for a quick comment?

Senator JOHNSON. Certainly.

Senator KYL. One of the reasons that I am so concerned about

ethanol, and this goes directly to the point you made about lack of

facilities in California, and I think the same is true in Arizona, is

that the ozone which is produced naturally by the burning of ethanol is one of the most pernicious air pollution issues in the hot climates of Arizona, and, I suspect in California. That may also be

one of the reasons why, in any look at that issue, I think there does

have to be some regional consideration of the byproducts of the

burning of these different kinds of fuels.

Senator JOHNSON. Well, the gentlemen may very well be correct

that there are some regional modifications that are appropriate. I

think the second panel is going to be probably in a better position

to talk about those issues of what we do in hot climates relative

to the ethanol.

Mr. Chairman, I yield back.

The CHAIRMAN. Thank you. There are two other Senators waiting

to ask questions of this panel, and then as soon as they are complete we will move to the second panel.

Senator Dorgan.

Senator DORGAN. Mr. Chairman, I, too, have to go to the markup

of the supplemental appropriations bill, as I believe Senator Johnson is going there, so I am going to just take one minute and say

thank you to the witnesses.

I regret I am not going to be able to be here for the second panel,

but I do want to clarify, again, this issue with Senator Kyl. His use

of the New York Times piece I think sounded as if the Times piece

was a rap on ethanol. In fact, it was not at all.

The New York Times piece was being critical, implicitly, of the

automobile industry, not the ethanol industry, so I think it is very

important—I forgot who answered the question, but I believe, Ms.

Fisher, that when you responded, it took you a while to respond,

but it boiled down, you were essentially saying Senator Johnson

was correct in his assessment, is that correct?

Ms. FISHER. Yes, that is correct.

Senator DORGAN. All right. I just think it is very important. I believe that this was put in the record in its entirety, was it not, but

I just think it is very important that we understand this piece was

not a rap on the ethanol industry at all. It was about the automobile industry.

I am a big supporter of the ethanol industry and renewable fuels.

I also believe we need to increase production and so on and so

forth, but you know, if our entire energy policy is simply yesterday

forever, it is not much of a policy. Let us find ways in which we

develop fuels that are limitless.

One final point, Mr. Chairman. I have said this before, but my

first car when I was a young boy, it was an antique car that my

father pointed out to me and I bought for $25. It was a 1924 Model

T Ford, and I restored it, but in the process of restoring as a very

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young boy this 1924 Ford, I learned how a 1924 car worked, and

it worked just like today’s car in terms of putting gas in it.

You take the gas hose at the pump and you stick it in the tank

and you put gasoline in the engine, and 76 years later, nothing has

changed. We are still driving up to a pump and sticking a hose in

the tank and filling the car, and my point is, as we develop this

energy policy we need to do a lot of things, we need to do them

right, but let us also think in the long, long term as well about renewable and limitless energy sources.

I think one step here that is important is this hearing. The chairman has described a hearing here that I think is also a very important part of these questions that we must deal with, the many different standards of fuels and the boutique fuels, and all of the supply issues that relate to them and relate to various regions of the

country.

So again, my regrets at not being able to stay, but I must go over

to the Appropriations Committee for a markup of the supplemental.

Mr Chairman, thank you.

The CHAIRMAN. Thank you very much.

Senator Fitzgerald.

Senator FITZGERALD. Well, thank you, Mr. Chairman, and I am

pleased to be here, and I want to be on the team that is congratulating the EPA on your decision. I think you absolutely did the

right thing.

A couple of years ago, working with Senator Boxer from California, I sponsored a resolution calling upon the EPA to ban MTBE

and replace it with ethanol. Subsequently, the two Senators from

California I guess changed their mind on ethanol, but at one point

just 2 years ago they were supporting banning MTBE and replacing it with ethanol.

The EPA, under the previous administration, did institute an administrative ban Nationwide of MTBE, am I correct?

Ms. FISHER. Senator, they began an action under TSCA, the

Toxic Substances and Control Act, to look at both a ban and phasedown of MTBE. We have continued work on that and hope to propose something I think sometime this late summer/fall.

Senator FITZGERALD. So you are still going through the process

of banning it Nationwide, and within a few years MTBE will be

banned Nationwide.

Ms. FISHER. Well, TSCA is one of the more interesting environmental statutes, and there is a huge amount of analysis that the

agency has to put forth in order to effectively ban a substance. It

requires the agency to look at all different ways to manage a toxic

chemical, including a ban, and so we have to go through the proposal process, and in that, we will undoubtedly consider some kind

of phase-down and ban.

We are not through with the process yet, so it is hard for me to

predict kind of over what time period it would actually happen.

Senator FITZGERALD. Okay, but it should theoretically—I think

Administrator Browning had thought that the ban would be complete within about 3 years after she began the process.

90

Mr. BRENNER. Our expectation is that if we were to use TSCA,

it would probably take longer than 3 years to complete that full

process.

Senator FITZGERALD. Oh, really? Okay. So in the absence of a

congressional act to ban MTBE—do you think Congress should step

up and ban MTBE? I know that they are doing a geologic survey,

that everywhere they look they are finding MTBE in underground

drinking water supplies.

In Illinois, we do not even use MTBE, but we have had 25 communities that have detected it in their drinking water supplies, and

their wells have had to be shut down. I know 60 Minutes did a big

report about MTBE contaminating underground drinking water

supplies in California.

What would you think if Congress stepped up to the plate and

banned MTBE?

Ms. FISHER. Well, first of all that is probably the most expeditious way of dealing with MTBE, because the TSCA rule-making

process is long.

I cannot provide a precise answer to your question. There are

some components that we really would need to look at with a ban,

as was said earlier. It currently makes up a significant part of the

fuel supply of the country, and one of the reasons California has

phased it down over a few years is to be able to address that, so

I think there are some issues we would want to look at.

Certainly we have many environmental concerns with it. It is

leaking in underground storage tanks. Perhaps more importantly,

the cleanup of it is very expensive and very difficult to do, so I

think while we proceed on our administrative rulemaking under

TSCA, we would like to work with you to come up with the right

solution.

Senator FITZGERALD. I know that some oil companies are already

starting to switch over to ethanol to meet the Clean Air Act requirements and to get sufficient octane in their fuel, and I think

some were concerned about liability they were potentially facing for

cleanup.

I know that in Illinois and in New York there are large class action suits against refiners and petroleum producers, or gasoline

producers, for the cleanup of MTBE-contaminated waters. Am I

correct to say that some oil producers were already starting to

switch, or petroleum producers were already starting to switch off

of the MTBE?

Mr. BRENNER. I believe it is correct that some of the oil producers have begun to move away from MTBE and use more of other

oxygenates such as ethanol.

Mr. CARD. I am not aware of exactly what is happening there,

but I guess I would just reiterate our concern on timing, and as

EPA has stated, being stated to the volumetric effects of whatever

we do here, which has to be balanced, and also, as I said on my

opening statement, to assure ourselves that we have done everything we can to contain it before we decide it needs to be eliminated.

Senator FITZGERALD. I guess MTBE started out back in the seventies, when the EPA banned lead. The oil producers or the refiners had to find a way to get sufficient octane out of their fuel, and

91

they started adding additives, oxygenate additives, and that is

when MTBE started being used, and then it was discovered that

there was a clean air benefit to having an oxygenate.

Now, some people are criticizing ethanol and saying that it increases the volatility, which I guess is true, in warm climates, but

my question is, doesn’t the EPA regulate volatile organic compound

emissions out of gasoline so that they are capped at a certain level,

and so whether it is refined with MTBE or ethanol, there would be

a VOC cap?

Ms. FISHER. Yes. When gasoline is blended with ethanol, the underlying volatility of the base fuel lowered to account for the higher

volatility of ethanol, so that it can meet the overall limit for VOCs.

So refiners must adjust the base gasoline fuel’s volatility. They

lower that to account for the increased volatility that the blending

with ethanol will cause.

Senator FITZGERALD. Now, I know some of the other Senators

were raising the issue of the transportation of ethanol, and it is

true, because of its propensity to evaporate, we have never been

able to ship it in pipelines and the like, and most of it, as the map

shows, is produced in the Midwest, but for a long time it has been

transported to certain areas around the country such as Denver,

Las Vegas, and Anchorage, Alaska, as I understand it, and it could

be manufactured right where it is going to be used. An ethanol

plant, for example, could be set up and running in the Los Angeles

area, or not far from Los Angeles. Would that not be a way to address the transportation issue?

Mr. CARD. I guess there would be a question of feedstock. Normally, economically you would want to put the plant close to the

feedstock, since that is the higher volume component. There is no

technical reason why that could not exist, but I would wonder

about the economics of it.

Senator FITZGERALD. Well, you would just have to transport the

grain, the corn, for example. Corn typically is what is used for

manufacturing ethanol, and you could just transport the corn to

wherever the plant is. I mean, there is no prohibition against having ethanol plants on the west coast, is there? I mean, that map

could change over the next 10 years so that we have some plants

closer to the West and the east coast.

Mr. CARD. There would certainly be no technical reason why not.

Perhaps the next panelists could comment on the economics of

transporting corn versus ethanol. I think that is probably what it

would come down to.

Mr. BRENNER. Senator Fitzgerald, I know that the State is also

looking at opportunities to produce ethanol, and other oxygenates—

well, oxygenates from some of the agricultural products in their

State.

Senator FITZGERALD. My staff just pointed out to me that we already have some plants on the west coast, one in California, one

in Washington, both that make ethanol out of beverage waste, or

brewery waste.

Ethanol can be manufactured out of any plant product that has

a lot of starch content in it, so we should have plentiful sources of

it.

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Well, I will not take any more time of the committee, but I did

want to compliment the administration. I think you made the right

decision.

Ms. FISHER. Thank you.

Senator FITZGERALD. It took a lot of courage. I think it will be

good for our Nation’s clean air, and it will not have an adverse impact on our Nation’s water supply. Ethanol, as I understand it,

evaporates, or is eaten by the microbes in soil very quickly if it

ever inadvertently leaks out of an underground storage tank, and

we should not have the problems that we have with MTBE, so I

want to congratulate the administration on a job well done.

Ms. FISHER. Thank you.

The CHAIRMAN. Thank you very much, and let me thank the witnesses. I think this has been a useful discussion. We will dismiss

this panel and ask the second panel to please come forward.

Mr. BRENNER. Mr. Chairman.

The CHAIRMAN. Yes.

Mr. BRENNER. As we leave the table, I would like to just clarify

what I told you about New Hampshire’s submission. We are still

talking to New Hampshire about the details of their plan, but we

do have a formal petition for them, and have begun the review

process for that petition.

The CHAIRMAN. Okay. Thank you.

The second panel will come forward.

I am informed that Mr. Grumet has another obligation, and

would like to go first. After his testimony he will have to leave before we ask questions, so let us just start on the left-hand side here

with Mr. Jason Grumet, who is the executive director of the Northeast States for Coordinated Air Use Management. Go right ahead,

please.

STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR,

NORTHEAST STATES FOR COORDINATED AIR USE MANAGEMENT (NESCAUM)

Mr. GRUMET. Mr. Chairman, thank you very much for that indulgence, and I can stay until about 12 o’clock, so I will speak even

faster than usual.

Mr. Chairman, again, my name is Jason Grumet, and I am the

executive director of NESCAUM, which for the past 30 years has

been representing the air quality programs in the Northeast

States.

On behalf of our eight member States, Mr. Chairman, I welcome

the opportunity to testify here today in support of the proposition

that legislative options do exist to improve the environmental performance, the cost-effectiveness, and the resiliency of our Nation’s

gasoline supply. We would like to applaud this committee, Mr.

Chairman, the Environment and Public Works Committee, and the

administration for focusing necessary attention on these opportunities.

Mr. Chairman, to address any problem, of course, we have to

first start with its diagnosis, and what I would like to do in the

bulk of my testimony is to identify the forces that drive States

away from consistent Federal requirements to what we are calling

boutique fuels, and then I would like in the final minute or so to

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outline the parameters of what we believe could be a solution that

would provide the national or broad regional clean fuel I think we

all desire.

At the outset, Mr. Chairman, I think it is worth noting that few

governors bounce out of bed in the morning exuberant in the hopes

of navigating the labyrinth of Federal preemptions necessary to

adopt their very own fuel specifications. It is the unequivocal preference of the Northeast States to have access State-wide and region-wide to clean fuels that are adequately protective of public

health, and rationally designed.

There are two reasons why States leave the Federal program.

Those two reasons are inadequately protective or irrationally designed Federal programs, or successful efforts by some petroleum

companies to limit State access to the clean fuel we desire. These

inadequacies, Mr. Chairman, are numerous and, sadly, they are increasing, and I will only summarize a few and skip the rest, lest

that would be the totality of my testimony here today, but a couple

that are worth noting, first, as Senator Murkowski pointed out, the

Clean Air Act itself is in part to blame.

The Clean Air Act fundamentally bars many States from having

a single fuel. In New York State, the downstate New York City

Metropolitan Area is compelled by the Clean Air Act to sell Federal

RFG. In the attainment areas, Mr. Chairman, the State is absolutely legally barred from access to Federal RFG, so we have one

boutique established under law, which we suggest Congress reconsider.

Secondly, Mr. Chairman, a substantial inadequacy in the Federal

fuel program is its failure to effectively address air toxic emissions.

Air toxics pose a national health problem in this country. Attached

to my testimony are several charts which lay a couple of key

points. They note that there are four toxins, several known human

carcinogens which exceed the appropriate health standard Nationwide, and in many urban areas they exceed the health standards

by a factor of 10. I am speaking of the pollutants benzene, 1,3-butadiene, formaldehyde, and acetaldehyde. These are known carcinogens, or asthma irritants, and they are well in excess of healthbased levels.

Mr. Chairman, 80 percent of these priority compounds are emitted by mobile sources, and even taking into account all of the EPA

regulations that are adopted or proposed, these compounds will

continue to exceed health-based thresholds through 2030. Recognizing the national scope of the air toxics problem calls us, Mr. Chairman, to question the rationale of excluding two-thirds of the Nation

from the 40 percent benzene reductions provided by Federal RFG.

Moreover, any serious efforts, we would submit, to address the

boutique fuels problem must provide access to entire States, and

must provide toxic benefits to all Americans, not just those who are

unfortunately living in nonattainment areas for ozone.

The final category relating to the rationale for States leaving the

Federal program apparently tends dynamically to relate to decisions that favor ethanol at the cost of clean air. First, Mr. Chairman, I would like to mention the issue that Senator Fitzgerald

raised, which is the volatile organic compounds. While the fuels are

required by law to meet a certain VOC level, ethanol-blended fuels

94

are given waivers. In conventional gasoline, they are given a 1-

pound waiver from this requirement, which results in a 15-percent

increase in VOC emissions.

States like New York that do not want to suffer those increased

VOC emissions are driven, again, away from the Federal program,

and just recently, citing concerns about rising fuel costs in Wisconsin and Illinois, Administrator Whitman relaxed the RFG standards, creating a waiver of the volatility requirements in Federal

RFG. Not only does this drive States away from RFG, but it foreshadows, Mr. Chairman, weakening of standards, and the increases

in prices that we in the Northeast will experience if the administration’s decision to mandate ethanol is not reconsidered.

If it is not possible for the States where ethanol is produced to

cost-effectively use ethanol without weakening environmental

standards, we shudder at the potential implications for the cost

where ethanol is not produced.

I would like to touch on EPA’s recent decision to deny the California waiver, and I am sure my colleague, Mr. Keese from California, will go beyond my discussion. EPA’s recent decision is in direct

conflict with the desire to harmonize fuels, and, Mr. Chairman, it

falls more than a few notes flat of the desire to reduce prices at

the pump.

For those concerned with supply and price issues, Mr. Chairman,

I would submit, respectfully, that boutique fuels are the deck

chairs on the ethanol mandate Titanic. Under the current ruling,

States are left with three unacceptable choices. We can perpetuate

the harms caused by MTBE, which I fear, in fact, will happen, and

Connecticut, in fact, has already asserted that their legislature

should delay their MTBE ban because of how unworkable an ethanol mandate will become.

Our second choice is to propel States to abandon the Federal

RFG program, creating more boutique fuels, and this I also believe

will happen. I will submit that every State not statutorily bound

by the program will seek every available means to get out of it, in

lieu of an ill-designed ethanol mandate.

Or finally, we can simply force consumers to pay more for a higher-polluting fuel.

Mr. Chairman, while the Northeast recognizes the important national benefit that ethanol has to offer—Senator Johnson touched

on these benefits to the farm economy—energy diversity, national

security, reductions in greenhouse gases, urban air quality is by far

the weak link upon which to base the desire for expanded ethanol

use. Therefore, we will continue to urge the Senate Environment

and Public Works Committee to lift the ethanol mandate and lift

the oxygen mandate, and we will continue to urge our friends in

the ethanol community to design proposals that shift away from

the false pretext of urban air quality towards the legitimate attributes that ethanol has to offer.

If I can move now to the second reason why States are drive

away from the fuel program——

The CHAIRMAN. Why don’t you do that quickly?

Mr. GRUMET. I will give you just a moment, Mr. Chairman—and

that is the effective efforts by some petroleum companies to discourage the use of Federal clean fuels. Since 1995, petroleum comVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00098 Fmt 6601 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
95

panies have consistently, systematically, and successfully worked

to discourage or even legally bar States from reformulated gasoline,

urging instead the adoption of the very boutique fuels that they are

now complaining about, and I am simply submitting that we need

to better understand this dynamic and the evolution in their thinking so that we can address this problem rationally.

In conclusion, Mr. Chairman, let me just outline the parameters

of the solution, and they are brief. In terms of program design, all

areas of the country that desire clean fuel must have access to

clean fuel.

Secondly, Mr. Chairman, the clean fuel must be based on environmental performance standards, not on product mandates.

Third, Mr. Chairman, we must balance the legitimate needs for

lead time and stability of the oil interests with the legitimate needs

of States to adopt more protective programs if the Federal programs fail to adequately protect public health.

And lastly, with regard to environmental specifications, we

should build upon EPA and California’s low sulphur standards, we

should address toxicity Nationwide, we should address the legitimate drive-ability concerns raised by the auto industry so they can

optimize cars to achieve low emissions, and finally, efforts to promote renewable fuels must be based on the true advantages of ethanol, not on the false pretext that we need it to clean up the air.

Thank you very much, Mr. Chairman.

[The prepared statement of Mr. Grumet follows:]

PREPARED STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR, NORTHEAST

STATES FOR COORDINATED AIR USE MANAGEMENT (NESCAUM)

Thank you Mr. Chairman. My name is Jason Grumet and I am the Executive Director of the Northeast States for Coordinated Air Use Management (NESCAUM).

NESCAUM is an association of state air pollution control agencies representing

Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode

Island and Vermont. NESCAUM provides technical assistance and policy guidance

to our member states on regional air pollution issues of concern to the Northeast.

On behalf of our eight member states, I would like to express our appreciation for

this opportunity to address the Committee regarding opportunities to improve the

environmental quality, economic efficiency and resiliency of our nation’s fuel supply.

The Northeast states appreciate the concerns voiced by representatives of the petroleum industry that the proliferation of state fuel specifications constrains market

flexibility and exerts upward pressure on fuel prices. Moreover, we believe that the

environmental quality of gasoline must continue to improve if we are to provide our

citizens with the public mobility they desire and the public health protection they

deserve. Both these concerns can be addressed through the development of a consistent national clean fuels program. We applaud this Committee and the Administration for focusing public attention on the opportunity to simultaneously strengthen

the reliability and environmental quality of our nation’s gasoline supply. Already,

staff at EPA have reached out to the states and to a host of interest groups to garner our input in pursuing the recommendation from the National Energy Policy report to explore the boutique fuels issue. We greatly appreciate their efforts and look

forward to working with EPA, DOE and USDA as they conduct this inter-agency

process.

At the outset, it is important to note that few Governors wake up in the morning

exuberant to navigate the labyrinth of statutory pre-emptions necessary to adopt

and enforce their very own fuel specifications. On behalf of the NESCAUM member

states, I wish to express our unequivocal preference for a well-designed, environmentally adequate, regional or national fuel that provides Northeast consumers

with a reliable supply of clean, low-cost gasoline.

In charting a course toward the desired harmony of a low cost clean fuel, it is

necessary to explore the dynamic that has encouraged states to regulate the environmental properties of gasoline. There are two dynamics that lead to the patchwork of fuel standards present in our nation: 1) environmentally inadequate or poorVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00099 Fmt 6601 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
96

* The attachments have been retained in committee files.

ly designed federal requirements and 2) successful efforts by petroleum companies

to limit access to clean fuels.

INADEQUACIES IN FEDERAL FUEL PROGRAMS

States bear the ultimate responsibility to protect the health of our citizens. While

we strongly prefer effective federal regulation to individual state requirements,

states must maintain and responsibly exercise the ability to adopt environmental

regulations necessary to protect public health.

Inadequacies in the current federal program are numerous and sadly appear to

be increasing. The Clean Air Act restriction barring attainment areas from the federal reformulated gasoline (RFG) program is the first inadequacy we would ask Congress to reconsider. This federal requirement absolutely precludes states like New

York from having a single fuel. The New York City Metropolitan area is mandated

under the Clean Air Act to sell only RFG while the majority of the remainder of

the state is legally barred from participating in the federal RFG program. Beyond

supporting the exclusion of attainment areas under statute, the American Petroleum Institute (API) and National Petrochemical and Refiners Association (NPRA)

successfully litigated in 1999 to bar the states of Kansas and Missouri from extending RFG into the Kansas City ozone maintenance area. The intensity with which

API and NPRA worked to prevent these states from taking advantage of the federal

fuel template must be better understood before we can fairly and effectively address

these same organizations’ concerns over the multiplicity of different fuel requirements.

A second inadequacy of the current federal fuels program is its failure to address

air toxics emissions in the two thirds of the nation’s fuel supply that is satisfied by

conventional gasoline. Mobile source air toxic emissions pose a very real health

threat across virtually the entire nation. EPA’s National Air Toxics Assessment

(NATA) indicates that four pollutants resulting primarily from the combustion of

gasoline, benzene—1, 3 butadiene, formaldehyde and acetaldehyde—exceed 1 in 1

million cancer and/or non-cancer health benchmarks across the country. Benzene,

1, 3 butadiene and formaldehyde also each exceed one in one hundred thousand cancer risk thresholds in all major population centers in our region. In the Northeast,

motor vehicles are responsible for over 80 percent of the emissions of these priority

toxic compounds. I have attached several graphs that 1) illustrate ambient levels

of air toxics in our region; 2) depict mobile source contributions to these ambient

levels; and 3) demonstrate that even with all the regulations EPA has adopted or

proposed to adopt, many areas of the country will continue to experience unhealthy

levels of mobile source toxics for the next thirty years.* The national scope of this

problem leads us to question the public health basis for excluding two-thirds of the

nation from the 40 percent reduction in benzene levels provided by the RFG program.

Unfortunately, EPA failed to act as required under Section 202(l) of the Clean Air

Act to reduce emissions of benzene and the other mobile source air toxics. Several

weeks ago, New York State, Connecticut and several national environmental and

public health organizations challenged EPA recent mobile source air toxics rulemaking in the D.C. Circuit Court. The substantive basis of this challenge is EPA’s

failure to require any actual reductions in mobile source air toxics despite its clear

obligation under section 202(l) to promulgate regulations ‘‘containing reasonable requirements to control hazardous air pollutants from motor vehicles and motor vehicle fuels.’’ Such requirements must reflect ‘‘the greatest degree of emission reduction

achievable through the application of technology which will be available, taking into

consideration the standards [already established for motor vehicles], the availability

and costs of the technology, and noise, energy, and safety factors, and lead time.’’

42 U.S.C. § 7521(l)(2). Finally, the statute required EPA to issue regulations no later

than the beginning of 1995 that, ‘‘at a minimum, apply to emissions of benzene and

formaldehyde. Id.’’ A fuller explanation of the inadequacies in the Agency’s rule is

attached.

The strong state interest in achieving reductions in the toxicity of motor vehicle

fuels argues that any serious effort to reduce the number of state fuel specifications

must enable entire states to access the same federal requirements and must provide

air toxic benefits to all Americans, not just those living in ozone nonattainment

areas.

An additional environmental inadequacy in federal fuel specifications is the federal relaxation of volatility (RVP) requirements in conventional gasoline containing

ethanol. Here again, states that are concerned about evaporative pollutant emisVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00100 Fmt 6601 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
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sions are forced to adopt state specific standards to correct this weakening of federal

fuel requirements. The recent federal decision to relax RVP requirements in Midwest states for ethanol-blended gasoline foreshadows the relaxation of environmental quality and/or the increase in price that the NESCAUM region will face if

a de facto ethanol mandate is imposed in our region as a result of continued adherence to the current RFG oxygen requirement.

In fact, the problem of ‘‘boutique fuels’’ is certain to get much worse unless EPA

reconsiders its decision to deny states relief from the RFG oxygen mandate. With

the mandate in place, states have three unfortunate choices. We can allow our water

supplies to remain vulnerable to the unacceptable harms posed by continued MTBE

contamination. We can pay higher prices for the more polluting fuel that will result

from a summertime ethanol mandate in the Northeast and California or we can

seek every means possible to abandon the federal RFG program and adopt state fuel

specifications. Already, Maine and New Hampshire have been driven to abandon

federal RFG in lieu of state fuel specifications absent the oxygen mandate. Unless

the decision to mandate ethanol in RFG areas is revisited, I predict that those

states not statutorily bound to the RFG program will soon follow suit.

The Administration’s expressed concern over fuel price increases and its call for

states to harmonize fuel specifications is in conflict with the Administration’s proposed denial of the California waiver request. We find the analysis behind the Agency’s action unconvincing, to say the least. The concern it asserts over the co-mingling of ethanol and non-ethanol fuels—while legitimate—seems thoroughly overwhelmed by the increases in volatile organic compound (VOC) emissions caused by

substantially increasing the ethanol content of summertime fuel. Moreover, EPA

seems to conveniently ignore the fact that California’s request was based on interference with both ozone and particulate matter (PM) National Ambient Air Quality

Standards (NAAQS). EPA agrees that emissions of nitrogen oxides (NOX) increase

when ethanol is mandated and has long acknowledged that NOX is a key precursor

to PM formation. Regardless of whether one agrees or disagrees with the EPA’s comingling analysis, the consensus that NO emissions increase under an ethanol mandate clearly meets the requirements set forth to grant states relief from the oxygen

mandate.

NESCAUM interest in this decision is far from academic. New York State and

Connecticut have banned MTBE and are actively considering filing waiver requests

seeking similar relief from the oxygen mandate. We believe that denying state requests for relief from the oxygen mandate is contrary to the environmental and economic interests of our region. In the context of this discussion, it is fair to think

of boutique fuels as deck chairs on the ethanol mandate Titanic. The price impacts

from an ethanol mandate in RFG are staggering. Equally concerning are the inevitable requests to weaken environmental standards that are certain to follow. Any

serious effort to address fuel infrastructure concerns, supply constraints, cost increases and environmental quality must begin by lifting the oxygen mandate in

RFG.

While the Northeast states recognize that ethanol presents many important national benefits including farm income, fuel diversity, energy security and reduced

greenhouse gas emissions, urban air quality is without question the weakest link

upon which to base an expansion of ethanol use. Until advocates of renewable fuels

abandon the pretext that ethanol is needed to address ozone nonattainment and

focus on ethanol’s legitimate attributes, our nation will fail to capitalize on the potential benefits ethanol has to offer.

SUCCESSFUL EFFORTS BY PETROLEUM COMPANIES TO LIMIT ACCESS TO CLEAN FUELS

Stated concerns over boutique fuels resonate with an ironic ‘‘dog catches car’’ ring

to those who have actively participated in the debate over fuel quality standards.

As noted above, a central factor in state decisions to adopt separate boutique fuel

requirements has been the aggressive and successful lobbying campaigns by some

petroleum companies to discourage adoption of federal RFG. The detailed specifications and requirements that define federal RFG were established through a lengthy

and ultimately successful regulatory negotiation (reg neg). Of course the petroleum

industry participated actively in this process, as did states and the environmental

community. Within weeks of the successful conclusion of the reg neg, while the

hand-shakes remained warm, some petroleum companies initiated active campaigns

to discourage states from opting their nonattainment areas into the RFG program.

With catchy slogans such as ‘‘Only Fools Opt-in to RFG,’’ a number of petroleum

refiners and distributors worked to convince a host of regions to adopt separate low

RVP boutique fuel requirements in lieu of federal RFG. A request for input from

environmental regulators in Atlanta, Phoenix, Pittsburgh, St. Louis, Detroit, BirVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
98

mingham and Kansas City would reveal that in every instance some, if not all, of

the petroleum interests involved in these discussions urged states to adopt the very

state-based fuel requirements about which they now voice concern.

The purpose of this review of recent history is not to discourage the pursuit of

harmonized clean fuel standards, but rather to try and determine what has changed

in the last few years. Having worked with representatives of API, NPRA and their

member companies closely over the past several years, I have come to respect their

professionalism, intelligence and ability to enhance corporate profitability. Therefore, it seems necessary to dig deeper in an effort to better understand the dynamics

that led these companies to consistently advocate for separate state fuel standards

in lieu of a consistent federal program since the inception of the RFG program in

1995.

Superficially it would appear that petroleum interests have worked rather systematically to circumscribe the use of clean fuels to the narrowest geographic scope. If

this view is accurate, I fear that the effort to limit state fuel standards is unlikely

to succeed. In the absence of more effective and protective federal requirements,

states will undoubtedly strive to continue to improve the environmental performance of motor fuels. However, if changing circumstances provide an opportunity to

reconsider the environmental and economic benefits of extending clean fuels to

broader reaches of the nation, then I am very optimistic of our ultimate success.

PROPOSED NATIONAL CLEAN FUEL STANDARDS

In closing, I would like to outline the essential parameters of an effective national

fuels program.

Program Design: The program must: 1) be accessible to all areas of the country

that desire clean fuel; 2) be comprised of environmental performance standards and

not burdened with poorly designed product specifications; 3) provide adequate lead

time for fuel refiners and suppliers and adequate market stability to enable effective

planning; and 4) maintain the rights of states to adopt more protective state standards if such standards are necessary to protect public health and or the natural environment.

Fuel Quality Specifications: The program should: 1) build upon EPA and California Air Resources Board (CARB) low sulfur requirements; 2) address the toxic emissions of—at a minimum—benzene, formaldehyde, 1, 3 butadiene and acetaldehyde;

and 3) address driveability issues to enable the automobile industry to optimize vehicle emission control systems. In addition, any efforts to promote renewable fuels

must provide the fuel industry with the flexibility to determine where and when to

sell ethanol, must maintain all environmental performance standards and must be

grounded in the legitimate national benefits that ethanol has to offer. Efforts to perpetuate further price supports and/or to mandate the sale of renewable fuels nationally should be justified by a demonstration that ethanol provides national value that

is not captured in the free market.

In closing, I would like to again thank the Committee for the opportunity to appear before you today and offer the commitment of the Northeast states to continue

working with Congress and the Administration to develop a federal fuels program

that meets the environmental and economic needs of our region and the nation.

The CHAIRMAN. Thank you very much. We appreciate that excellent testimony.

Mr. Segal, why don’t you go right ahead. This is Scott Segal, who

is a partner with Bracewell and Patterson, speaking on behalf of

the Oxygenated Fuels Association.

STATEMENT OF SCOTT SEGAL, PARTNER, BRACEWELL AND

PATTERSON, ON BEHALF OF OXYGENATED FUELS ASSOCIATION

Mr. SEGAL. Thank you, Mr. Chairman, Senator Fitzgerald. I

want to thank you for the opportunity to appear on behalf of OFA.

OFA is the national trade association of manufacturers of

oxygenates, principally MTBE. For a variety of environmental,

commercial, and performance-related reasons, MTBE is now used

in 80 to 85 percent of all the RFG in use today. As the Department

of Energy has pointed out, it contributes over 400,000 barrels of

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gasoline production, which is equal to the output of five U.S. refineries.

By contrast, boutique low RBP fuels sap the conventional gasoline supplies by as much as 5 percent, particularly during the summer months. Lately, and in fact just a few seconds ago, we have

heard a lot about the concept of boutique fuels. The President’s national energy plan called for an exploration of ways to increase the

flexibility of the fuel distribution infrastructure to improve

fungibility and to provide added gasoline market liquidity.

Whatever we may say about the use of MTBE in reformulated

gasoline, such RFG cannot be usefully described as boutique fuel.

Indeed, RFG is about one-third of the current mix of gasoline used

in the United States, and given its volume and performance, use

of MTBE adds to fuel fungibility and liquidity.

While some criticize the administration’s recent decision to comply with the Clean Air Act in denying the California waiver request, that decision is by no means inconsistent with the national

energy plan. As EPA’s own blue ribbon panel put it, MTBE is currently an integral component of the U.S. gasoline supply both in

terms of value and octane. It is equal to about 5 percent of the U.S.

gasoline supply but, more importantly, it represents nearly 15 percent of the RFG supply in the United States. The folly of banning

MTBE lies in the reduction of gasoline fungibility. A ban on MTBE

implemented by some States poses unacceptable problems in fuel

segregation, pipeline transportation, and the serving of remote

markets like the State of California.

The ultimate boutiques fuel market is one in which some States,

in a haphazard fashion, ban the most useful fuel additive in the

RFG program. That is the ultimate boutique fuel market. Of

course, there are those that would have the Federal Government

ban MTBE while allowing the oxygenate standard to remain in

place. This, of course, is a mandate for ethanol.

While the current market includes a healthy share for ethanol,

further mandates are likely to be counterproductive. An ethanol

mandate simply makes it harder to provide cleaner fuels at acceptable prices. According to the California Energy Commission—I am

sure we will hear more about this today—the cost of substituting

ethanol-blended gasoline in that State could increase refinery production costs by up to 7 cents per gallon. If that figure upholds Nationwide, that is a $10 billion cost to consumers.

One OFA member who actually refines in California estimated

that in California an MTBE ban, coupled with ethanol blending, reduces production volume at that facility by 8 percent. Research on

price elasticity of gasoline, which has been accepted in over 300

studies, means that high prices in California will pull gasoline from

the rest of the country, creating short supply in the country, and

potentially upping retail prices significantly.

Some have argued that phasing out MTBE is necessary to maintain water quality. With all due respect, that appears to be an outdated view. In light of the implementation and enforcement of new

underground storage tank requirements. A March 2001 study indicates that the average MTBE concentrations in California have

steadily declined over 1995 to 1999 time frame. Indeed, after 9

years of widespread MTBE use in California and other RFG areas,

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the level of detects in drinking water are less than 1 percent of

water supplies, and even in those instances are barely detectable.

Congress and the States are to be commended for implementation thus far of the UST program, and current statistics regarding

MTBE do not constitute a principal basis to eliminate it from the

marketplace.

Regarding health impacts, a consensus has emerged. Reviews of

scientific panels from the U.S. Government, even California’s own

Carcinogenic Identification Committee, indeed, from the World

Health Organization, and the European Community, all have declined to list MTBE as a human carcinogen.

The Health Effects Institute—you quoted, Mr. Chairman, Mr.

Greenbaum at the beginning of the hearing—which chaired the

EPA blue ribbon panel, released a report only last week, on June

15, which analyzed three independent studies, and concluded

MTBE would be considered less likely to have adverse effects than

previously sought.

Administrator Whitman, in denying the California waiver, stated

that EPA was, quote, ‘‘committed to working with Congress to develop legislation that addresses the concerns about MTBE, while

maintaining air quality and other benefits of the RFG program.’’ Administrator Whitman’s concerns are well-founded, because the

air quality benefits of RFG with MTBE are significant. EPA’s own

analysis of phase 1 RFG shows that fuel reduces ozone-forming

compounds such as VOC’s by over 28 percent. That is 144 percent

compliance with the law.

Air toxics are reduced by about 30 percent. That is almost twice

as much required by law. Testing shows that benzene levels, which

Mr. Grumet just spoke of, have declined 31 percent between 1994

and 1997 in areas using Federal RFG, so how, then, to meet the

Administrator’s commitment of addressing water quality while not

diminishing air quality? By supporting Federal legislation to address underground storage.

While the UST record is good, we can make it even better. Recently, OFA has been in active discussions with gasoline marketers

and convenience store owners on shared principles for achieving

greater benefits from the UST program. We believe that a bipartisan national consensus exists to recognize the allocation of funds

from the UST fund and to target resources to high remediation

need areas. In this way, the broad energy supply and environmental benefits of the RFG program on the one hand can be maintained in a cost-effective manner while ground water is simultaneously addressed.

In conclusion, a word to our friends in California. We hope that

California will carefully reexamine its position regarding the status

of MTBE, which represents about 11 percent of the volume of the

State’s gasoline, and Mr. Chairman, you see very few gold triangles

in the State of California—11 percent of the volume coming from

MTBE.

New data on reduced levels of contamination, coupled with even

more targeted UST resources, could give consumers in California

and elsewhere clean water and clean air for the foreseeable future.

Thanks for this opportunity to testify. We look forward to answering your questions.

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[The prepared statement of Mr. Segal follows:]

PREPARED STATEMENT OF SCOTT SEGAL, PARTNER, BRACEWELL AND PATTERSON, ON BEHALF OF THE OXYGENATED FUELS ASSOCIATION

Chairman Bingaman, Senator Murkowski, and other Members of the Committee,

I want to thank you for this opportunity to appear on behalf of the Oxygenated

Fuels Association to address issues related to national energy policy with respect

to fuel specifications. OFA is the national trade association of manufacturers of

oxygenates, principally MTBE. For a variety of environmental, commercial, and performance-related reasons, MTBE has become the oxygenate-of-choice for making

RFG outside the Midwest. MTBE is used in 80-85 percent of all the RFG produced

today and comprises significant volumes of the national gasoline supply. As the

Dept. of Energy points out, MTBE is valuable not only from the standpoint of it’s benefit to cleaner air, it is contributing over 400,000 barrels of gasoline production

which is equal to the output of 5 US refineries.

This hearing is a timely one, for even as gasoline prices have recently declined

somewhat, this country faces significant structural problems related to supply and

distribution. Consumers, as well as businesses dependent on motor transportation,

demand that our leaders take a reasoned and responsible approach to addressing

fuel issues.

It is the difficult task of this Committee to resist the temptation to embrace easy

solutions, and instead to travel the path dictated by the facts. Today, I hope to clear

away some of the underbrush surrounding the use of oxygenates and the role they

play in maintaining a clean and secure source of octane as well as insuring an adequate supply of gasoline at reasonable prices.

Lately, we have heard much about the concept of ‘‘boutique’’ fuels. The President’s National Energy Plan called for an exploration of ‘‘ways to increase the flexibility

of the fuels distribution infrastructure, improve fungibility, and provide added gasoline market liquidity.’’ Whatever else some may say about the use of MTBE in reformulated gasoline, such RFG cannot be described as a boutique fuel. Indeed, RFG

with MTBE is a very significant portion of the current mix of gasoline used in the

United States; and given its volume and performance, use of MTBE adds to fuel

fungibility and liquidity. While some criticize the Administration’s recent decision

to comply with the Clean Air Act in denying the California waiver request, that decision is by no means inconsistent with the National Energy Plan.

As EPA’s own Blue Ribbon Panel put it, ‘‘MTBE is currently an integral component of the US gasoline supply both in terms of volume and octane.’’ Because MTBE

has such premium blending qualities, EIA estimates that MTBE use in the US is

contributing over 400,000 barrels per day of gasoline production which is equal to

the output of five U.S. refineries. This production is equal to about 5% of the U.S.

gasoline supply, but more importantly it represents nearly 15% of the RFG supply

in the U.S.

Without careful examination and appropriate planning, the severe energy and environmental consequences of ill thought government action will further increase our

dependence on imports and force prices on the spot market to increase rapidly. It

is incumbent on those who would eliminate MTBE, or any other component of our

gasoline supply to identify with precision the way in which lost volume would be

recovered particularly given refinery utilization and capacity restraints.

The folly of banning MTBE lies in the reduction of gasoline fungibility. A ban on

MTBE implemented by some states poses unacceptable problems in fuel segregation,

pipeline transportation, and the serving of remote markets. The ultimate boutique

fuels market is one in which widely used additives are actually banned in a haphazard and ill-conceived manner.

Of course, there are those that would have the states or the federal government

ban MTBE, while allowing the oxygenate standard to remain in place. This, of

course, is a mandate for ethanol. Actions like this tend only to compound supply

problems, not alleviate them. While the current fuel market includes a healthy

share for ethanol, further mandates are likely to be counterproductive. An ethanol

mandate will make it harder for refiners to provide cleaner fuels to consumers at

acceptable prices. Due to ethanol’s high blending vapor pressure, pentanes are

backed out of the gasoline pool, further decreasing supply. An ethanol mandate will

hinder refiners’ ability to optimize the quality and volume of cleaner-burning gasoline. This will increase refining costs, and negatively impact both gasoline supplies

and price. According to the California Energy Commission, the costs of substituting

ethanol-blended gasoline in that state could increase refining production costs by up

to 7 cents per gallon. One OFA member estimated that in California an MTBE ban,

coupled with ethanol blending, reduces production volume by 8%.

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What would this approach mean in real terms for the price of gasoline? Noted petroleum economist Phil Verleger puts it this way: removal of MTBE from the California market could push the retail price of gasoline to levels previously unseen

across the United States. Research on price elasticity of gasoline—confirmed in over

300 studies—means that high prices in California will pull gasoline from the rest

of the country, leaving everyone short of supply. This is the real potential price impact of eliminating MTBE in favor of ethanol in California.

The worst part about this dire scenario is that it is all avoidable. Some have argued that phasing out MTBE is necessary to maintain water quality. With all due

respect, that appears to be an outdated view in light of the implementation and enforcement of the new underground storage tank requirements. A study in the March

2001 edition of Soil, Sediment & Groundwater indicates that the average MTBE

concentrations in California have steadily declined over the 1995 to 1999 time period.

Regarding health impacts, a consensus has emerged. Reviews by scientific panels

from the U.S. Government (the National Toxicology Program), state governments

(such as California’s own Carcinogenic Identification Committee), and even international health organizations (such as the World Health Organization’s International Agency for Research on Cancer and, more recently, the European Community) all have declined to list MTBE as a human carcinogen.

Indeed, the Health Effects Institute, which chaired the EPA Blue Ribbon Panel,

released a report only last week (June 15) based on three new, independent studies.

HEI stated that ‘‘effects of MTBE exposure are likely to be no more, and may be

less, that the effects seen in previous studies.’’ Therefore, they concluded that

‘‘MTBE would be considered less likely to have adverse effects than previously

thought.’’

Administrator Whitman, in denying the California waiver, stated that EPA was

‘‘committed to working with Congress to develop legislation that addresses concerns

about MTBE, while maintaining the air quality and other benefits of the RFG program.’’

Administrator Whitman’s concerns are well founded, because the air quality benefits of RFG with MTBE are significant. EPA has compiled data for the United

States showing that Phase I RFG has surpassed the requirements of the Clean Air

Act. An analysis of the Phase I RFG produced by refiners shows that the fuel reduces ozone-forming compounds, such as VOCs, by over 28 percent—that’s 44 percent above the requirement of the law. Air toxics are reduced by approximately 30

percent—that’s almost twice as much as required by law. Ambient air monitoring

confirms that the RFG program is working. Testing shows that benzene levels have

declined by 31 percent between 1994 and 1997.

So, how then to meet the Administrator’s commitment of addressing water quality

while not diminishing air quality? By supporting federal legislation to address the

mechanism by which any component of gasoline reaches groundwater: underground

storage. EPA’s own Blue Ribbon Panel bluntly stated, ‘‘The major source of groundwater contamination appears to be releases from underground gasoline storage systems.’’ Recently, OFA has had serious discussion with gasoline marketers and convenience-store owners on shared principles for achieving greater benefits from the

UST program. We believe that a bipartisan, national consensus exists to regularize

the allocation of resources from the underground storage fund and to target resources at the highest priority remediation needs. In this way, the broad energy

supply and environmental benefits of the RFG program can be maintained in a costeffective manner, while groundwater needs are simultaneously addressed. A variety

of classical treatment processes and proven technologies are readily available. Furthermore, increasing evidence is being found and reported on the biological natural

attenuation of MTBE in gasoline impacted water sources.

Further, we would hope that California will carefully re-examine its position regarding the status of MTBE, which represents about 11 percent of the volume of

the state’s gasoline. We would hope that new data on reduced levels of contamination coupled with even more targeted UST resources could give consumers in California and elsewhere clean air and clean water for the foreseeable future.

Thank you for this opportunity to testify. I look forward to working with the Committee on these difficult issues.

[Note: Additional material submitted with this statement has been retained in

committee files.]

The CHAIRMAN. Thank you very much. Next is Mr. Robert

Dinneen, who is the vice president of the Renewable Fuels Association. Go right ahead, please.

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STATEMENT OF ROBERT DINNEEN, VICE PRESIDENT,

RENEWABLE FUELS ASSOCIATION

Mr. DINNEEN. Thank you very much. Mr. Chairman and Senator

Fitzgerald, I want to thank you very much for the opportunity to

present testimony today at this hearing to discuss the gasoline

price volatility situation in this country and EPA’s recent decision

denying California’s request for waiver from the oxygen content requirement.

In the near term, we believe that ethanol supply is important as

the Nation addresses gasoline price volatility by adding important

supply to a tightly constrained market. In the long term, as the

United States develops a more responsible and proactive energy

policy, ethanol offers the promise of a stable, renewable energy

supply.

First of all, I should note that the Renewable Fuels Association

is the national trade association for the domestic ethanol industry.

There are 56 ethanol production plants across the country, operating in 20 different States, including California and other places on

the west coast. Last year, we produced about 1.6 billion gallons of

ethanol. We have a capacity to produce over 2 billion gallons of ethanol today, and the industry continues to grow significantly, particularly among farmer-owned coops, as farmers attempt to receive

the direct benefits of the value-added benefits of ethanol production.

I should also note that ethanol is sold in virtually every State in

the country, and I wish Senator Kyl was here, because I would tell

him that ethanol is not only used in Arizona, the State actually requires ethanol to be used in Arizona in terms of its government

oxide program in the winter months.

Ethanol is also used extensively in Alaska. Several years ago,

when Alaska had experienced some problems with MTBE, virtually

all of the refiners in the State converted to ethanol. It has not been

a challenge to get ethanol from the Midwest all the way down the

Mississippi River and through the canal and passing California and

waving as it goes by, and landing in Alaska. We can absolutely

transport ethanol to any market in this country today.

With regard to the gasoline price volatility issue, which is a significant one, and the committee is very rightly looking at it, I

would only add that we agree with the FTC’s comments that the

fundamental problem is a chronic lack of refining capacity in this

country. Indeed, no refineries have been built in the last 25 years.

Refiners have chosen to use capacity cushion to meet gasoline demand, operating at more than 95 percent of capacity. That creates

significant problems whenever there are disruptions in production

or supply.

There have been, however, 56 ethanol refineries built in the last

25 years. We have been adding supply to the U.S. motor fuel market, and we will continue to do so. We think we ought to be adding

more, which is exactly why the Renewable Fuels Association is

strongly supportive of legislation introduced a couple of weeks ago

by Senators Hagel and Johnson, that will require increasing percentages of renewable fuels used in gasoline, 3 percent of the market by 2011, 5 percent of the market by 2016. That is an achievable

104

* The studies have been retained in committee files.

goal, and one that we think would be critical to having a more sustainable energy policy for our country.

We have heard a little bit about boutique fuels today. Indeed, I

want to make a couple of comments. First of all, the Federal Government only requires two fuels, reformulated gasoline and conventional gasoline. The balkanization that has occurred in the U.S.

fuel markets is a direct result of oil companies lobbying the States

to have a clean fuel program that is not reformulated gasoline, because they have not wanted to use oxygenated fuels.

There is actually a memo that Senator Wyden referred to earlier

today that specifically notes that eliminating the oxygen requirement would reduce gasoline supply. That has been the objective of

the oil companies for quite sometime. It does not make any sense.

The oxygen requirement was included for a number of different

reasons, including security and fuel diversity, that continues to

make sense today. Simply adding oxygen to gasoline does not make

a boutique fuel. You have got conventional gasoline and you add

oxygen to it, refiners are not doing anything different to that fuel

blend.

Yesterday, Representative Blunt from Mississippi introduced legislation that would address the boutique fuel issue, because if you

really want to address it, there is only one way, and that is to

eliminate the States’ authority to create these separate and distinct

fuel programs.

I am not certain, quite frankly, that boutique fuels create gasoline price increases. They clearly exacerbate them when there are

differences in supply and distribution, which has occurred at an

ever-increasing rate lately, but to the extent that the Congress

wants to look at boutique fuels, I think you need to look at the

States’ authority to create this balkanized system that is out there.

Now, I guess there are some questions about the California waiver, and I am glad that I am here to address it, because I think

there has been a lot of information out there.

I would first of all like to commend the Environmental Protection

Agency and the administration for deciding this issue on the basis

of the law and the science. Everybody says this is a political decision that was made, as if all of a sudden the influence of the refiners on the Bush administration had just gone away. The fact of the

matter is, the Bush administration had to make this decision based

on what the Clean Air Act allowed them to do and the science that

they had before them.

I would like to submit for the record, if you would, Mr. Chairman, the numerous studies that the Renewable Fuels Association

and the Corn Growers and others have submitted to EPA supporting the scientific conclusion that the agency ultimately made.* Ms.

Fisher earlier today was absolutely right, the administration was

prohibited from granting the waiver on the basis of water contamination or on the basis of supply. They could only grant the waiver

upon a conclusion that there would be a negative impact on an air

quality standard. That is not the conclusion that was supported by

the facts.

105

Now, I would like to quote just for a moment from a grassroots

environmental organization in California, who notes that the data

clearly shows that the best way to protect California’s air quality

and the economy is to maintain the oxygen requirement. Another

California environmental group, the Renewable Action Project,

noted after the waiver was denied that this decision by the Bush

administration will actually reduce more than 529,000 tons of carbon dioxide from the air, because ethanol use absolutely has a very

positive impact on greenhouse gases.

Will there be enough supply? Mr. Chairman, Senator, yes, there

will. The demand created by the California waiver is about 580,

maybe 600 million gallons of ethanol. We produce 2 billion gallons

of ethanol today, but there is 400 million of underutilized capacity.

There are 34 expansions to existing facilities going on today, which

will add an other 235 million gallons. There are 11 plants under

construction today that are going to add another 250 million gallons of production.

Mr. Chairman, I spoke at a conference yesterday where there

were 700 people, and I asked them at one point if they would raise

their hands if they knew of ethanol expansion plans that were

going on. Mr. Chairman, every single hand in that audience went

up.

Farmers are excited about the potential opportunities that will

be created by the market. We are committed to satisfying the demand created in California and elsewhere, as other States look to

reduce MTBE water contamination and try to address fuels issues.

The concerns about transportation and how we can get ethanol

all the way from the Midwest, where all those ethanol plants are,

to California, misses an important point. 90 percent of the MTBE

used in California today is not produced in California. It is imported. It is imported from the gulf coast or, a lot of it, from Saudi

Arabia.

Now, Mr. Chairman, I am sorry, but if it is easier to get MTBE

from Saudi Arabia than it is to get ethanol from the Midwest, my

geography is just awfully bad.

The CHAIRMAN. Let me just ask, MTBE can be transported by

pipeline, ethanol cannot, is that right?

Mr. DINNEEN. Well, that is—ethanol is not. It can be. But the

fact of the matter is, MTBE is not being shipped to California via

pipeline today. There are not pipelines that go from the gulf coast

to California that are in operation today. MTBE is being shipped

to the State by vessel, because ethanol has twice the oxygen content of MTBE, we only need half as many vessels in order to supply

the same amount of oxygen content.

But there is another advantage. MTBE is typically not shipped

by rail car. Ethanol can be. We have got more avenues of transportation to get the product there. We do not have to go as far, and

we do not have to use as much. There is absolutely no transportation problem associated with getting ethanol to the great State

of California or any place else.

I have taken up a lot of time already, and maybe I will just close

with something that Governor Jesse Ventura noted yesterday, who

spoke just before me, and it is just such a good slogan, I have to

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1 EIA

2www.eia.doe.gov/emeu/international/gas2.html

3www.eia.doe.gov/emeu/steo/pub/special/mtbecost.html

throw it out here just for you to ponder. Jesse Ventura, as only he

can say, closed his comments with, ethanol kicks gas.

[The prepared statement of Mr. Dinneen follows:]

PREPARED STATEMENT OF ROBERT DINNEEN, VICE PRESIDENT,

RENEWABLE FUELS ASSOCIATION

Mr. Chairman and Members of the Committee, I would like to thank you for the

opportunity to provide comments on the rising cost of gasoline, and particularly the

positive role that ethanol plays on stabilizing gasoline prices. The causes for the unacceptable volatility in gasoline markets are numerous, but the primary factors are

crude oil prices and supply of finished gasoline. Ethanol as a gasoline-blending

agent reduces the demand for crude oil and increases gasoline supply for a given

refining capacity. In the near term, ethanol supply is important as the nation attempts to address these soaring gasoline prices. In long term, as the United States

develops a more responsible and proactive energy policy, ethanol offers the promise

of a stable, renewable energy supply.

The Renewable Fuels Association is the national trade association for the domestic ethanol industry, located in Washington, D.C. Our membership includes ethanol

producers, gasoline marketers, farm organizations and state agencies dedicated to

the continued expansion and promotion of fuel ethanol. Today’s domestic ethanol industry consists of 56 production facilities located in 20 states with an annual production capacity of 2.1 billion gallons. In 2000, the U.S. ethanol industry produced

a record 1.6 billion gallons of high quality, clean burning fuel ethanol. Production

capacity continues to expand, particularly among farmer owned cooperatives, the

fastest growing segment of our industry.

BACKGROUND

The United States has experienced severe price volatility in gasoline markets for

more than a year. This price volatility has impacted both reformulated gasoline

(RFG) markets and conventional gasoline, and has been the subject of numerous investigations. Because last year’s price crisis occurred at a time of ample crude oil

supplies, public officials questioned whether collusion or price gouging was the

cause. A U.S. Federal Trade Commission report on the issue uncovered no such

criminal activity, but did note ‘‘conscious, (but independent) choices by industry participants to engage in profit maximizing strategies.’’ The FTC also pointed to the

chronic lack of refining capacity in the U.S. as the principle reason for systemic

price volatility in gasoline markets across the country.

When releasing the Commission’s report on gasoline prices earlier this year, FTC

Chairman Robert Pitofsky stated, ‘‘the underlying lack of U.S. refining capacity

threatens similar price spikes in the future in the Midwest and elsewhere.’’ Unfortunately, Mr. Pitofsky has proven to be prescient as gasoline prices spiked again this

year.

Figure 1 (not shown) shows average crude oil, spot and U.S. retail gasoline

prices 1 over the past four years. Generally, gasoline wholesale and retail prices

track the price of crude oil. However, imposed on top of the general trend is an increased volatility in gasoline prices. During the spring of 2001, Gulf Coast spot

wholesale (pretax) prices of gasoline were well over $1.00 per gallon.2 I would note

that MTBE prices across the country have been near record levels for much of this

year, topping $1.60 per gallon.3 Importantly, while gasoline prices have been rising,

ethanol prices have remained fairly constant. Recent average net contract prices for

ethanol have hovered between $0.90 and $1.00 per gallon. Indeed, ethanol is less

expensive than gasoline in most markets across the country today and is helping

to extend gasoline supplies and reduce consumer costs.

THE REASONS FOR HIGH FUEL PRICES

According to the recent FTC report of Midwest gasoline prices, there are several

key reasons for the high gasoline prices. These may be divided into factors that directly impact the variable cost of production of gasoline and gasoline supply constraints.

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4www.api.org/consumer/61900gasolineoverview.htm

VARIABLE COST

The price of gasoline is directly impacted by crude oil prices and taxes. In particular, every $10 per barrel increase in the cost of crude raises the cost of production

of gasoline by about 24 cents per gallon. State and federal gasoline taxes amount

to about $0.40. With crude costs averaging near $25 per barrel, these two factors

alone account for $1.00 per gallon. Additional costs passed on to the consumer include refining, transportation, and marketing and, of course, an acceptable amount

of profit.

GASOLINE SUPPLY

The refining industry is also directly contributing to higher prices by how it is

controlling the supply and distribution of gasoline. In terms of supply, refineries are

operating at historically high rates of utilization, exceeding 95% on an annual basis.

Refiners have limited investment in recent years, using much of their existing refining capacity cushion to meet increased gasoline demand. No new refineries have

been built, many small refineries have been closed, and merger has lessened competition. Additionally, refiners are now practicing ‘‘just in time’’ distribution techniques to lower inventory costs. Furthermore, price volatility is exacerbated by low

inventory because any upset in the system, such as protracted outages of refineries

or pipelines.

WHO ARE REFINERS BLAMING?

It is evident that the refining industry is currently enjoying record profits. The

American Petroleum Institute 4 suggests that the reasons for higher prices are:

• High crude oil prices

• High refinery utilization

• Increasing demand for gasoline

• Boutique fuels

Refiners also argue that the oxygen requirement for reformulated fuels is an important factor and its elimination would lower the cost of production of gasoline.

It needs to be stressed that record profits are a result of record high sales margins, that is, the spread between price and cost. It is in the refiners interest to limit

supply by discouraging the expansion of ethanol and other alternative fuels since

less ethanol will mean a greater demand for both crude and refined products. This

translates to higher prices for refined products, and greater income to the companies

who produce and sell large quantities of crude oil.

Rather than blaming everything else for the high price of gasoline, refiners should

reinvest some of their profits into expanding refining capacity and debottlenecking

the distribution system.

CONSUMER BENEFITS OF ETHANOL

Ethanol is blended directly into gasoline. Thus, using ethanol reduces gasoline

prices two ways. First, to meet gasoline demand, less crude must be refined resulting in overall lower crude prices. Second, since ethanol is directly blended into gasoline, it increases the supply of finished gasoline for a given refining capacity. The

quantity of ethanol produced today is equivalent to the gasoline production of a

180,000-barrel per day refinery.

But gasoline prices don’t tell the whole story. Consumers also need to pay other

costs resulting from the public health and environmental damage caused by the use

of gasoline. Ethanol doesn’t pollute the water like MTBE and BTX. Blending

oxygenates reduces the need for aromatics to meet octane demand. EPA now lists

not only benzene, but also other light aromatics including toluene, xylene and

ethylbenzene as mobile source air toxics. Aromatics in gasoline are converted to benzene in the exhaust. Toluene, often cited by refiners as a preferred blending material for non-oxygenated RFG is more likely to produce benzene in the exhaust of

motor vehicles than the mixed aromatics generally blended into gasoline. Additionally, a portion of the aromatics in gasoline exhaust and evaporative emissions is

converted to cancer-forming diesel-like particulate. It is now recognized that aromatics are also converted to additional fine particulate in the air during the ozone forming process. Oxygenates reduce ozone, carbon monoxide and fine particulate pollution and can greatly reduce the cancer risk associated with motor vehicle emissions.

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ETHANOL SUPPLY

The nameplate capacity for ethanol production is currently 2.1 billion gallons per

year. According to EIA, during the first 5 months of 2001, the ethanol industry production averaged 113,000 barrels per day or 1.732 billion gallons per year. Thus,

the industry average stream factor is about 82.5%. The industry continues to add

capacity. Thirty-four existing facilities are undergoing significant expansions today,

adding an additional 235 million gallons of capacity, and another 11 plants, with

a combined capacity of 250 million gallons, are currently under construction.

There is ample corn to greatly expand ethanol capacity. USDA has estimated that,

in the shorter term, corn could be used to produce about 6 billion gallons per year

of ethanol without shocking the system. DOE and USDA have projected that 10 billion or more gallons per year of ethanol could be produced from crop residues and

dedicated biomass crops produced on idled land.

How much corn and biomass ethanol is actually produced is a function of market

conditions and public policy. To greatly increase the supply of ethanol, there needs

to be some market certainty. Recently, Senators Chuck Hagel (R-NE) and Tim Johnson (D-SD) introduced legislation, S. 1006, to expand domestic liquid fuel production

by requiring that renewable fuels like ethanol and biodiesel supply an increasing

percentage of the U.S. motor gasoline market. The bill requires that renewable fuels

be used to meet 3% of the nation’s fuel supply by 2011 and 5% of the transportation

fuel supply by 2016. That’s the equivalent of about 600,000 barrels per day of imported crude oil.

The Renewable Fuels Association is strongly supportive of S. 1006, and other

similar renewable fuels requirements, and we commend the leadership of Senators

Hagel and Johnson for advocating making such a dramatic step toward moving this

country away from greater and greater imports of oil and toward a sustainable energy future for this country.

BOUTIQUE FUELS

API collectively calls RFG with ethanol, RFG with MTBE, California oxygenated

RFG, California non-oxygenated RFG, CO oxygenated gasoline, Minnesota

oxygenated gasoline, Arizona and Nevada CBG, and various low RVP gasoline formulations all ‘‘Boutique Fuels’’. API leads one to believe that if all of these different

fuels didn’t exist, and the oxygen requirement was removed from RFG, the market

would have more flexibility to maintain the supply of gasoline and gasoline prices

would be lower. The truth is that the oxygen requirement and ‘‘boutique fuels’’ are

not related.

In the U.S., very little oxygenated gasoline (Oxy) in non-RFG areas is produced

with MTBE because ethanol is a much less expensive source of oxygen. Thus, essentially all CO gasoline and Minnesota gasoline contains ethanol. Generally, the ethanol must be refinery rack or terminal blended. To limit the number of blendstocks

refiners must supply, the basic starting material for oxygenated gasoline is conventional gasoline. At the refinery rack, or the terminal, ethanol and other tempering

blendstocks may be added to adjust the octane level and possibly the RVP as the

gasoline is pumped to the retail delivery truck.

Thus, non-RFG oxygenated fuels really are not ‘‘Boutique fuels’’. The refiner does

not need to make a different formulation for oxygenate. Instead oxyfuels are merely

produced from non-oxygenated conventional gasoline by blending ethanol just prior

to retail distribution.

The only true ‘‘boutique fuels’’ are the myriad of low-RVP gasoline programs that

were advocated by the petroleum industry as alternatives to federal RFG. Simply

removing the oxygen standard will not impact these programs at all. The Clean Air

Act allows the states to create such programs, but EPA must approve the programs

after considering the impacts of such non-air quality issues as price and supply. To

date, EPA has not disapproved a single low-RVP state-imposed program on the

basis of reduced gasoline fungibility.

It is important to note that ‘‘boutique fuels’’ are a profit center for refiners, allowing them to maximize production efficiencies in certain areas. But whenever there

are disruptions in production or distribution, consumers pay the price because motor

fuels are no longer fungible. Congress should look at this issue closely, and remove

the state’s authority to further balkanize gasoline markets. Yesterday, Representative Roy Blunt (R-MO) introduced bi-partisan legislation to reduce the number of

boutique fuels while preserving air quality. The RFA supports this effort and encourage the Committee to look closely at this issue.

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5MathPro, Inc, ‘‘Analysis of California Phase 3 Standards’’, California Energy Commission,

December 7, 1999.

THE CALIFORNIA OXYGEN CONTENT WAIVER

After more than two years of study, the U.S. Environmental Protection Agency

denied a request by the State of California to be exempted from the requirement

to use oxygenates in the reformulated gasoline program. The Administration is to

be commended for deciding this issue on the basis of the law and science, and not

bending to the political pressure of California and the petroleum industry that

sought a waiver because of unsubstantiated fears related to supply and price. The

fact is the Clean Air Act does not allow waivers to be granted on the basis of MTBE

water contamination, or supply. The only basis upon which the Agency could have

granted a waiver is upon a demonstration that the use of oxygenates will prevent

or interfere with a National Ambient Air Quality Standard (NAAQS). That demonstration was simply not made.

As noted by Bluewater Network, a grass roots environmental group in California,

‘‘the data clearly shows that the best way to protect California’s air quality—and

the economy—is to maintain the oxygen requirement.’’ Another California environmental coalition, the Renewable Action Project concluded using ethanol in place of

MTBE in California as a result of the waiver denial will reduce statewide carbon

emissions by over 529,000 tons.

As a consequence of the decision, approximately 600 million gallons of ethanol will

be needed to meet the state’s oxygen requirements beginning in 2003. This will provide an important value-added market for farmers. USDA estimates each 100 million bushels of corn increases the price of a bushel of corn 3-5 cents. Thus, this decision will increase the price of corn between 10-15 cents, adding more than $1 billion

to the depressed farm economy.

It is critically important to recognize that if the waiver had been granted, and ethanol not used in California, refiners would have to replace 11% of the state’s gasoline supply with other petroleum products. MathPro 5 estimated the cost of production of California Phase 2 gasoline oxygenated with MTBE, and California Phase

3 gasoline with ethanol and no oxygenate. The analysis was set in a timeframe that

allowed substantial capital investment to optimize the refineries for the type of gasoline being produced. MathPro concluded that the cost of gasoline produced with

ethanol could be slightly more or slightly less than the cost of non-oxygenated gasoline. Gasoline cost will increase whether ethanol is used or not because the environmental specification for Phase 3 gasoline is more difficult to meet than the specification for Phase 2 gasoline. In fact, an important conclusion in the MathPro analysis

is that without ethanol, refiners would have to import a substantial quantity of finished California RFG to satisfy demand. Such an outside reliance on a large quantity of gasoline supply would certainly put California gasoline prices in jeopardy.

Approximately 90% of the MTBE currently used in California is imported. The decision to deny the oxygen waiver request, and to create such a significant market

for ethanol in the state will encourage significant oxygenate production in the state

over time. The California Energy Commission estimates that as much as 400 million

gallons of ethanol can be produced from agricultural waste products in the state,

including rice straw. As noted by the Institute for Local Self-Reliance, ‘‘the President’s decision may well spur California to develop a homegrown transportation fuel

industry based on its well-known leadership in the biotechnology and bioengineering

fields.’’

In sum, denying the California waiver request was the right decision for air quality, farm economies and California consumers. It will preserve the air quality benefits of oxygenates, extend California’s fuel supply and reduce gasoline prices, and

encourage the development of a California bio-based renewable ethanol industry.

ETHANOL CAN MEET THE CALIFORNIA DEMAND

As noted above, the U.S. ethanol industry has a current production capacity of

2.1 billion gallons. But the industry is growing at a record pace. In anticipation of

the California market, 34 existing ethanol plants are undergoing expansion and

eleven new plants are under construction. As a result, the ethanol industry expects

to have an additional 300 million gallons of production capacity on line by the end

of this year. But there are numerous additional ethanol plants planned and awaiting financing. The denial of the California waiver will allow many of those plants

to move forward.

The RFA is currently working with the California Energy Commission on a comprehensive survey of the ethanol industry to evaluate potential production capacity.

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Finally, while the 90% of the MTBE used in California is now imported via vessel

only, ethanol will be moved to California by both vessel and rail, providing a greater

degree of flexibility to refiners. Moreover, because only half as much ethanol will

be needed to meet the oxygen content requirement, only half as many vessels would

be needed for ethanol. Refiners plan to utilize the existing MTBE transportation

and storage infrastructure and to upgrade their rail unloading capabilities. There

will be ample ethanol available at an acceptable price in California.

CONCLUSION

The problems causing chronic price volatility in the nation’s gasoline market are

systemic, and will not be resolved quickly or easily. In many cases, refiners must

be convinced to put aside ‘‘profit maximizing strategies’’ and act in the consumers’ interest. First, refinery production capacity must be increased significantly. Second,

inventories of refined products must be increased to accommodate unanticipated disruptions in production or distribution, averting short-term supply shortages. Third,

the ability of the states to create unique regional fuel specifications must be limited.

Federal RFG should become the only clean fuel program allowed, eliminating the

so-called boutique fuels and promoting increased fungibility. Finally, Congress

should adopt the Hagel/Johnson renewable fuels standard in an aggressive national

energy policy that promotes the increased production and use of ethanol and biodiesel to extend gasoline supplies and reduce consumer gasoline costs.

Thank you.

The CHAIRMAN. I can see that is a new opportunity for the bumper sticker industry.

[Laughter.]

The CHAIRMAN. Mr. Keese, William J. Keese, who is the chairman of the California Energy Commission, we very much appreciate you coming and testifying at the hearing as well. Why don’t

you go right ahead.

STATEMENT OF WILLIAM J. KEESE, CHAIRMAN, CALIFORNIA

ENERGY COMMISSION

Mr. KEESE. Thank you, Mr. Chairman, Senator Fitzgerald. California faces the most intractable air pollution problem in the Nation, and as you are aware, significant energy challenges, too. Over

90 percent of all Californians live in areas that do not meet State

or Federal air quality standards established to protect public

health. In addition, California faces a very delicate balance between existing refining capacity and growing consumption of petroleum products. As you have heard, we have our own RFG. It is the

single most effective tool to combat summertime smog in California. It provides 50 percent greater NOX reductions than Federal

standards, so it is with extreme disappointment that we learned

that the US EPA decided to deny California’s request for a waiver

from the Federal oxygen requirement.

The information provided by the California Air Resources Board

provides ample evidence that granting a waiver will reduce both

oxidates of nitrogen and toxic emissions, and that the impact of increases in carbon monoxide on ozone will be more than compensated for by reductions in volatile organic compounds. I believe

that is what we have heard from EPA today.

Granting the waiver will clearly assist California in reducing

ozone levels and attaining the Federal ambient air quality standard. Furthermore, CARB’s analysis shows that a waiver would result in lower emissions of toxic air pollutants, and a decrease in

fine particulate pollution. Unless we reverse EPA’s denial of California’s request, it will result in higher levels of ozone and particulate pollution and greater exposure to toxic air pollutants.

111

Now I would like to discuss briefly some of our economic consequences that have been hit on by other speakers. California consumers will pay at least an additional $450 million per year for

gasoline, in addition to the air and water quality penalties we take

because of the denial of the waiver. Increased probability of supply

disruptions and resulting price spikes will equate to even greater

cost impacts for California consumers, due to the loss of flexibility

associated with the denial of a waiver.

According to the analysis by my staff, a temporary of shortage

of ethanol during the year 2003 could result in price spikes of up

to 50 cents per gallon for periods like to exist for 3 to 4 weeks. The

cost to California from such a spike would be another $660 million.

If California refiners are unable to obtain adequate supplies of

ethanol, or experience problems with specialized refinery equipment that is needed to create the different type of gasoline to blend

with ethanol, refiners will be unable to switch to another oxygenate, and not be allowed to produce nonoxygenated gasoline.

We have had a bad experience, I should say I guess we are having a bad experience with a shortage of an energy commodity in

California today. With EPA’s inaction on our waiver, we are headed

towards dependence on another singular energy commodity.

Finally, the real challenge in avoiding supply disruptions and

price spikes will be a reliable delivery infrastructure for ethanol to

ensure adequate deliveries, both where it is needed and when it is

needed. It is clear that the vast majority of the ethanol will come

from the Midwest, where the distribution to either coast will be, at

best, complex and difficult.

Locally, no analysis has shown that California can be self-sufficient in ethanol production at a reasonable cost. Regionally, there

are many questions about the availability of tank cars and the marine vessels needed to transport the volumes needed for California.

I would like to give a brief discussion here on the proliferation

of fuel specifications, or boutique fuels. A national fuel standard

would create a gasoline that could be sold in any market in the

country. Various regions in the United States have experience dramatic price spikes for a period of time when supplies of fuel were

temporarily constrained.

One of the reasons that prices increase so quickly is because fuel

suppliers from adjacent markets could not be used to cover the

shortfall. Instead, adequate supplies had to be obtained from more

distant locations. A national fuel standard would ensure that this

situation was not repeated. If California reformulated gas specifications were adopted throughout the Nation, air quality benefits

would be maintained and actually increased.

We know that this approach would come at a cost to refiners and

consumers. It is also likely that refinery capacity would decline because some refiners will be unwilling to make the necessary investments, or be unable to obtain the financing to modify their facilities. Decreased refinery capacity, coupled with increasing fuel demand, would require additional imports of finished gasoline and

blending components. Foreign sources of these types of refined

products are currently not readily available, and can be expensive.

Finally, if other regions of the country eliminate the use of

MTBE, or an ethanol mandate is legislated for all gasoline in the

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Nation, supplies of ethanol could be inadequate. California alone

will require up to 50 percent of current U.S. ethanol capacity.

These additional demands for other uses will cause ethanol prices

to be even higher, increase the probability that supplies of ethanol

will be inadequate, and cause fuel prices to rise.

In conclusion, now is the time to establish a transportation fuel

policy that will preserve and enhance the environmental and public

health advancements we have made, while protecting consumers

from unreasonable price volatility and fuel shortages. Providing

California a waiver from the Federal oxygenate requirement would

provide the flexibility to meet our mutual environmental and public

health mandates without sacrificing consumers to shortages of supply and outrageous costs. Establishing a national fuel specification

could expand these benefits to all consumers, regardless of where

they live.

I appreciate this opportunity, and I have submitted my formal

comments for the record. Thank you.

[The prepared statement of Mr. Keese follows:]

PREPARED STATEMENT OF WILLIAM J. KEESE, CHAIRMAN,

CALIFORNIA ENERGY COMMISSION

INTRODUCTION

Mr. Chairman and members of the Committee, thank you for the opportunity to

testify today before the United State’s Senate Committee on Energy and Natural

Resources regarding these important issues.

During my presentation, I ask that the Committee keep in mind that California

faces the most intractable air pollution problems in the nation and energy challenges. Over 90 percent of all Californians live in areas that do not meet state or

federal air quality standards established to protect public health. In addition, California faces a very delicate balance between existing refining capacity and growing

consumption of petroleum products. This Congress is in a unique position to establish policy relating to motor vehicle fuels that would help to ensure that California,

and other areas in the nation not meeting air quality standards, can achieve clean

air.

Today, I will focus largely on the recent denial by the U.S. EPA of California’s

request for a waiver from the federal oxygenate mandate and the significant negative consequences this action will have on California’s gasoline refining and marketing industries and air quality.

BACKGROUND

Before I start, I want to provide some background.

• California consumes about 15 billion gallons of gasoline per year or about a

truck and trailer load every 20 seconds. This is about 11 percent of the total

amount of gasoline consumed in the United States. By 2003, demand is expected to increase to 15.8 billion gallons.

• California has its own reformulated gasoline (RFG) program. This program provides about 50 percent more reduction in vehicle emissions of oxides of nitrogen,

about 10 percent more reduction in toxics emission and about the same VOC

emission reduction as the federal RFG program.

• To obtain these benefits, Californians pay, on average, a little more than 5 cents

per gallon for their gasoline compared to federal reformulated gasoline. For this

price, ozone-forming emissions from motor vehicles are reduced by about 15 percent and risks from toxics emitted by vehicles are reduced by 40 percent. No

other program can provide these types of emission reductions in the near term.

• Since the implementation of the California reformulated gasoline program in

1996, the population in the South Coast has increased by over 10 percent while

the number of days exceeding the federal air quality standard for ozone has

been reduce by nearly 50 percent. While there have been other emission reduction programs during this time, the California reformulated gasoline program

was one of the most significant.

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• Refiners have been able to supply California Reformulated Gasoline (CaRFG)

at the volumes needed and at an acceptable cost because of the flexibility built

into the California program. • Just as important, California’s fuel program has allowed vehicle manufacturers

to design pollution control technologies that meet California’s aggressive vehicle

emission requirements. This would not be possible without the quality of gasoline supplied in California. Vehicle manufacturers have repeatedly testified to

this at numerous meetings in California.

OXYGEN REQUIREMENTS IN GASOLINE

Because of federal law, about 70 percent of the gasoline sold in California is required to contain an oxygenate. By 2003, this requirement will expand to 80 percent

of the State’s gasoline. As is the case for most federal RFG, most California RFG

produced for use in areas subject to the federal oxygenate requirements use methyl

tertiary-butyl ether (MTBE) as the oxygenate. In areas of California where gasoline

is only subject to California RFG requirements, refiners are free to market gasoline

without MTBE with no loss in air quality benefits. In the San Francisco Bay Area,

a non-federal RFG area, more than 50 percent of the gasoline marketed is oxygenate

free.

As is the case for most federal RFG, California RFG is produced today using

MTBE to supply the oxygen required by the federal oxygen mandate for RFG. However, MTBE use has resulted in ground water contamination. MTBE, with its unpleasant taste and odor characteristics, can render ground water unsuitable for

drinking. In California, a number of drinking water wells, most notably in the Lake

Tahoe and Santa Monica areas, have been closed because of MTBE contamination;

similar conditions exist in the Northeast.

In response to these concerns, Governor Davis took action to eliminate the use

of MTBE in California gasoline. Governor Davis also requested a waiver from the

federal oxygen requirement to facilitate this phase-out and to gain additional air

quality benefits from our California RFG program. Without a waiver, MTBE cannot

be phased out until the necessary refinery modifications; blending infrastructure

and supplies of ethanol are in place.

ENVIRONMENTAL CONSEQUENCES OF DENYING THE WAIVER

It is with extreme disappointment that we learned that the U.S. EPA decided to

deny California’s request for a waiver from the federal oxygen requirement. The

emissions benefits of a waiver have been fully demonstrated in materials submitted

to the U.S. EPA. Furthermore, additional supporting materials were provided in numerous meetings and phone conferences over the more than two years that U. S.

EPA has considered California’s waiver request.

The information provided by the California Air Resources Board (CARB) provides

ample evidence that granting a waiver will reduce both oxides of nitrogen and toxics

emissions, and that the impact of increases in carbon monoxide (CO) on ozone will

be more than compensated for by reductions in volatile organic compounds (VOC).

Granting the waiver will clearly assist California in reducing ozone levels and attaining the federal ambient air quality standard. Furthermore, CARB’s analysis

shows that a waiver would result in lower emissions of toxic air pollutants from gasoline combustion and evaporation and a decrease in the nitrate portion of fine particulate pollution (PM10). Finally, CARB’s analysis shows that even with a waiver,

the wintertime oxygen requirement in the Los Angeles area would be maintained,

thereby preventing CO increases and ensuring reductions needed to attain and

maintain that standard.

Numerous independent investigators have undertaken studies to assess the need

for oxygenates in gasoline. These investigations include a University of California

study; the U.S. EPA Blue Ribbon Panel on the use of oxygenates in gasoline, and

a National Academy of Science study. Overall, these groups found that the use of

oxygenates bears little benefit in improving ozone levels. They also found that the

use of oxygenates is not needed to preserve the benefits of California’s RFG Program. A NESCAUM study concluded the same for the northeastern states. Thomas

Skinner, Director of the Illinois Environmental Protection Agency, was quoted in the

Chicago Tribune as saying, ‘‘From a strictly environmental standpoint, ethanol is a

wash.’’ In CARB’s submittals to U.S. EPA on this topic, the agency made a very

strong technical case for California RFG without the oxygenate requirement.

In summary, CARB disagrees with U.S. EPA’s conclusion that the effect of a waiver on VOC emissions is uncertain, and that California has not made a satisfactory

demonstration that the waiver would result in an overall reduction in the emissions

of ozone forming pollutants from the California vehicle fleet. California state law reVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00117 Fmt 6601 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
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quires that the adoption of the California Phase 3 reformulated gasoline regulations

not result in an increase in emissions. The only uncertainty is how large the benefit

for California will be; not whether there will be a benefit. Unless reversed, U.S.

EPA’s denial of California’s request will result in higher levels of ozone and PM10

and greater exposure to toxic air pollutants. And, unfortunately, it will deny refiners

the opportunity to immediately replace MTBE with an oxygen-free gasoline, creating even a greater risk for California’s water supply to be contaminated with MTBE.

ECONOMIC CONSEQUENCES OF DENYING THE WAIVER

Now I will discuss some of the economic consequences of denying California an

oxygenate waiver. California consumers will pay at least an additional $450 million per year for gasoline, in addition to the air and water quality improvement opportunities lost because of the denial of the waiver. These opportunities will be lost because refiners

lose flexibility in their production of RFG and must use ethanol in every gallon of

gasoline sold throughout most areas of California.

Increased probability of supply disruptions and resulting price spikes will equate

to even greater cost impacts for California consumers due to the loss of flexibility

to refiners associated with the denial of the waiver. Our distribution system will require refiners to use ethanol in virtually every gallon of gasoline sold throughout

the State. If California refiners are unable to obtain adequate supplies of ethanol

or experience problems with specialized refinery equipment that is needed to create

the different type of gasoline that is blended with ethanol, then refiners will be unable to switch to another oxygenate and not be allowed to produce non-oxygenated

gasoline. Also, the need to use ethanol limits the blendstocks that can be used to

produce complying gasoline. Today, with non-oxygenated RFG, the main criteria for

acceptable blendstocks are low sulfur content. With the mandated use of ethanol,

acceptable blendstocks will have to have both low volatility and low sulfur content.

This further reduces refiners’ flexibility and increases the likelihood for shortages

of oxygenated gasoline, thereby increasing cost to the consumer.

According to analyses by my staff at the California Energy Commission, a temporary shortage of ethanol could result in price spikes of up to 50 cents per gallon

for periods of 3 to 4 weeks. By 2003, a 50 cent price spike lasting four weeks will

cost California consumers an additional $660 million. California has experienced a

number of price spikes over the last several years ranging from 10 to 50 cents per

gallon. These price spikes were attributed to a tightening of gasoline supplies due

to major unplanned refinery outages.

Even these impacts are probably underestimated because they don’t consider what

will happen if both California and the northeastern states need ethanol. The increased demand on the ethanol supply would nearly double from a minimum of 715

million gallons per year for the California market to over 1.3 billion gallons of ethanol per year for the national market.

Finally, the real challenge in avoiding supply disruptions and price spikes will be

a reliable delivery infrastructure for ethanol, to ensure adequate deliveries, both

where it is needed and when it is needed. It is clear that the vast majority of this

ethanol will have to come from the Midwest where the distribution to either coast

will be, at best, complex and difficult. Locally, no analysis has shown that California

can be self-sufficient in ethanol production at a reasonable cost. Regionally, there

are many questions about the availability of railroad tank cars and the marine vessels needed to transport the volumes needed for California and the Northeast.

We are hopeful that U.S. EPA will reconsider its denial of the California waiver

and we are committed to continue working with the U.S. EPA to address any technical concerns it may have.

PROLIFERATION OF FUEL FORMULATIONS

I will now briefly comment on the national situation, where the number of gasoline formulations is contributing to supply distribution problems and price volatility.

I believe it is in the nation’s interest to minimize the number of fuel formulations.

This facilitates the distribution of gasoline and makes production more efficient as

long as it is done in a manner that preserves the emission benefits of the specialized

blends.

Examination of the gasoline formulations currently being marketed indicates that

the dominant formulations are federal RFG, California RFG, and a mixture of others. Outside of the federal and California RFG areas, in addition to the national sulfur standard of 30 parts per million, appropriate uniform standards could be established for volatility, benzene content, and a drivability index (a function of the temperatures at which certain fractions of the gasoline evaporates). A correctly estabVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00118 Fmt 6601 Sfmt 6621 75-190 SENERGY2 PsN: SENERGY2
115

lished drivability index would result in vehicle performance improving and emissions being reduced.

These four specifications together could provide a gasoline that would preserve

the environmental benefits that various states have established outside of the RFG

areas and provide gasoline that would meet the minimum needs of the automotive

industry for the foreseeable future. Although this approach would decrease some of

the distribution issues that arise, the three different types of gasoline in use under

this scenario would still not be completely interchangeable across all the markets.

A national fuel standard would create a gasoline that could be sold in any market

of the country. Various regions of the United States have experienced dramatic price

spikes during periods of time when supplies of fuel were temporarily constrained.

One of the reasons that prices increased so quickly is because fuel supplies from

adjacent markets could not be used to cover the shortfall. Instead, adequate supplies

had to be obtained from more distant locations. A national fuel standard would ensure that this situation was not repeated. If California RFG specifications were

adopted throughout the nation, air quality benefits would be maintained and actually increased.

Both approaches would come at a cost to refiners and consumers. It is also likely

that refinery capacity would decline because some refiners will be unwilling to make

the necessary investments or unable to obtain the financing to modify their facilities. Decreased refinery capacity, coupled with increasing fuel demand would require additional imports of finished gasoline and blending components. Foreign

sources of these types of refined products are currently not readily available and can

be expensive.

Finally, if other regions of the country eliminate the use of MTBE or an ethanol

mandate is legislated for all gasoline in the nation, supplies of ethanol could be inadequate. California alone will require up to 50 percent of current U.S. ethanol capacity. These additional demands for other uses will cause ethanol prices to be even

higher, increase the probability that supplies of ethanol will be inadequate and

cause fuel prices to rise.

CONCLUSION

In conclusion, now is the time to establish a transportation fuel policy that will

preserve and enhance the environmental and public health advancements we have

made while protecting consumers from unreasonable price volatility and fuel shortages. Providing California a waiver from the Federal oxygenate requirement would

provide the flexibility to meet our mutual environmental and public health mandates without sacrificing consumers to shortages in supply and outrageous costs. Establishing a national fuel specification could expand these benefits to all consumers

regardless of where they live. I appreciate the opportunity to appear before you

today.

The CHAIRMAN. Thank you very much. Let me thank all of you

on this panel. Let me ask just a very few questions, and then ask

if Senator Fitzgerald has some questions. Mr. Segal, as I understand your testimony, it is in disagreement with Mr. Keese on

some of the issues, particularly on supply and difficulties in doing

the necessary transportation.

Mr. SEGAL. I am shocked.

The CHAIRMAN. Could you just give us your view? We seem to

have a real difference of opinion here as to whether or not we are

going to see supply problems and price increases as a result of the

decisions to eliminate MTBE and deny the waiver on the oxygenate

requirement.

Mr. SEGAL. Yes, sir. I am in the uncomfortable position of having

to disagree with the Renewable Fuels Association, but I will try

and do my best. Essentially, there are 300,000 barrels a day of

MTBE consumed, but because MTBE is clean octane, it allows another 100,000—its footprint in the fuel pool is actually about

400,000 a day.

Now, of that amount, we supply all of California, we supply all

of the Northeast, we supply all of the Midwest south of St. Louis.

They have the upper Midwest. So you have to believe, and Senator

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Fitzgerald, you have to believe that capacity that is barely adequate to satisfy the Upper Midwest is suddenly going to magically

appear in all corners of the Nation in adequate amounts to supply

the market. Let me tell you why that is not going to happen.

Your question, Mr. Chairman, was exactly right regarding transportation by pipeline. What happens is, if you blend ethanol into

gasoline and then place that resulting mix, which is what we are

talking about here, into a gasoline pipeline, it dewaters and evaporates. It cannot be used, pipeline transportation cannot be effectively used.

One of the most efficient ways of transporting ethanol, that was

described by Mr. Dinneen, is actually barge traffic, which does, indeed, flow through the Midwest. Somewhat problematic, however,

is the fact that the Upper Mississippi is frozen for 4 months of the

year. It is not an adequate approach to try and get this ethanol fuel

supply to market.

Further, Mr. Dinneen’s own statement shows you just how difficult it would be to conform the market. He is exactly right, there

is some MTBE that comes in from Saudi Arabia, and despite the

fact that section 211 of the Clean Air Act allows open competition

between MTBE and ethanol, ethanol from the relatively close Midwest cannot compete even with MTBE from around the world.

Now, this is not because of some kind of cabal, or allergic reaction to ethanol. It is because it cannot compete on a cost-effective

and availability basis, and most MTBE, Mr. Chairman, is, of

course, a domestic resource. In fact, the State of New Mexico, as

you probably know, is the number 3 source in the United States

of natural gas liquids, which is the primary feedstock for the production of MTBE.

So we would definitely call MTBE an important domestic resource of the United States that is easy to transport, cost-effective,

and is the cleanest part of RFG. Any alternative formulation of

RFG is made cleaner by the addition of MTBE, and on the transportation side, there is no way that you could possibly believe that

there would be sufficient capacity expansion for ethanol, nor could

you overcome the transportation or logistical needs to get it to the

markets in the four corners of the United States.

The CHAIRMAN. Let me ask if Mr. Keese has any comment, and

then I will give Mr. Dinneen an opportunity to respond to the

salacious—— [Laughter.]

Mr. KEESE. Senator Bingaman, I would like to mention that I

served on Governor Davis’ MTBE task force. We made the difficult

decision that we had to ban it. We set a time line of the end of

2002, January 2003, and we set that time line as an aggressive

timetable when we could possibly do it. We immediately applied to

EPA for a waiver, as you have heard, 2 years ago, because we

needed an immediate decision if we were going to make our aggressive timetable of the end of 2002.

We cannot afford to develop a parallel delivery system for product in California. We are going to have one delivery system, and

what we see here is that we are being totally tied into one fuel

method. We like ethanol. We believe ethanol use in California is

the only way we will meet our octane requirements over the next

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few years, but if we are tied to just that one fuel, and converting

our whole system over to that one fuel, we do not know how in the

world we can make it by the end of 2002.

The CHAIRMAN. In light of the decision by EPA to deny your

waiver, are you going to revisit the date on which California will

ban MTBE? It would seem to make a lot of sense, based on what

you just said.

Mr. SEGAL. We are researching all alternatives at this time.

The CHAIRMAN. Mr. Dinneen, did you have any comment?

Mr. DINNEEN. Oh, one or two, Mr. Chairman. Mr. Segal is a

friend, and a worthy advocate for MTBE, and a worthy adversary

for us. He is not, however, an expert on ethanol supply and logistics.

The fact of the matter is, ethanol has no problem getting product

out of the Midwest 12 months of the year. The time when ethanol

demand is greatest is in the winter months, when we have got to

supply places like Anchorage, Alaska, Denver, Colorado, and Missoula, Montana, that require ethanol for carbon monoxide programs. We have never, ever missed a shipment or created any kind

of a supply disruption.

His comments about the price-competitiveness of MTBE versus

ethanol are interesting, but maybe a little bit misleading. The fact

of the matter is, petroleum companies produce MTBE, the petroleum feedstocks, but when looked at from a gallon basis, the cost

of MTBE today is about $1.65 per gallon. The cost of ethanol on

that basis is between 90 and $1, and you only need half as much

of it, again, in order to meet the oxygen requirements.

You can take a look at prices today in certain markets and make

some comparisons for yourself. In Los Angeles, which is an MTBE

reformulated gasoline market, the price of reformulated gasoline is

$1.97. In Chicago today, an ethanol RFG, it is $1.76. Interestingly,

and I hope the State of California is keeping track of this, the highest priced gasoline in the country today is in San Francisco, which

has no oxygen. Their price today is about $2.13.

Now, there are a lot of factors that go into gasoline pricing, there

is no question about that, but when looked at in terms of relative

oxygenate economics, I think they do tell an interesting tale.

The CHAIRMAN. I believe Mr. Segal was anxious to make a comment, if you wanted to make a comment, then Senator Fitzgerald

has a question.

Mr. SEGAL. Just one brief point. I wanted to agree with something Bob just said, which is that it does take half the volume of

ethanol to achieve the same amount of oxygen that you would have

in MTBE. Sir, that is a vice, not a virtue. Let me explain why.

Ethanol has 40 percent—because it has more oxygen in it—yes,

it has more oxygen in ethanol, which is also why ethanol has 40

percent of the Btu content of MTBE, so even if you could supply

an equivalent amount of ethanol, or enough ethanol to satisfy the

California oxygen requirement, you still lost volume, significant

amounts of volume of gasoline.

And remember, as Ms. Fisher said, there are several reasons

why there is an oxygenate standard. Part of it is to make sure

there is oxygen in the fuel for combustion purposes, control of

VOC’s, but part of it is to make sure there is adequate energy supVerDate 11-MAY-2000 15:04 Sep 20, 2001 Jkt 000000 PO 00000 Frm 00121 Fmt 6601 Sfmt 6602 75-190 SENERGY2 PsN: SENERGY2
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ply, so even if Bob is correct, it only takes, quote, half as much,

you had better come up with the additional percentage volume that

is lost.

The CHAIRMAN. Let me let Senator Fitzgerald ask his question.

Senator FITZGERALD. Well, I would like to ask Mr. Keese, following up along the line that Mr. Segal was talking about, if you are

not using ethanol and you ban MTBE, you are going to have to

make up that volume, and I think even the California Energy Commission, their own report concluded that a complete ban on all

oxygenates would result in the greatest average cost increase of

gasoline.

So I mean, does California not recognize that it would be a problem if you were to lose the 11 percent of your volume that you are

now getting from MTBE and even, say, 5 percent additional volume

that you are getting from ethanol? That would drive up your cost,

would it not?

Mr. KEESE. Clearly, we recognize that that is a problem. As we

heard earlier, we have 13 refineries in California. Most of them are

landlocked. There is an inability to expand them for that reason

and for air reasons. There just has not been much talk about expansion.

We will lose the 11 percent if we get ethanol as the sole substitute. We are probably down 5 or 6 percent in supply already, and

that will have to be imported from somewhere to pick up the slack,

so yes, that is one of the reasons that we had hoped that we had

4 years to go and settle this issue.

We wanted to know which path, so we could guide our oil refineries in how to get to the deadline. We have now unfortunately—we

were highly optimistic that we were going to be granted this waiver. As you have heard, the draft suggested we would get this waiver. As you have heard, at the last minute there was some question

about whether commingling this product might cause a problem

somewhere.

That was an issue that during our discussions, I believe, was

considered virtually irrelevant to the discussion. We were talking

about more serious things when EPA’s staff visited Sacramento,

when California’s staff visited EPA. That was not a major issue.

Senator FITZGERALD. If you had been granted that waiver, it

would have driven your gasoline prices even higher, because you

would have had to make up for the lost volume by virtue of the loss

of oxygenate.

Mr. KEESE. Senator, I believe you have indicated familiarity with

our study. Our study indicated that we would use a huge amount

of ethanol in California in the short-term and the next 10 years to

meet the octane demands of the California market, but we would

have had flexibility.

Now, our hands are going to be tied if we choose to go this route

and can only sell gasoline that has ethanol in it, with no option

whatsoever, under any circumstances.

Senator FITZGERALD. Well, eventually, where would you have

gotten your octane when you—say, 10 years from now?

Mr. KEESE. Alcolytes and oxygen—I am sorry, we would not need

oxygen. We would have gotten our octane through alcolytes.

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Senator FITZGERALD. And what can you tell me about that substance? Do we know anything about it?

Mr. KEESE. It is a petroleum product. It requires more refining.

It would have had to be imported in the short term.

Senator FITZGERALD. Mr. Dinneen, would you want to comment

on those alcolytes?

Mr. DINNEEN. Absolutely, Senator. I was going to get to that very

point, because I think it gets back to the comment that Mr. Segal

was making about volume a moment ago.

First of all, I want to just stress the fact that the worst volume

situation is nonoxygenated gasoline. You use 11 percent volume.

That would have the worst impact on volume and price to consumers.

Now, Mr. Segal is right, if you have ethanol, you have still got

a volume gap that you have to make up, and we believe the way

the refiners are contemplating making the adjustment, making the

fuels meet the standards, is by using alcolyte, which is a product

that Mr. Segal’s companies are likely going to begin to make, because units that are currently producing MTBE, MTBE is produced

by reacting ethanol with isobutylene. It can begin producing

alcolyte.

The State of California—the California Energy Commission was

one of the leaders in pulling this together several months ago—had

an ethanol and alcolyte conference, and indeed, the discussion was

that ethanol and alcolyte would make up the volume, and that

there were synergies between the two products in terms of the distillation properties and their octane benefits that made it a great

fit for California.

I mean, I appreciate the fact that the CEC is now thinking that

there is all this uncertainty, but I would suggest that the uncertainty was created by the waiver request that they filed. The ethanol industry was equally confident that the waiver would be denied, and while it was difficult, we have gone on to make sure that

we built the capacity to meet the demand that is going to be created in California, and I am proud of my companies for having

done that, because I am absolutely confident that we will do so.

Senator FITZGERALD. Mr. Keese, do you care to comment whether

California, now that the waiver has been denied, will they continue

the timeline on their ban on MTBE?

Mr. KEESE. We have an active study to reconsider all our options.

Senator FITZGERALD. Why would you reconsider that time line

now? I mean, nothing has changed, no new information has come

out to suggest that MTBE all of a sudden is not a problem for our

drinking water. It clearly is, is it not?

Mr. KEESE. Clearly, we are now being forced into a position—we

had felt that we can deliver a product that meets California, that

meets all Federal standards, and solves both our water and our air

problem. Now we are being forced to juxtapose one against the

other. It is a very unfortunate choice that we have, but we will

have to look at that choice.

Senator FITZGERALD. All right. I appreciate all of you having the

opportunity to testify, and thank you very much. I have no further

questions, Mr. Chairman.

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The CHAIRMAN. I think the testimony has been very useful.

Thank you all again for being here. That is the end of the hearing.

[Whereupon, at 12:30 p.m., the hearing was adjourned.]

[Subsequent to the hearing, the following letter was received for

the record:]

EXXONMOBIL REFINING & SUPPLY COMPANY,

Fairfax, VA, June 29, 2001.

Hon. Jeff Bingaman,

Chairman, Energy and Natural Resources Committee, Hart Senate Office Building,

Washington, DC.

DEAR CHAIRMAN BINGAMAN: We respectfully disagree with the conclusions in Senator Wyden’s recent report and comments regarding the oil industry. In a significant

decision, the California Supreme Court on June 14 ruled 7-0 to dismiss antitrust

allegations against major petroleum refiners operating on the West Coast. The judgment states that there is no evidence of anti-competitive or improper behavior and

cleared the industry of any wrongdoing. The court refuted charges that major oil

companies attempted to drive smaller refiners out of business or that they manipulated supplies of CARB gasoline.

This judgment was based on extensive discovery, including a review of over

500,000 documents. The allegations repeated in the Senator’s report were considered and rejected by the court. We consider this ruling to be comprehensive and definitive.

In addition, earlier this year the FTC voted 4-0 to close a three-year investigation

of West Coast gasoline marketing practices after finding that oil companies did in

fact follow all antitrust laws in marketing gasoline. These most recent findings join

a lengthy list of past government investigations—at least one every two years since

1973—that have ultimately exonerated major gasoline suppliers.

Allegations that Mobil attempted to illegally influence the CARB market were

also thoroughly considered by the California Supreme Court and rejected. Comments in the Mobil memo refer to the company’s objection to one refiner’s request

for an exemption from an environmental requirement to produce cleaner-burning

fuel. This exemption would have created an unfair playing field, allowing refiners

who had not made the investments necessary to produce cleaner-burning fuels to

sell environmentally unfriendly gasoline in the Los Angeles market, which required

lower-emissions fuels.

ExxonMobil stands by our ethical business practices, and we take strong exception

to Senator Wyden’s allegations of impropriety.

Sincerely,

D.H. DAIGLE,

Director, Americas Region.

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