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FUEL MARKETS: UNSTABLE AT ANY PRICE?

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

APRIL 23, 2002

Serial No. 107–131

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY

AFFAIRS

DOUG OSE, California, Chairman

C.L. ‘‘BUTCH’’ OTTER, Idaho

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, OHIO

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

——— ———

JOHN F. TIERNEY, Massachusetts

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PATSY T. MINK, Hawaii

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

DAN SKOPEC, Staff Director

JONATHAN TOLMAN, Professional Staff Member

ALLISON FREEMAN, Clerk

ELIZABETH MUNDINGER, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on April 23, 2002 .............................................................................. 1

Statement of:

Hutzler, Mary, Acting Administrator, Energy Information Administration; Vicky Bailey, Assistant Secretary for Policy and International

Affairs, Department of Energy; and William Kovacic, General Counsel,

Federal Trade Commission .......................................................................... 9

Montgomery, David, vice president, Charles River Associates; Nicholas

Economides, director, Hart Downstream Energy Services; Gordon

Rausser, professor of economics, University of California at Berkeley;

and A. Blakeman Early, environmental consultant, American Lung

Association ..................................................................................................... 171

Letters, statements, etc., submitted for the record by:

Bailey, Vicky, Assistant Secretary for Policy and International Affairs,

Department of Energy:

Information concerning safe harbors ....................................................... 89

Prepared statement of ............................................................................... 39

Early, A. Blakeman, environmental consultant, American Lung Association, prepared statement of .......................................................................... 236

Economides, Nicholas, director, Hart Downstream Energy Services, prepared statement of ........................................................................................ 197

Hutzler, Mary, Acting Administrator, Energy Information Administration, prepared statement of .......................................................................... 12

Kovacic, William, General Counsel, Federal Trade Commission:

Letter dated May 6, 2002 ......................................................................... 167

List of players ............................................................................................ 98

Prepared statement of ............................................................................... 53

Montgomery, David, vice president, Charles River Associates, prepared

statement of ................................................................................................... 174

Ose, Hon. Doug, a Representative in Congress from the State of California, prepared statement of ........................................................................... 4

Rausser, Gordon, professor of economics, University of California at

Berkeley, prepared statement of .................................................................. 207

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, letter dated April 23, 2002 .................................................... 66

(1)

FUEL MARKETS: UNSTABLE AT ANY PRICE?

TUESDAY, APRIL 23, 2002

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2154, Rayburn House Office Building, Hon. Doug Ose (chairman of

the subcommittee) presiding.

Present: Representatives Ose, Shays, Tierney, Kucinich, and

Waxman (ex officio).

Staff present: Dan Skopec, staff director; Barbara Kahlow, deputy staff director; Jonathan Tolman, professional staff member;

Yier Shi, press secretary; Allison Freeman, clerk; Elizabeth

Mundinger and Alexandra Teitz, minority counsels; and Jean Gosa,

minority assistant clerk.

Mr. OSE. Good afternoon. I welcome you to today’s meeting of the

Energy Policy, Natural Resources and Regulatory Affairs Subcommittee of the Government Reform Committee.

We have two panels today of witnesses. The way we’re going to

proceed is that I’m going to make an opening statement, any other

Members who are here by the time I finish are going to be allowed

to enter an opening statement, and, to the extent they arrive after

I’m finished and they have opening statements, we will enter them

into the record. Each of the committee members is allowed to do

that.

Each of the witnesses has submitted written testimony to the

committee. We’ve reviewed that testimony on both panels of all

witnesses.

Each of the witnesses is going to be provided 5 minutes to summarize their testimony, and then we will go to questions. If there

are no other Members here, we will just have question after question after question from me. If there are other Members, we will

rotate back and forth, Democrat, Republican, Democrat, Republican, etc.

Today, we find ourselves in a unique set of circumstances. Across

the way in the other body, we find the Senate considering the energy bill, and I’m glad to see that the other body is coordinating

its schedule with ours.

Over the last several weeks, gasoline prices have risen more than

25 cents per gallon; and that makes this an extremely timely issue.

Recent years have seen dramatic price increases in gasoline during

each spring as demand increases and refiners switch from winter

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to summer formulations to meet environmental regulations. The

double combination has typically led to general increases in prices

nationwide as well as regional price spikes.

Last June, this subcommittee held a similar hearing to today’s

as gasoline prices soared and consumers in some areas of the country were paying more than $2 a gallon for regular unleaded gasoline. Although prices have yet to get that high this year, our gasoline markets still face all the challenges that they did a year ago.

To paraphrase a former President from my home State of California, ‘‘Ladies and gentlemen, here we go again.’’ Recent unrest in the Middle East and labor protests in Venezuela have increased uncertainty over the supply of crude oil. The

cost of crude directly affects the cost of refined gasoline products.

Imports account for 60 percent of our crude oil that we process.

While the United States imports oil from a variety of countries, the

bulk of the oil imports come from a small number of oil-exporting

countries. Interestingly, both Venezuela and Iraq are among the

top five oil exporters to the United States.

However, it isn’t just the crude oil markets that are affecting the

price of gasoline. Our own domestic refining industry is struggling

to meet consumer demands as well as comply with an array of complex Federal and State regulatory requirements. An example of

such complexity was reported in the Wall Street Journal on April

4th of this year, when the main terminal for Phillips Petroleum in

Phoenix literally ran out of the gas. It got so bad that several filling stations in the Phoenix area also ran out of gas.

One of the problems plaguing the refining industry in recent

years has been the balkanization of the gasoline market. Twenty

years ago, the Nation was essentially a single market for gasoline.

Today, the Nation has been cut up, balkanized, if you will, into dozens of tiny boutique markets with their own specialized blends of

gasoline, all done pursuant to Federal statute. As the Phoenix situation shows, when there’s a supply problem, prices can go up— imagine that—or worse, areas can literally run out of gas.

If these problems weren’t enough, future gasoline markets may

become even less stable as refiners deal with the effects of phasing

out the fuel additive MTBE and replacing it with ethanol. Under

the Clean Air Act, refiners selling gasoline in areas with severe air

pollution are required by legislative mandate to add oxygenated

fuel additives to the gasoline. Currently, two additives, MTBE and

ethanol, constitute nearly all of the oxygenates added to fuel.

You’d think that those of us in Congress since 1990 would want

to solve the problem that was created in the 1990 Clean Air Act.

However, across the building in the other body today, the Senate

is considering Senator Daschle’s energy bill, S. 517, which would

only make the problem worse. Senator Daschle’s bill would ban the

use of MTBE outright and replace it with a new national mandate

requiring the use of 5 billion gallons of ethanol.

Unfortunately, MTBE does have serious environmental side effects, most notably the pollution of groundwater. We need to resolve these environmental challenges with science, not mandates.

If you actually examine the record and the facts, you’ll find most

of the MTBE pollution stems from leaky storage tanks and leaky

transmission lines.

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The Federal Government should set the environmental goals that

we want out of our automobiles, what is it that comes out of the

tailpipe, to achieve the clean air, or the clean water, or clean soil

that we desire and then allow science the flexibility to achieve

these clean air goals or clean water goals as science finds acceptable, rather than by a legislative mandate. It’s the only way to get

to the most cost-effective, scientifically sound solution.

The Federal Government should literally not be in the business

of micromanaging what goes into our gas tanks. Senator Daschle’s

bill, unfortunately, will ensure that we face higher gasoline prices

and less stable markets in the future.

According to the independent Energy Information Administration

[EIA], the provisions of the Senate energy bill banning MTBE and

requiring a renewable fuel standard will increase the average cost

of reformulated gasoline by between 9 and 10.5 cents per gallon.

So everybody here, get ready. When you fill up, you’re going to be

paying between 9 and 10.5 cents per gallon more due to Senator

Daschle’s ethanol requirement than you are today.

EIA estimates that the provisions will result in higher annual costs to consumers nationwide of $6.37 billion a year. That’s the

low number, by the way, because there are other industry experts

who predict the cost will be higher, approaching $8.4 billion a year.

If either prediction is accurate—well, let’s say if either prediction

is halfway accurate—it’s an expensive proposition. As the late Senator Everett Dirksen put it, ‘‘A billion here, a billion there, and

pretty soon you’re talking real money.’’ In short, unstable crude oil supply, tight refining capacity, a dizzying array of Federal and State clean air requirements, and,

frankly, counter-productive currently-being-considered Senate legislation all lead us to question whether or not our gasoline market

is stable at any price.

I want to welcome our witnesses today. I look forward to your

testimony. I have, in fact, read it; that probably comes as a surprise, but I have read it.

I want to welcome, on our first panel, the Acting Administrator

for the Energy Information Administration, Ms. Mary Hutzler; and

the Assistant Secretary for Policy and International Affairs at the

Department of Energy, Ms. Vicky Bailey; and the General Counsel

for the Federal Trade Commission, Mr. William Kovacic.

Ladies, gentlemen, thank you for coming. We’re going to recognize Mr. Shays for the purpose of an opening statement.

[The prepared statement of Hon. Doug Ose follows:]

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Mr. SHAYS. No opening statement, Mr. Chairman, but just really

delighted you are having this hearing. It’s very important. Delighted that you have the witnesses you have, and I’m happy to be

here. Thank you.

Mr. OSE. We welcome the gentleman.

As is the custom with this committee, we swear our witnesses in.

We’ll do it on the second panel, too, so you’re not getting special

treatment here. If you’d all rise and raise your right hands.

[Witnesses sworn.]

Mr. OSE. Let the record show that the witnesses answered in the

affirmative.

Ms. Hutzler, we’re going to recognize you first for a period of 5

minutes to summarize your testimony. You’re on.

STATEMENTS OF MARY HUTZLER, ACTING ADMINISTRATOR,

ENERGY INFORMATION ADMINISTRATION; VICKY BAILEY,

ASSISTANT SECRETARY FOR POLICY AND INTERNATIONAL

AFFAIRS, DEPARTMENT OF ENERGY; AND WILLIAM

KOVACIC, GENERAL COUNSEL, FEDERAL TRADE COMMISSION

Ms. HUTZLER. Mr. Chairman, I appreciate the opportunity to appear before you today to discuss the current situation in and the

outlook for U.S. gasoline markets.

The gasoline outlook depends on assumptions about certain key

factors, including worldwide economic growth, the extent of OPEC

supply restriction and non-OPEC supply response and the implications of these factors for world oil balances and crude oil prices.

Economic growth in the United States, while improving, is expected to be relatively modest this year, up a projected 1.6 percent,

with more robust overall growth likely in 2003.

Oil demand growth in the United States is expected to be minimal this year, while global demand is expected to begin recovering,

rising 600,000 barrels per day. This level of demand, coupled with

the cutbacks in production initiated by OPEC, which between December 2000, and today have amounted to approximately 4 million

barrels per day, is expected to move industrialized country oil

stocks toward the lower end of the average range later this year,

as shown in this chart. This change in oil stocks is expected to result in rising crude oil prices in 2002 and into 2003.

World oil prices rose on average by about $4 per barrel in March

from February levels, as the benchmark West Texas intermediate

crude oil price rose to an average of $24.50 per barrel. West Texas

intermediate prices are projected to rise to the high 20’s per barrel

by the end of 2002, even assuming that production from OPEC will

increase from current levels. Uncertainty about overall world oil

market conditions, rising tensions in the Middle East and political

turmoil in Venezuela pushed prices to levels above $27 per barrel

briefly in early April.

However, if OPEC does not increase production during the second half of this year, world oil markets could witness a repeat of

2000 when prices rose sharply during the second half of the year

before large production increases eased price pressures.

For the upcoming summer season, rising average crude oil costs

are expected to yield above-average seasonal gasoline price inVerDate 11-MAY-2000 11:14 Dec 13, 2002 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\82633.TXT HGOVREF1 PsN: HGOVREF1
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creases at the pump. However, pump prices are expected to range

below last year’s averages, assuming no unanticipated disruptions.

Inventories are at higher levels than last year in April, providing

a cushion against early season price spikes.

Regular grade retail gasoline prices are expected to average

$1.46 per gallon, 5 percent lower than last summer’s average of

$1.54 per gallon. However, based on the aggregate uncertainties involved in forecasting the world crude oil market and the domestic

refining distribution system, prices could average 11 to 13 cents

per gallon higher or lower than the baseline forecast during the upcoming driving season.

The projected average summer gasoline price, when adjusted for

inflation, is well below the record reached during the summer of

1980, about $2.65 per gallon in 2001 dollars. Gasoline demand is

projected to average 8.88 million barrels per day, a new record, up

140,000 barrels per day or 1.6 percent from last summer. The

growth comes amid the gradual acceleration of the U.S. economy

out of the 2001 economic slowdown. This summer’s expected

growth rate is almost double last year’s rate of 0.9 percent.

Motor gasoline stocks were about 17 million barrels above last

year at the end of March. All Petroleum Administration for Defense

Districts had higher levels of stocks than last year, and only the

Midwest was slightly lower than the historical average as of the

end of March.

Total domestic gasoline output is projected to average 8.29 million barrels per day during the summer months, about 115,000 barrels per day above last summer. Higher U.S. output and the greater availability of product in storage at the outset of the season are

expected to displace net imports of gasoline. Net imports are projected to be 560,000 barrels per day, down 100,000 barrels per day

from those of last summer.

It is important to note that we have always experienced spring

gasoline price run-ups. However, they now are appearing more frequently, with larger increases and in a compressed period of time.

Part of the reason for the increased volatility can be traced to declining stock levels. Over the last 10 years, there has been a clear

downward trend in the level of gasoline inventories. This trend is

exacerbated when it is compared to demand levels that have been

increasing. Thus, U.S. gasoline inventory levels cover far fewer

days of consumption than they did 10 years ago. With lower inventory levels, there’s a reduced ability to quickly increase supply

when demand increases unexpectedly or when supplies are impacted either by distribution problems or decreased refinery production.

Spring price run-ups have also occurred following winters with

tight distillate fuel markets resulting in refiners maximizing distillate fuel production at the expense of gasoline. Also, refiners

typically increase their refinery throughput in the spring as they

increase gasoline production and buildup inventories, resulting in

increased demand for crude oil, which leads to pressure on crude

oil markets. At times this has coincided with decreases in crude oil

production, leading to sharp crude oil price increases that eventually lead to higher gasoline prices.

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Mr. OSE. Ms. Hutzler, you’ve used your 5 minutes. I would appreciate your summary. I’m going to give you 30 seconds to summarize.

Ms. HUTZLER. I wanted to mention that there were two more factors in price run-ups. One is the transition from winter grade to

summer grade gasoline. The other is the impact that crude oil

prices have on gasoline prices. They represent about 40 percent of

the gasoline price, and, therefore, they’re also a factor.

I thank you.

Mr. OSE. I appreciate it. Thank you, Ms. Hutzler.

[The prepared statement of Ms. Hutzler follows:]

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Mr. OSE. Our next witness, again, is the Assistant Secretary for

Policy and International Affairs with the Department of Energy,

Ms. Vicky Bailey.

Ms. Bailey, you are recognized for 5 minutes.

Ms. BAILEY. Good afternoon, Mr. Chairman. I am happy to appear before you today to discuss gasoline prices and the complex

factors contributing to our current supply and price situation. I

would also like to provide some information for your committee on

what the administration is doing to address the situation and to assure you that the administration is eager to work with Congress

to ensure stable and affordable energy supplies for American consumers and the U.S. economy.

You have just heard testimony and some technical analysis from

Mary Hutzler of the EIA on gasoline prices, international markets,

and domestic factors that impact gasoline prices. I would like to address some of the broader policy aspects of the international and

domestic market.

There are a number of factors affecting gasoline prices and supplies in the United States with both domestic and international

roots. No. 1 is the price of crude oil on the world market. Global

supply and demand dictate the crude oil price for every consuming

nation. In the United States, our economy is rebounding. Demand

for gasoline is increasing as we approach the summer driving season, and refiners are making the transition from winter to summer

quality gasoline, helping to contribute to upward pressure on

prices.

Countering this trend, product inventories are rising, and refining production is increasing.

The NEP was prepared to address our long-term energy needs.

It presents a balanced approach to assuring secure and affordable

energy supplies to our citizens and our economy. It is comprehensive in addressing energy conservation, energy production, and environmental protection.

The administration is actively involved in the international situation in many ways. We are working to diversify our foreign

sources of energy such as in the Caspian region and Azerbaijan.

I attended the inauguration of the Caspian Pipeline Consortium

pipeline that took place in Russia last November. This new pipe

will bring crude oil directly from landlocked Kazakhstan to the

Black Sea and then to world oil markets. We also are pleased that

the Baku-Tbilisi-Ceyhan pipeline is moving ahead to supply an additional 1 million barrels per day of oil to global markets by early

2005.

We are increasing cooperation in our hemisphere through the

North American Energy Working Group with Canada and Mexico,

which is reviewing ways to further integrate the North American

energy market. The Secretary of Energy with his Canadian counterpart will lead the dialog at the G–8 Energy Ministers’ meeting

in Detroit next month.

A number of domestic actions are following the recommendations

of the national energy policy. The Clean Air Act’s New Source Review program is being reviewed in an interagency process with considerable public comment. The review will be completed in the near

future. President Bush has directed us to fill the Strategic PetroVerDate 11-MAY-2000 11:14 Dec 13, 2002 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 C:\DOCS\82633.TXT HGOVREF1 PsN: HGOVREF1
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leum Reserve to its full capacity of 700 million barrels, and we

have begun to do so. Since January, we have added 11.4 million

barrels of oil. As we did last year, the Department has set up a 24-

hour gasoline hotline for consumers, a 1–800 number for consumers

concerned about gasoline prices.

In addition, the Secretary of Energy has asked EIA to publish a

daily energy situation analysis report to monitor world events that

could disrupt supplies, and DOE will continue to collect data and

monitor the gasoline market.

We will also need additional actions to assure adequate and dependable energy supplies at affordable prices and use energy more

wisely. We need to improve efficiency and develop new transportation technologies. The National Energy Policy aims to optimize

energy efficiency and conservation to effectively manage and extend

the use of our energy resources while also enhancing our standard

of living and advancing our environmental objectives.

The Department is working to implement our long-term vision of

both a dramatic reduction in our dependence on petroleum and a

dramatic reduction of vehicle emissions through the development

and deployment of hydrogen fuel cells in the Freedom Car program.

The administration supports significant tax incentives to reduce

the price of highly efficient electric and gas hybrid vehicles now

coming to market. We support increased use of biofuels. We need

increased domestic energy production, including environmentally

sensitive production using the best available technology in the Arctic National Wildlife Refuge.

Finally, I’d like to address MTBE. The MTBE issue creates a

challenge for public policy: the inherent need to balance energy

supply and price concerns with resolution of environmental concerns for air quality and water quality.

MTBE has played a significant role in improving air quality in

areas impacted by transportation emissions and provides important

quality and volume benefits for our gasoline supply. However, detection of MTBE in our water supply has raised public concerns. To

limit the risks of future price spikes, we must provide certainty to

the market and industry to make the investments needed to continue to provide us with sufficient quantities of clean product to

power the U.S. economy.

The Department of Energy remains concerned about our current

and longer-term energy supply situation. While we fully support

the various clean fuel requirements that are necessary to protect

our environment, we believe that it is important that any government action be implemented in a way that provides the regulatory

certainty to encourage the necessary investments to protect our

citizens from price spikes. We are eager to work with Congress to

get our Nation’s energy house in order so that we have adequate,

clean, safe supplies of petroleum at reasonable cost to consumers.

This concludes my testimony, Mr. Chairman, and I would be glad

to respond to any questions you may have.

Mr. OSE. Thank you, Ms. Bailey.

[The prepared statement of Ms. Bailey follows:]

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Mr. OSE. Our third witness on the first panel is the General

Counsel for the Federal Trade Commission, Mr. William Kovacic.

Thank you for joining us. You’re recognized for 5 minutes.

Mr. KOVACIC. Thank you, Mr. Chairman. I’m grateful to the committee for the opportunity to appear at today’s hearing.

The written statement I have submitted represents the views of

the Federal Trade Commission, and my comments today and my

answers to your questions are my views and not necessarily those

of the Commission or its members.

The FTC’s experience in enforcing the Nation’s antitrust laws

and performing competition policy research confirms this committee’s view that the performance of the petroleum industry is a matter of special importance in our economy. Since Congress created

the FTC in 1914, no sector has commanded greater attention from

the Commission.

Today I will summarize three points from the Commission’s written statement. First, I will describe the FTC’s recent competition

policy activities involving the petroleum industry. Second, I will review forces that our work to date has identified as factors that may

affect the price of the petroleum products. And, finally, I will address future measures that the FTC intends to take to increase our

understanding of pricing patterns to preserve competition and to

protect consumers of petroleum products.

Let me begin with recent FTC activities concerning competition

policy in the sector.

The Commission’s work in recent years falls into three categories: reviewing mergers, non-merger investigations, and research. Perhaps the most prominent of these initiatives is merger

review. The Commission scrutinizes mergers to challenge transactions that appear likely to reduce competition. Two recent matters are illustrative.

The first is the merger of Chevron and Texaco. In December

2001, the FTC agreed to a consent order with these companies, requiring numerous divestiture of refining transportation and retailing assets to maintain competition in various areas of the country,

particularly in the southern and western United States.

The second transaction is the merger of Valero Energy and

Ultramar Diamond Shamrock. These firms are leading refiners and

marketers of CARB gasoline. In February of this year, the FTC accepted a consent order requiring Valero to divest assets in California, including an Ultramar refinery in Avon and retailing assets in

northern California.

Our second major area of recent activity consists of investigations into possible non-merger antitrust violations. A major example was our inquiry into pricing behavior in the midwestern United

States in the summer of 2000. This inquiry did not identify evidence of collusion or other antitrust violations. Nonetheless, the investigation did increase the Commission’s understanding of phenomena that cause periodic price increases.

The third activity is research. One major example of our work in

this area took place last August when the FTC held a 1-day conference on gasoline pricing patterns. The conference stimulated an

informative discussion of possible causes of pricing volatility in this

sector.

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Let me turn to some preliminary lessons from the Commission’s

work about factors that influence prices. Taken together, our work

has improved our understanding of what causes periodic dramatic

price increases. We have learned that pricing spikes result from a

complex interaction and phenomenon. The factors include the following: increases in crude oil prices, refinery production problems

such as breakdowns, pipeline disruptions, low inventories and the

unavailability of substitutes for certain gasoline formulations required by environmental statutes, and regulations. In many respects, this list mirrors the factors that this committee’s hearings

of roughly a year ago identified.

Let me finish by turning to what we see as the next steps for

the Commission in this field.

The first element of our work will be to continue our scrutiny of

structural developments that influence the number of market participants, especially mergers.

The second will be to sustain our efforts to increase understanding of the causes of pricing behavior in this sector. On May 8th and

9th we will hold a second public conference that extends the work

we did in August with a further examination of petroleum pricing

patterns.

And, third, we are monitoring wholesale and retail prices of gasoline in many areas of the United States. This project will assist us

in identifying unusual pricing patterns, diagnosing causes, and devising cures for any antitrust problems we observe.

To sum up, energy sector and petroleum industry practices have

been the centerpiece of modern FTC enforcement actions. There is

every reason to expect they will remain a central focus of our work

in the future. Thank you.

Mr. OSE. Thank you, Mr. Kovacic.

[The prepared statement of Mr. Kovacic follows:]

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Mr. OSE. Now we’re going to go 5-minute rounds here. I’m going

to start, and then we’re going to go to Mr. Waxman and back to

Mr. Shays until we exhaust the questions that the Members have.

Ms. Hutzler, in your testimony you have an extensive discussion

about the effect that the Senate’s ethanol mandate would have on

gasoline prices, and there is, frankly, a laundry list of assumptions,

and reference cases, and provisos, and caveats, and all that. I’m

sure that makes sense to economists, but, frankly, when you talk

about reference cases and I talk about reference cases, there is a

divergence. I talk about the reference case of what does it cost me

to go into the gasoline station today and fill my tank, compared—

in that context, I want to ask you this specific question: compared

to today, what effect would the ethanol requirement in Senator

Daschle’s bill have on gasoline prices?

Ms. HUTZLER. We looked at a number of different scenarios, one

of which looks at an MTBE ban with a renewable fuel standard.

If we take a look at that scenario in S. 1766, where we looked at

100 percent MTBE ban, we found that reformulated gasoline prices

could be 9 to 10.5 cents higher than today where there is no MTBE

ban. That would make average prices about 4 cents a gallon higher.

If you looked at S. 517, which allows waivers within States, and

if States chose their waivers so that they could still produce about

13 percent of MTBE in their gasoline, which was what we were

asked by Senators Daschle and Murkowski to analyze, we would

see RFG prices 7.5 to 8 cents per gallon higher than today and average prices about 3 cents per gallon higher.

Now, if you did not look at an MTBE ban but you had a renewable fuel standard, we’d find that prices would increase far less,

less than 1 cent per gallon for RFG and less than a half a cent per

gallon for average gasoline.

Mr. OSE. So if you left the decision as to how to meet the mission

issue to science under the renewable fuel standard, you’d have

roughly a 1 cent increase in the price at the retail pump, versus

a 3 or up to 10 cent increase with the ethanol mandate under the

two cases you’ve cited?

Ms. HUTZLER. Well, the cases deal with whether you’re banning

MTBE and must use other products to blend your gasoline—mostly, that would be ethanol today—or whether you’re looking at a renewable fuel standard.

A renewable fuel standard by itself without banning MTBE gives

refiners flexibility to use the renewable fuels in all forms of gasoline, not just to ban MTBE and to use it in RFG.

Mr. OSE. And that translates to a 1 cent increase?

Ms. HUTZLER. Yes.

Mr. OSE. OK.

Ms. HUTZLER. For reformulated gasoline.

Mr. OSE. Mr. Kovacic, in your testimony, you talk about concentration in the refining industry; and, frankly, we all are concerned about that. It’s my understanding that there’s actually an

index that somebody has cooked up to calculate how concentrated

any industry is, and it’s called—and if I get this wrong, I need to

be corrected—the Hirschman-Herfindahl Index.

Mr. KOVACIC. That’s it exactly.

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Mr. OSE. Does the FTC have guidelines for how much scrutiny

an industry receives based on how concentrated it is per the

Hirschman-Herfindahl Index?

Mr. KOVACIC. The FTC and the Department of Justice have

merger guidelines that rely on that index as one factor for evaluating the competitive effects of mergers.

Mr. OSE. It’s my understanding that an index reading of less

than 1,000 means that FTC’s concerns are, frankly, nonexistent;

that a reading between 1,000 and 1,800 means that FTC will at

least look at it but other factors must be considered; and then a

reading over 1,800, FTC is going to apply careful scrutiny.

Mr. KOVACIC. That’s a good summary.

Mr. OSE. Now how concentrated is the refining industry today?

Mr. KOVACIC. Basically, when we examine refining industry concentration, we do that on a geographic basis. The amount of concentration typically varies from geographic area to geographic area.

So the answer would depend crucially on what part of the country

we’re examining.

Mr. OSE. Well, let’s look at the petroleum defense district 1, 2

and 3. According to my records, the index has a reading of 586 for

those three.

Mr. KOVACIC. I’m not certain what the precise numbers are. I

know that in several of our principal merger reviews in those

areas, we have seen, in examining specific transactions, levels of

concentration well above the 1,800 level which defines the zone of

our most serious concern.

Mr. OSE. But the nationwide average—you’re talking about a regional market.

Mr. KOVACIC. Precisely, and many of the mergers we’ve looked

at have involved markets that for antitrust purposes are generally

regional rather than nationwide.

Mr. OSE. All right. My time is expired. I’m going to recognize the

gentleman from California, the ranking member on the full committee, Mr. Waxman, for 5 minutes.

Mr. WAXMAN. Thank you very much, Mr. Chairman; and I want

to thank you for holding this hearing. I commend you for your

opening statement. I share your concerns about the fact that our

own domestic refining industry is struggling to meet consumer demands as well as comply with an array of complex Federal, State

regulatory requirements. In addition, I agree with you that we

have Balkanization of fuel and that we have possible shortages and

higher prices as a result of the effect of trying to deal with this

MTBE replacement.

Is it the position of the administration that you support the

Daschle bill that’s being considered in the Senate?

Mr. OSE. I think your question is directed at Ms. Bailey?

Mr. WAXMAN. Yes. You’re representing the administration here?

Ms. BAILEY. Yes. Yes. Now you can hear me. Our position——

Mr. WAXMAN. Yes or no, because I wanted to say some other

things in the time that I have. If the answer is yes, say yes; if it’s

not, say no.

Ms. BAILEY. We support the reformulated fuels package that is

in the bill.

Mr. WAXMAN. In Senator Daschle’s bill.

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Well, let me say that I agree with the chairman that we should

have solved this problem in a very different way, and it seems to

me that last year the Bush administration made a decision which

was going to cost Californians dearly. Faced with over 10,000

MTBE contaminated sites in California, Governor Davis decided in

1999 to phaseout the use of this terribly polluting fuel additive. To

facilitate this phaseout, the State of California requested a waiver

of the Federal oxygenate requirements for reformulated gasoline.

This waiver would have allowed the State to maintain the cleanest fuel standards in the country while shielding California consumers from gasoline price shocks. Without the waiver California’s

air quality and economy would suffer as massive amounts of ethanol were needlessly imported to comply with the oxygenate requirements.

Now, EPA’s technical staff examined the facts, and they found

that a waiver was warranted. Unfortunately, the White House reversed EPA’s decision after meeting with special interests. As a result of the Bush administration’s decision, the Governor has had to

delay the ban on MTBE to avoid dramatic price increases at the

pump. This means California groundwater will continue to face the

threat of contamination and California consumers and refiners will

continue to face massive uncertainties.

The President’s decision is truly remarkable, because it appears

to be bad for consumers, bad for the environment and bad for California’s refining industry. So who benefits from this decision? Well,

it’s been widely reported that the ethanol industry lobbied against

the California waiver, and I know the ethanol industry is very

much with the administration and Senator Daschle in the bill

that’s now pending.

Other special interests may have played a role in the administration’s decision. Lobbying disclosure documents and press reports

provide evidence that companies involved in the MTBE industry,

such as Enron, also lobbied against the California waiver. Enron

and other MTBE companies took the cynical approach that, without the California waiver, California would have to delay their

MTBE ban; and, sadly, they’ve turned out to be right.

To better understand the extent to which Enron or other companies in the MTBE industry influenced the decision, I’ve written to

Vice President Cheney, the Department of Energy, the U.S. EPA,

and OMB Director Mitch Daniels, and I’m going to ask unanimous

consent that my letters be attached to my statement today as part

of the record.

Mr. OSE. Without objection.

[The information referred to follows:]

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Mr. WAXMAN. I expect a considerable discussion in this hearing

today and especially from the next panel, regarding the legislation

the Senate has designed to ban MTBE and replace it with a renewable fuels standard. I’m hoping we’ll hear from others in this hearing on this legislation.

We should be taking a thoughtful approach to this legislation to

assure that we don’t create new problems in trying to solve existing

ones. Ultimately, decisions about our fuel supply need to be made

based on the best science; and I noted, Mr. Chairman, you made

that point very, very clear in your opening statement.

Our goal should be clear: Minimize air pollution, reduce dependence on foreign oil, and keep costs down. Good science can help us

achieve these goals.

What the California delegation did on a bipartisan basis was

urge that we not have an ethanol requirement, an oxygenated requirement, an MTBE requirement, that we be allowed to have a reformulated gasoline that would achieve the environmental goals. If

California had been allowed to do that, we wouldn’t have to be worried about the price hikes in gasoline and the shortages that we

may face and all of the other pollution problems and contamination

problems resulting from the extended use of MTBE longer than it

should be permitted.

So I thank you, Mr. Chairman, for holding this hearing and giving everyone an opportunity to air this issue out, because I think

it’s an important one.

Mr. OSE. I thank the gentleman.

The gentleman from Connecticut.

Mr. SHAYS. Thank the Chairman. Again, thank you for holding

these hearings.

I am representing part of the Northeast. We see a very volatile

cost of gasoline; and it, in my own mind, is based on the points

made in the second to last paragraph of our chairman: the unstable

crude oil supply, tight refining capacity, and dizzying arrays of

Federal and State clean air requirements in particular.

But the one thing that happens is we still have the supply. The

price changes, but we have a supply. People don’t have a shortage

of supply in the sense that when they go, they can get what they

need, but it costs more at certain times of the year.

What I’m interested in understanding is, it’s my understanding—

and I want to be corrected if it’s not true—that we have different

blends, obviously, during different times of the year. Is that correct? Nodding of heads doesn’t get recorded.

Ms. HUTZLER. Yes. It’s correct.

Mr. SHAYS. And what I then want to understand is, I have been

told that when we go from one blend to another, we actually have

to have the tanks empty out before we start the new blend. It

seems to me that just encourages a shortage of supply and I wonder why we don’t allow it to be a blend on a blend. In other words,

they put in the new mixture and over time the new mixture becomes the dominant mixture. Why isn’t that allowed?

In other words, I don’t understand—maybe I’m inaccurate and

maybe someone else can answer this question, but I don’t understand why we empty a tank, because it just guarantees that you’re

87

going to have shortages. You have to use it all up. Why can’t you

just start a new blend?

Ms. HUTZLER. Well, the problem with blending the two together

is that you would no longer meet the requirement. So there are

specific requirements that have to be met—— Mr. SHAYS. But is there something magical at a certain point at

a certain date that says you have to go from one absolute blend to

another? Why can’t it become a graduated change from one blend

to another? I don’t understand it.

Ms. BAILEY. If I can possibly jump in here for a little bit, I’m

wading into an area that I’m not that familiar with from my own

personal background. But from the understanding that these transitions happen winter to summer, I think the transition period happens sometime between mid-April through about the end of June,

and then of course you have that blend through the summer. Now,

these different blends are State, region required, and I think

they—— Mr. SHAYS. I know. They may be required, but does it make

sense?

Ms. BAILEY. From my reading and what I know, it seems to

make sense to that locality and that region and according to EPA

requirements—— Mr. SHAYS. Ma’am, I understand the requirements. We’re trying

to—excuse me, Ms. Bailey. I’m sorry. Ms. Bailey, I understand, I

think I understand the requirements. What I don’t understand is

why we haven’t tried to find a way to address it. There’s nothing

magical about a particular date that all of a sudden you go from

one blend to another, and all I’m asking is—and if you don’t have

the expertise to answer or don’t know the answer, that’s another

issue. I just need to understand why there’s something magical

about one blend from another and why we have to empty one.

If you told me that one blend counteracts the other and it creates

some incredible cocktail that we don’t want, that’s another issue.

Ms. BAILEY. I——

Mr. SHAYS. If that’s the issue, then that would be the answer,

but that would be the only answer that would justify it.

Ms. BAILEY. I was trying to share the knowledge that I did have,

but I understand that the blends, of course, have to do with the

needs of the region as well as the volatility of the fuel, considering

it’s summer versus, for instance, winter.

Mr. SHAYS. How many different blends do we have?

Ms. BAILEY. I think at one point there may have been, like, 15

or so, possibly.

Mr. SHAYS. Fifteen different—so that means you have to have 15

different tanks devoted to that.

Ms. BAILEY. I don’t know that means you have to have different

tanks. I think the issue is the refineries—the capacity of the refineries, where the refineries are located. I’m from the Midwest. I

know they use ethanol because of the abundance of corn and refineries in that region are able to produce the needed blends. If their

blend stocks have to come from the Gulf of Mexico, Gulf Coast

area, and it has to go to California, obviously, there are other costs

and premiums required because of that.

Mr. OSE. The gentleman from Massachusetts for 5 minutes.

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Mr. TIERNEY. Thank you, Mr. Chairman.

I thank the witnesses for being with us today.

I certainly don’t profess to be an expert on this, so I hope you’ll

bear with me a little bit.

Just look at this whole idea about additives. Would you all agree

that it appears at least that additives do cause groundwater or

drinking water to be unsafe to a certain degree, particularly the

MTBE? Is there agreement generally about that?

Ms. BAILEY. I guess that’s what the science has found, that there

has been—I guess from leakage—some problems.

Mr. TIERNEY. And nobody is generally contesting that? There’s

nobody claiming that’s not the case, am I right?

Mr. KOVACIC. At the FTC we haven’t done any work in the area.

I’m certainly aware of the work especially that the committee did

a year ago where there was extensive testimony on the point.

Ms. BAILEY. From my information on it, I just know that detection of MTBE in our water supply has raised public concern. So

I’m——

Mr. TIERNEY. I raised that, because I looked at the provision in

the Senate language that would provide a shield for the oil industry from liability for producing the gasoline that poses a threat to

clean water or safe drinking water, and it doesn’t make sense to

me that if we have a very limited number of additives that we can

use and some people are eliminating one of those additives and

that now we’re telling people that they can produce another additive or whatever that pollutes or poses a threat and they won’t be

held responsible or accountable for it if they do. What does that do

in terms of basically giving people no incentive at all to produce

any kind of an additive that will, in fact, be good or beneficial and

certainly at least not harmful to our clean water and our safe

drinking water?

Ms. BAILEY. If I may answer.

Mr. TIERNEY. Please.

Ms. BAILEY. Again, I’m not sure who you’re directing——

Mr. TIERNEY. Anybody. Because it doesn’t make any sense to me,

and I’m wondering if somebody can lend some—— Ms. BAILEY. As I have said in my comments and in my statement, the MTBE issue creates a challenge for public policy. The inherent need to balance the energy supply, price concerns, as you’ve

mentioned, the resolution of environmental concerns that EPA is

concerned about, air quality, water quality in the different locations. All we have to go on is our analysis. We have recent EIA

analysis that shows that the restriction on the use of MTBE could

impact gasoline supply and increase prices. So what the administration is hoping to do is try and balance those issues and come forward with a solution.

We are aware that there are States—California I know is going

to ban the use of MTBE, I believe, in 2004. There are other time

lines for other phase outs of MTBE through State actions.

Mr. TIERNEY. I don’t mean to be rude, but we have limited time.

What’s the policy basis behind saying that if you get rid of MTBE,

whatever else you use, no matter how bad it is, you won’t be held

liable? I mean, what’s the administration’s position on that? And

explain to me how that makes any sense at all how there would

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be a provision that allows the oil industry to just walk away from

liability, that does not encourage them, in fact, to have some substitute that, in fact, it protects or at least doesn’t injure.

Ms. BAILEY. From what I know, the balance in the bill and the

language in the bill and our support for the use of ethanol, our support for the oxygenates that the different blends—obviously, we

have to take into consideration the issues of the industry; and not

being a part of that negotiation, per se, I’m not quite aware of all

of the particulars of the issue, but from the standpoint we’re trying

to balance the needs of energy security, trying to balance the environment, trying to balance that along with the economy——

Mr. TIERNEY. Well, explain to me any balance at all—you know,

we’re the government. We’re supposed to be protecting citizens. Explain to me the balance where it works to allow the industry to

walk away from liability when they produce something that’s

harmful to our drinking and our water supply.

Ms. BAILEY. Once again, not knowing all of the particulars, I

would recognize surely that EPA also has various restrictions and

detections there, which I’m sure they cannot walk away from. I’m

not, once again, cognizant of all of the particulars of the negotiation.

Mr. TIERNEY. All right. Well, your answer isn’t really satisfactory, but I’m not sure whether that’s because——

Ms. BAILEY. Well, I’ll be glad to get back with you with further

information.

Mr. TIERNEY. Would you? I mean, my question is—and I’d like

some response in writing, if we’re holding this open—what is the

administration’s policy argument behind supporting a provision

that would shield the oil industry from liability when they produce

a gasoline that poses a threat to clean water or our safe drinking

water? And that would be the question. I’d love to have an answer

on that. I really don’t think there is one, but I’m more than willing

to listen.

Thank you. I yield the balance of my time.

Ms. BAILEY. Get back with you. Thank you.

[The information referred to follows:]

The Administration supports a ‘‘safe harbor’’ provision in order to protect the industry from liability for use of a chemical mandated by an action of Congress, in

this case mandated use of ethanol in gasoline. The Administration does not believe

an industry should be held liable for the possible adverse effects of a product that

has been specifically mandated by the Federal Government.

Mr. OSE. The gentleman yields back.

Mr. Kovacic, I want to go back to this issue on the concentration

in the refining industry. I have in front of me an analysis by

Charles River Associates, who Mr. Montgomery on the second

panel works for, that indicates that the concentration in the East—

that would be the Petroleum Administration Defense District 1, 2

and 3 has a rating of 586, keeping in mind the HirschmanHerfindahl Index ratings, that the Petroleum Administration Defense District 4 and 5 has a rating of 955 and that the U.S. total,

the average on a nationwide basis, is 532. Now, I don’t know if

you’ve seen that or not. My question is that you’ve done an investigation on the West Coast having to do with all of the factors that

the FTC considers in determining whether something is conVerDate 11-MAY-2000 11:14 Dec 13, 2002 Jkt 000000 PO 00000 Frm 00093 Fmt 6633 Sfmt 6633 C:\DOCS\82633.TXT HGOVREF1 PsN: HGOVREF1
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centrated or not. What was your determination as it relates to

PADD 5 as to whether or not it was or was not concentrated?

Mr. KOVACIC. To use the Valero transaction as an example of

how regional circumstances can be very important, in the California market Valero and Diamond Shamrock were two of the leading

producers of gasoline blends that are acceptable by CARB standards in California. If we focused on the competitive effect of that

transaction, we found that allowing the merger would pose a serious danger, unless cures were imposed, for the production of CARB

gasoline for the California market.

That’s an instance in which the HHI Index would have been well

above the threshold of concern that confronted us. It’s one example

of an instance in which the broader brush that I suspect the CRA

study is taking would not have picked up a significant competitive

problem within California itself.

Mr. OSE. How you condition that merger accordingly and force

the liquidation of certain assets——

Mr. KOVACIC. Precisely.

Mr. OSE [continuing]. And, in the end, the index rating after the

fact, so to speak, determined by FTC was acceptable?

Mr. KOVACIC. Yes, that’s right; and, in fact, in all of the major

transactions we have examined involving the West Coast market—

and in many respects we’ve used a West Coast analysis or a California analysis—we’ve in fact required divestitures to create competitive conditions that we felt would be acceptable.

Mr. OSE. Now, when you talk about competitive conditions, are

you talking about ratings if 1,000—I mean, the HHI Index standard is a rating of 1,000 or less, the industry is unconcentrated, requiring no competitive review. The HHI Index reading of between

1,000 and 1,800 indicates an industry moderately concentrated and

that other factors must be considered; and an HHI Index greater

than 1,800 indicates an industry that is widely concentrated and

needs careful scrutiny for any mergers.

In your analysis, you said that after the conditions were placed,

you found that the concentration was at an acceptable level. Does

that mean 500 under the index, 800, 999? I mean, where did you

find it?

Mr. KOVACIC. I think the crucial point that you mentioned earlier

is that the numerical thresholds are a starting point, and we consider qualitative factors that bear upon the likelihood that a single

firm will be able to raise prices acting by itself or a collection of

firms, acting at arm’s length or collusively, we’d be able to raise

prices. As a consequence, we tend not to look at a specific numerical threshold as being the decisive criteria. We examine other qualitative factors that would bear upon the acceptability of a specific

transaction as well.

Mr. OSE. We are going to examine this until you tell me whether

we were really close, down around 500, 800? Where were we? Were

there qualitative factors in the West Coast analysis that were required because the HHI index reading was above 1,000?

Mr. KOVACIC. Some of the relevant factors included the possibility that, given the nature of rivalry among firms, whether there

would be continued competition among them. Another factor is the

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possibility that shipments from outside the area would exercise a

constraining influence on the firms.

Mr. OSE. These were precursor considerations, before the fact?

Mr. KOVACIC. That is correct.

Mr. OSE. And after the fact, by virtue of the conditions you

placed, you were able to remove the quantitative analysis below the

1,000 threshold?

Mr. KOVACIC. We have in a number of instances permitted mergers that had a post-divestiture or post-remedy HHI above 1,000, or

even above 1,800, so that our aim is not always to push the postremedy HHI below a specific threshold, say below 1,800 or below

1,000. It is to take account of the quality of competition in the market so that we are assured that the number of firms remaining and

the quality of the firms will ensure a robust competitive interaction, that there won’t be any reduction in the level of competition

beyond that existed before the fact.

Mr. OSE. At the end of the day, relative to PADD 1, you found

the industry not to be overly concentrated?

Mr. KOVACIC. That is correct. With the solution.

Mr. OSE. Market conditions were satisfactory?

Mr. KOVACIC. That is correct. With the solutions that we imposed.

Mr. OSE. My time has expired. I am going to recognize the gentleman from Massachusetts. And he and I may well have a little

conversation here privately.

I thank the gentleman.

Same question on the East Coast. You did an investigation on

the East Coast to determine whether or not the refining industry

was concentrated to the detriment of the marketplace.

What did you find there?

Mr. KOVACIC. When we examined transactions such as Exxon’s

acquisition of Mobil several years ago, there the focus of attention

was—we were convinced that the refining sector, as such, the refining features of the transaction didn’t pose a problem on the East

Coast.

There, the concern to us was retailing and distribution. And, in

that instance, the focus of the solution on the East Coast was a

massive divestiture of retailing assets, terminaling assets, but not

refineries.

Mr. OSE. So you found a way to sustain a competitive marketplace with a qualitative adjustment to whatever assets were held

after the fact by the parties to the transaction?

Mr. KOVACIC. That is correct. Principally by insisting upon retailing and distribution divestitures that placed selected retail stations

and terminals in the hands of a company that would be a robust

alternative to the merging parties.

Mr. OSE. So it is the opinion of the FTC, as it relates to PADD

1 and PADD 5, that it would be the littoral regions of the country

on the East and the West Coasts, that the refining industry is not

overly concentrated?

Mr. KOVACIC. I would say that, subject to solutions that we

would impose in individual transactions, we have not permitted a

merger to go forward without solutions that we felt brought things

to a level that would ensure an adequate level of rivalry.

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Mr. OSE. OK. The reason I ask that question is, I have the same

series of questions as they relate to the ethanol industry. And if

you recall, the Charles River Associates reports, according to the

information that I have, for PADDs 1, 2 and 3, the HHI index averaged 586.

On the West Coast for PADDs 4 and 5, the HHI index was 955.

The U.S. total of the index was 532. Same index, according to the

GAO, the U.S. ethanol industry’s rating under HerfindahlHirschman is 1,866, indicating a highly concentrated industry that

needs careful scrutiny, according to the standards that are in the

index itself.

So I would ask you, how concentrated is the ethanol industry?

Are these numbers accurate?

Mr. KOVACIC. I have seen the GAO study, and I have looked at

their conclusions. I would be interested to know the data on which

they built up the conclusions.

But let’s assume that they have defined what we would call a

sensible, relevant market. And let’s assume for purposes of discussion that it is an airtight analysis. Certainly, if we were thinking

about future mergers, applying our standard of an HHI at or above

1,800 is where we would begin asking very serious questions.

Mr. OSE. So you would have a red flag waving in the air saying,

Federal Trade Commission, look at this, by virtue of this number?

Mr. KOVACIC. We would say that once we have crept into that

zone of concentration in looking at future transactions, these are

the transactions where we would have the greatest concern, and we

would be focusing very carefully on qualitative factors that would

either reinforce the tentative conclusion that we would draw from

the numbers or disprove them.

Mr. OSE. All right. This particular 1,866 rating is for the U.S. industry as a whole?

Mr. KOVACIC. Yes, sir.

Mr. OSE. In terms of a regional situation in California, how concentrated—or for instance, in my friend’s State, Massachusetts,

how concentrated is the ethanol industry?

Mr. KOVACIC. We don’t have a sense of that right now, Mr.

Chairman, and I don’t recall that the GAO study tried to break

things out on a regional level. But if we were to examine this sector

in more detail, that would be precisely the type of question we

would ask, which is, for refineries that consumed ethanol or were

required to use ethanol, what supply sources could they draw from,

how broad a geographic area? In short, who could supply them?

So we would do that kind of analysis on a region-by-region basis.

Mr. OSE. Who is the largest supplier of ethanol in the United

States?

Mr. KOVACIC. ADM.

Mr. OSE. ADM. Archer Daniels Midland?

Mr. KOVACIC. Yes, sir.

Mr. OSE. Has ADM ever been fined or prosecuted for conspiring

with competitors to fix prices?

Mr. KOVACIC. The Department of Justice prosecuted ADM in the

mid-1990’s for fixing prices involving the food additive sector, food

additives used——

Mr. OSE. Lysine?

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Mr. KOVACIC. Lysine for the production of animal feed and, in

some instances, for human food supplements as well.

Mr. OSE. Now, the FTC, as you said, has done several investigations of collusion or price gouging in the refining industry, separate

and apart from the investigation in the food industry.

Does the FTC take into consideration how concentrated the industry is in terms of conducting those investigations?

Mr. KOVACIC. It is an important variable for us. The reason for

that is that the basic economic literature suggests that putting all

other factors aside, it is relatively easier for firms to reach agreement, consensus among them, on a course of action the smaller the

number of industry participants.

Mr. OSE. In terms of conducting these investigations, what sort

of behavior do you look for?

Mr. KOVACIC. We look first of all for a similarity in behavior.

But we also look for a similarity in behavior when we are focusing on collusion, the similarity of behavior that could only be explained if all of the industry participants agreed to take a given

course of action; that is, a similarity of behavior by course of action

that might be commercial suicide for one firm acting alone, but

might make a great deal of sense if everyone joined in the conduct

in question.

Mr. OSE. OK. Thank you for that.

My time is way overdue. I didn’t see Mr. Shays over there, I was

so focused on you. I am going to recognize the gentleman from Connecticut.

Mr. SHAYS. The one thing I don’t want to do is blame someone

for the price increases. I do believe it is an issue of supply and demand. I believe it is an issue of cost of crude, but obviously refining

capacity and so on.

But I was interested to hear our panel—each of you, explain to

me why the price seems to jump so quickly, but then when there

is a significant drop in crude and so on, the prices seem to go down

more slowly.

Why does the spike always seem to be quite significant and sudden, and then the reduction takes so long?

Ms. HUTZLER. In actuality, we believe that on the retail price

side the asymmetry you are talking about may actually be more of

a consumer perception than reality.

We have done a study called ‘‘Price Changes in the Gasoline

Market’’ that tries to track the wholesale costs versus the retail

prices, and, in fact, they do track fairly close. The issue is that

there is a lag from the time that the wholesale price reaches the

retail price. And that lag gives this asymmetry that the public perceives.

Mr. SHAYS. Let me ask you, Ms. Bailey, do you have anything to

add to that?

Ms. BAILEY. Aside from what Mary has said, aside from taxes,

the other factors that contribute to the differences in prices at different times obviously are proximity of supply, as to the areas further from the Gulf Coast, as I was discussing earlier, any kind of

supply disruption, any unplanned refinery outages, that kind of

thing.

Competition in the local market, the local area where the——

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Mr. SHAYS. The question, though, was, why does price seem to

jump so quickly and then gradually decline? And the response was

basically that it seems to track the price of crude oil. And so what

you are saying is, the crude oil goes up quickly and then seems to

fall more gradually?

Ms. BAILEY. The price of crude oil is a huge component of gasoline prices. But in addition to that, the other issues of State taxes

and other issues as they relate to refineries and other components

of what goes into the gasoline prices, operating costs and all of

those were the issues that I was raising.

But crude oil price obviously—any change in that affects the

price of the gasoline possibly, as well.

Mr. SHAYS. Do you have anything to add?

Mr. KOVACIC. Congressman, if I can offer a coming attraction,

one of the focal points of our conference on May 8th and May 9th

at the FTC will be precisely this issue. We have asked several academics to examine whether the perception that you mentioned is

borne out by actual practice.

Mr. SHAYS. When is that going to be?

Mr. KOVACIC. May 8th and May 9th at our headquarters in

Washington.

We are going to be looking at gasoline prices, and several of the

papers we have asked to be presented will examine precisely this

question. I am not certain what the researchers will find. I have

the impression that some of them are perhaps going to take issue

with whether the perception is borne out by actual practice.

But, within a few weeks, we hope to have a fuller perspective

about precisely that question from some who have studied actual

patterns and detail.

Mr. SHAYS. Thank you.

Last year we wrote a letter requesting that the Department of

Energy review the accusations of price manipulations. What was

the outcome of that? Is that something that you are familiar with?

Ms. BAILEY. Well, now, I am not sure when you requested that.

I was in the Midwest myself last year. I joined the administration

in August of last year, and I am not sure if that was during the

time of your request for the report.

Mr. SHAYS. How much of the price increase is—again, using Mr.

Ose’s statement, the unstable crude oil supply and tighter refinery

capacity, and also the challenge of meeting the array of different

requirements? If you broke up the cost component increase, how

much is due to each part of that? Crude oil price, tighter capacity

in the Northeast, tight capacity in the United States, but in the

Northeast, and the various Clean Air requirements.

When you break down that cost, how does it break down?

Ms. HUTZLER. I have it decomposed slightly differently.

In terms of the price of gasoline, 40 percent is generally from the

crude oil price. About 35 percent is from taxes.

Mr. SHAYS. When you say taxes?

Ms. HUTZLER. Yes, Federal, State, local taxes, all of them.

About 6 percent is from distribution and marketing. About 19

percent is from refinery costs. And that also includes the environmental portion.

Mr. SHAYS. OK. Thank you.

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I am happy—my time has run out. Sorry.

Mr. OSE. We thank the gentleman.

Mr. Kovacic, let me go back a minute. You told me the largest

supplier of ethanol in the United States is ADM?

Mr. KOVACIC. Yes, sir.

Mr. OSE. Do you have any feel for what percentage of the overall

market they possess?

Mr. KOVACIC. I would be glad to check on this, But I believe it

is 40 percent plus.

Mr. OSE. OK.

Now, I just asked you, in terms of conducting these investigations into collusion or price gouging, what sort of behavior does the

FTC look for; and you responded.

What kind of evidence or documents does the FTC look for in trying to determine if an industry is colluding?

Mr. KOVACIC. Two types of evidence: one would consist of company records that on their own face actually bear out the fact of

coordination or discussions with competitors.

If we don’t have that kind of evidence, we then tend to look at

what we can observe from outside of the company. And most interesting to us is a pattern in parallel behavior that can be explained

only if, or principally if, there is an agreement where it would be

irrational for the firms to act in a given way unless they were absolutely confident that their rivals were going to do the same. This

involves looking at pricing patterns. We look at input costs.

For example, if a firm’s input costs dropped dramatically, but all

of the firms in the sector decided to increase prices, that could be

provocative.

Mr. OSE. The clerk is going to hand you a binder containing some

documents. The first is document No. 1, titled the ‘‘Western Ethanol Memo on BP Bids,’’ which I presume means British Petroleum.

This document is a memo written by a Mr. Vind from Western Ethanol, which is a California-based ethanol distributor for LAICA,

which is a Costa Rican ethanol supplier that imports ethanol tariff

free under the Caribbean Basin Initiative.

The subject of the memo is an auction to sell ethanol to BP in

Seattle. I would like to direct your attention to the first paragraph

on the second page, to the highlighted section, where it says, ‘‘We

are prepared to stop bidding should the price drop below $1.38 per

gallon.’’

In an industry as concentrated as the ethanol industry, would

such a memo raise concerns for the FTC?

Mr. KOVACIC. Mr. Chairman, if you can give me just a bit of context. This is a memo internal to the company that—is the recipient

another executive within the company?

Mr. OSE. LAICA is a competitor to Western Ethanol. And Mr.

Vind works for Western Ethanol. And Mr. Wolf works for LAICA.

Mr. KOVACIC. So it is a memorandum from one rival to another

rival?

Mr. OSE. From Doug Vind with Western Ethanol to Herbert Wolf

with LAICA, saying, we are going to stop bidding—which is on the

sale to BP—if the price drops below $1.38.

Is that the kind of behavior that the FTC looks for in determining whether or not collusion or gouging is going on?

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Mr. KOVACIC. If you will accept the general caveat that one always would like to see the fuller context. Ordinarily, when one sees

one competitor telling another competitor, ‘‘this is our bidding

strategy; this is how we will bid,’’ that is a very provocative document.

Mr. OSE. Does this qualify as a provocative document?

Mr. KOVACIC. If you will allow me the partial caveat that to

study it in more detail and to know more about the context would

be helpful.

Were I simply reading this in the abstract and I saw one rival

tell another rival, this is my bidding strategy, and this is how I will

bid, I would want to have a very good reason for why that was

said.

Mr. OSE. Well, you can see why I am so interested. On the floor

of the other body, we are debating a proposal by the majority leader of the Senate to, frankly, legislatively embed a monopoly, and

we have got competitors who frankly are communicating with each

other.

And my question of you is, is this a provocative enough statement or document to merit an investigation? And you are telling

me maybe?

Mr. KOVACIC. I would put it at a higher level than maybe.

I would say this is almost invariably the kind of statement that

would invite further inquiry.

Mr. OSE. How many such documents do you need?

Mr. KOVACIC. Quite often it is a single document that sets things

in motion.

Mr. OSE. Allison, give him the second document.

Document No. 2 on the screen is a memo written by Mr. Vind

from Regent International which is the parent company of Western

Ethanol, to a Mr. Bok at ADM. ADM, in this reference, is Archer

Daniels Midland, regarding a bid for ethanol out of France.

The ‘‘Man’’ referred to in the memo is apparently ED&F Man Alcohols, which is an ethanol supplier based in London. If you could

look at the second paragraph, the second sentence, which reads, ‘‘In

order to avoid a ’showdown’ or bidding contest, I agree to this request. Therefore, Man will be bidding on the 75,000 hl out of

France at a price of 5.02’’—I presume that is French francs; it may

be European currency units—‘‘I would suggest that ADM underbid

at a price of 4.85. This will serve as a safety net in the event that

Man’s bid is rejected’’—and it says, ‘‘is rejected for any reason.’’

Given the concentration in the ethanol industry, would such a

memo, indicating apparent cooperation among three ethanol suppliers, be of concern to the FTC?

Mr. KOVACIC. Yes.

Mr. OSE. Give him the third document. I am not running out of

documents, by the way.

Document No. 3 is a second memo from Vind to Bok regarding

another purchase of alcohol from the European Union, ‘‘This will

confirm that ADM will be bidding 5.90 ecu’’—European currency

units—‘‘on Spanish tender, and somewhat less, (say 5.75) on Italian

tender.

‘‘I assume you have discussed with Man, and that all is OK.’’

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Would such a history of cooperation among companies in a concentrated industry concern the FTC?

Mr. KOVACIC. Yes.

Mr. OSE. Would a pattern of such cooperation going back several

years concern the FTC?

Mr. KOVACIC. Yes.

Mr. OSE. Would you like the documents one by one or would you

like them in toto?

Mr. KOVACIC. Any order you like, sir.

Mr. OSE. Allison, give him the binder. We are going to submit

these to you for your consideration. We would be happy to go

through them one by one with you.

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Mr. OSE. We are directly inquiring of the FTC whether or not

these documents constitute a need for an investigation as to the

concentration in the ethanol industry.

The inquiry is timely, and it is justified. We are in the process

of setting legislative policy for the next 20 years having to do with

whether or not to embed in statute a mandate for use of ethanol

in an industry that, at least on its face, is extremely concentrated

and engaged in price collusion or gouging.

Mr. KOVACIC. We will do that.

And could I ask the chairman’s permission, if we find that there

are other government institutions perhaps with more formidable

remedies that might have an interest in the same materials, would

you permit me to pass them along as well?

Mr. OSE. We would welcome that, yes.

Mr. KOVACIC. I would mention, as we were going through the

types of evidence that are helpful, I would also mention that certainly where there is the cooperation of a company insider that has

also been an indispensable ingredient in pursuing inquiries. In the

ADM lysine case that we referred to before, in fact, it was a tip

from a company insider that was a crucial piece of evidence for the

Department of Justice in its inquiry.

Mr. OSE. I do recall the investigation; that was well reported in

the Wall Street Journal and other media. We have no more verbal

questions for this panel. We do have some, and we are going to

leave the record open for submittal of written questions.

We do appreciate your attendance today. The record will be open

for 10 days as it relates to this panel.

Mr. SHAYS. Mr. Chairman, before you dismiss them, I would just

like to comment on the questions that you asked, and just say that

besides being provocative, they are somewhat alarming. And I

would like to know what the response will be.

I would love to know, when you have a chance to look at this information a little bit more, and to inquire when you would be getting back to this committee, so that we could have an assessment

of how you evaluate them.

Mr. KOVACIC. Congressman, I don’t have an immediate prediction. But, the types of materials we have just discussed briefly

are indeed, if not simply provocative, perhaps alarming as well.

Could we perhaps have a day or so to give you a more precise

response?

Mr. SHAYS. If you could give the committee—but I think the committee needs to have some dialog back as to what your impression

is and what you are doing with this information.

Mr. OSE. We will not only share these items, obviously, with Mr.

Kovacic, but we will provide copies to all of the members of the

committee. I know we have some over here. But I will be happy

to provide that.

I want to thank this panel for attending today. I am sorry we

went so long. I apologize for that. We will have written questions

and would appreciate a timely response.

Mr. Kovacic, we will hear from you sooner rather than later?

Mr. KOVACIC. Yes, sir.

Mr. OSE. Thank you all. We will take a 5-minute recess.

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[Recess.]

Mr. OSE. We will call this committee back to order. We are going

to have the second panel join us now.

As you saw in the first panel, we swear in our witnesses, so if

you would all rise, please, and raise your right hands. We are missing someone.

[Witnesses sworn.]

Mr. OSE. Let the record show the witnesses answered in the affirmative.

We have with us today three, soon to be four, panelists for the

second panel. The first is the vice president of Charles River Associates, Mr. David Montgomery. Our next, who will join us shortly,

is the director of Hart Downstream Energy, Mr. Nicholas

Economides. Our third is Gordon Rausser, a professor of economics

from my alma mater; and the fourth is an environmental consultant to the American Lung Association, Mr. A. Blakeman Early.

Gentlemen, welcome. We appreciate your taking the time.

We have received your written statements. They have been reviewed here. I have read them. If you could summarize within 5

minutes, that would certainly expedite things.

Mr. Montgomery, you are recognized for 5 minutes.

STATEMENTS OF DAVID MONTGOMERY, VICE PRESIDENT,

CHARLES RIVER ASSOCIATES; NICHOLAS ECONOMIDES, DIRECTOR, HART DOWNSTREAM ENERGY SERVICES; GORDON

RAUSSER, PROFESSOR OF ECONOMICS, UNIVERSITY OF

CALIFORNIA AT BERKELEY; AND A. BLAKEMAN EARLY, ENVIRONMENTAL CONSULTANT, AMERICAN LUNG ASSOCIATION

Mr. MONTGOMERY. Thank you very much, Mr. Chairman and

members of the subcommittee. I was honored by your invitation to

testify today, and I am very happy to be here. I have a feeling that

anything we say might be anticlimactic, so I will be brief. I would

like to start by summarizing a little bit of the commentary that I

made on crude oil prices.

Crude oil prices have certainly run back up in the last few

months due to a number of factors, including OPEC supply cuts

and international tensions, but they have not reached the levels

they reached even 2 years ago. This has happened before. I think

it does serve as an important reminder of how important energy security is as a policy issue and national concern.

At this point, my assessment is that things could get better, or

better in the short run, and we need to be prepared for that. But

I think maybe the best preparation is realizing in terms of world

oil markets that effects of supply disruptions have always been

temporary. I see no reason to expect that would not be the case

now.

If you could put up figure 1 of my prepared testimony, I just

want to refer briefly to this and be sure that the picture is clear.

It shows the last 13 years of crude oil prices. What is more important is the general shape than anything that you can’t read at this

point on the screen. And what it shows is that prices spiked in the

Gulf war. They have gone up and down, and then very far down.

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They went up quite far. The peak closest to the right, the peak

almost to the far right, is in the year 2000. They dropped to about

$13 a barrel and they have climbed back up.

They have averaged around $20 a barrel for this whole period

and for far further back than that. The price has always returned

to something like $20 a barrel with maybe a 1 percent per year

trend of growth in current prices.

The other thing that I think is most interesting is what we have

plotted here are those little pennants that are blowing to starboard.

They indicate what the futures market was saying at each point in

time. Where they are attached to the flagpole is the date of the future of the recorded prices; and then there are prices looking forward generally 3 to 5 years, and they show the futures market has

always been predicting that prices will come back to $20 a barrel.

It continues to do so, probably a little bit slower than prices have

actually collapsed. And this is something to keep in mind as we

look at world oil markets and high prices. The first one being,

prices certainly have not come back even to the levels we saw 2

years ago, despite horrible tensions in the world markets. And if

the supply disruptions disappear, prices are likely to come back

down again.

Another comment: I don’t think that at this point further price

increases are in the economic interest of Saudi Arabia. It has already cut production to the point where, in my opinion, increasing

its own production by, say, 10 percent would reduce world oil prices

by less than 10 percent; that is, Saudi Arabia has a sufficiently

small market share that it actually would be better off by having

more production than it does today.

I think that implies a growing incentive to raise production. That

also makes me believe that any further tightening of the market

that we might see by OPEC is for political and not economic reasons.

By the same token, reductions in U.S. oil imports would tend to

lower world oil prices with benefits to the United States and to our

allies. And getting back to the point of this hearing, I think policies

that restrict supply or increase demand without corresponding environmental benefits simply make matters worse in the world oil

markets.

I would now like to say a few words about gasoline prices. I

think that was discussed very capably this afternoon, especially by

Mary Hutzler from EIA. Gasoline prices have gone up a bit more

than crude oil, and if we could show my figure 2, it lists some of

the reasons that I think are responsible for that. This is also available at the back of my prepared testimony.

I calculate that the increase in the price of crude oil this year is

responsible for about 21 cents per gallon of cost increase. The price

of gasoline has gone up about 30 cents a gallon; that leaves about

9 cents that is due to the other factors, including the specific tightness of the gasoline market, the turnaround for producing summer

gasoline, the cost of producing reformulated gasoline, which is

higher in the summer than the winter, and probably a couple of

pennies a gallon for royalties that Unocal is demanding on patents

it recently asserted on reformulated gasoline.

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Right now, crude and product inventories are near the top of

their normal range. I think filling those inventories is also an important cause of the higher gasoline prices. As a precaution against

the events on the world oil market, terminals and refineries are

holding higher stocks than we have seen as normal for this time

of year. That has put some upward pressure on current prices, but

it is good thing because it means, in a purely private-market-driven

response, we are better capable of weathering future supply disruptions. That is kind of how the market works when it sees unstable

prices.

In terms of this refining industry itself, I think that you have already discussed many of the points and calculations that I discussed about in my testimony about concentration in the industry.

It is an industry that is a classic commodity industry, petroleum

refining. The history of the last 25 years has been long periods of

depressed profits with very short intervals of profitability in tight

markets. These occasional tight markets are actually all that kept

profits positive in the long run for the industry.

When there is excess capacity, as there has been for much of the

past decade, gasoline prices are set by competitive forces at something close to the cost of just keeping the refinery running—no return on capital. When demand exceeds capacity, there is a genuine

scarcity, and prices rise to the level that it takes to bring demand

down to that level. Reformulated gasoline, requirements that balkanized markets make that even more of a potential problem.

Let me say two words about concentration, and then I will stop.

The first one is that it strikes me that concentration and refining

does not reach levels of concern in the kind of geographic markets

I talked about. I think there are reasons for concern in the ethanol

industry.

I will stop there. Thank you.

[The prepared statement of Mr. Montgomery follows:]

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Mr. OSE. I thank you, Mr. Montgomery.

Mr. Economides, we need to swear you in as we did the other

witnesses. If you would please rise and raise your right hand.

[Witness sworn.]

Mr. OSE. Let the record show that the witness answered in the

affirmative.

Mr. Economides, you are recognized for 5 minutes. We have received your written testimony and we have read it. If you could

summarize, that would be wonderful.

Mr. ECONOMIDES. Great.

Chairman Ose, I want to thank you for this opportunity to appear before you today to address the issues related to our national

fuel markets and the ongoing debate related to gasoline price volatility.

Our country faces significant, ongoing structural problems related to fuel supply and distribution that are likely to cause rapid

gasoline price increases to continue to occur in the future, perhaps

with even greater frequency and at larger magnitude than those

we have experienced so far.

As you said earlier, even today the Senate is debating provisions

of an energy bill that is part of our overall national energy policy

that could drastically alter the composition of our gasoline supply.

There are many variables that, taken together, create an extremely tight U.S. gasoline supply. They include increased reliance

on imported oil, and I think that has been covered sufficiently by

previous panelists. Suffice it to say that we have relied not only on

imported oil, but also on imported product. And this additional imported fuel has helped the United States meet growing demand

without adding significant new refining capacity. However, the

combination of increasingly complex U.S. fuel specifications and the

potential ethanol mandate will likely significantly diminish the

availability of imported refined products.

The second area is the contraction of U.S. refining capacity. Since

1981, the total number of refineries in the United States has fallen

from 324 to only 149. I think this subject has also been covered,

but it is important to also note that without new refining capacity,

the combination of fewer gasoline components and diminishing fuel

imports could result in fairly severe supply shortages and price

spikes in the future.

The proliferation of the variety of gasoline blends has also been

brought up in front of this committee. We have over 16 different

categories of gasoline blends in the United States; even if we assumed that premium and regular unleaded are blended at the

pump to make mid-grade, that means 32 different products are

moving through different parts of our supply system in the country.

We need to start working on getting that down, and we are pleased

to see both API and MPRA recognize that need in recent months.

Environmentally beneficial gasolines have been brought up, especially the seasonal transition to make summer gasoline and what

that entails. There are legitimate reasons why it costs refiners

more to produce summer gasoline. Volatility controls require that

summer gasoline exhibit a lower tendency to evaporate. Lighter

components, such as butanes, that are included in the fuel in the

wintertime must be removed in the summer. This removal of light

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compounds for volatility control is rapidly compounded into additional volume loss as refiners move to rebalance the fuel.

The bottom line is this. While summer gasoline clearly offers superior smog-fighting characteristics, we can make less of it. Nearly

all of the steps required to produce it involve volume reduction. We

normally lose sense of this summer volume loss because we deal

with the issue preferentially in terms of increased refiner production cost. We make the mistake of not recognizing that cost to

produce has very little to do with the actual price rise seen in the

market.

It is the supply shrinkage, real or anticipated, that causes gasoline prices to advance rapidly. Short term refiners do seek the

handsome reward of increased prices by trying to squeeze every

barrel that they can during such periods. That is as it should be.

The problem lies with the long term outlook. After years of excess capacity, low prices, and underperforming assets, refiners are

hesitant to invest in capacity through increases; even though the

excess capacity has vanished, prices are now higher, and a reasonable case for return on investment can be made.

I would like to close with a few comments on 517 and the ethanol

situation. Hart, my company, has long held that ethanol has a role

in our Nation’s gasoline supply, particularly in the Midwest. The

questions that are remaining are, what are the costs associated

with ethanol use and what are the implications on gasoline supply

and price volatility?

As it now stands, the provisions of 517 would mandate the use

of ethanol and ban the use of MTBE, among other fuel composition

changes. We believe that 517 will likely cause gasoline supplies to

shrink significantly, causing more price volatility than the EIA

study predicts. There are three major areas that we want to highlight. The first area involves the proposed ban on MTBE.

MTBE comprises significant volumes in the Nation’s gasoline.

DOE has pointed out that MTBE is the equivalent of 400,000 barrels of gasoline production——

Mr. OSE. Mr. Economides, we are going to give you 40 seconds

to wrap up.

Mr. ECONOMIDES. That will be more than sufficient. Thank you.

The second important area involves the renewable fuel standard.

This is probably a step in the wrong direction as far as the stability

of the Nation’s gasoline supply is concerned. Ethanol does not extend summer gasoline supplies, at least not if one performs the

analysis on the basis of equal environmental performance and constant vehicle miles traveled.

We must also recognize that the reduced volume and added costs

will come in trying to get summer gasoline blended with ethanol

to perform equivalently in areas such as drivability, and to recognize the reduction in its energy content measured in BTU, where

it has at least 2 to 3 percent less energy content than

nonoxygenated gasoline.

Many of these points are conveniently finessed in most ethanol

studies to date. As a result, the estimates we have seen and have

been generated are at the very low end of the range of what can

actually happen in the marketplace.

With that, I will conclude and thank you.

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Mr. OSE. Thank you, Mr. Economides.

[The prepared statement of Mr. Economides follows:]

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Mr. OSE. Dr. Rausser, visiting us from the University of California at Berkeley, you are recognized for 5 minutes.

Mr. RAUSSER. I thank the committee for inviting me to offer an

analysis of the social costs and benefits of MTBE used in gasoline

and its planned ban in the State of California.

Eighteen months ago I was retained by Lyondall Chemical to assess whether the continued use and/or ban of MTBE in gasoline in

California would be a choice that, on balance, served or did not

serve the public interest. To answer this question, my colleagues

and I performed a comprehensive cost/benefit analysis within the

framework of the current Federal and State of California reformulated gasoline requirements.

We have relied on the extensive literature that has been accumulated over the course of the last decade by surveys that we ourselves conducted on the impacts with regard to air, water, and fuel

costs. And we have done this not only for MTBE, but for ethanol;

and as you would expect, there is much more data, much more

science, about MTBE, because of its wide use in the State of California over the last decade relative to ethanol.

We have submitted our analysis for independent peer review and

publication. The basis for my opinions that I am going to share

with you today is, first, that we look at all of the potential consequences whether they are good or bad of both MTBE and ethanol

in gasoline. Each of the effects is quantified in monetary terms to

allow us to compare using the same yardstick with regard to both

the benefits and cost.

Our focus is on the incremental cost to society of using MTBE

or ethanol. For instance, when gasoline is found in groundwater,

costs will be incurred to diagnose and clean up the spill whether

or not MTBE or ethanol is present. Our concern was to measure

the extent to which MTBE and in comparison ethanol influenced

those incremental costs.

We also focused exclusively on the annual cost going forward.

Clean-ups identified in the past should be irrelevant to policymakers, as those costs will be incurred whether or not MTBE is

banned in the future.

As we all recognize, factors that affect the expected cost and benefits, looking out over the next decade or next 20 years, are subject

to significant uncertainty. We incorporate in our analysis that uncertainty, reflecting the best available science with regard to each

of the major impacts that I briefly outlined.

What are our results? First of all, even though the anticipated

air quality benefits of oxygenated gasoline were in fact realized, the

large-scale use of MTBE, as we all know, has resulted in adverse

impacts on water quality. The use of MTBE exposed in a dramatic

fashion the fundamental problem, which is the source control of

leaking underground storage tanks.

While the widespread use of MTBE has had adverse impacts on

water quality, removal of MTBE from gasoline will impose significant other costs on society, both in terms of gasoline production

costs and ultimate prices at the consumer level.

Overall, the continued use of MTBE in California has clear and

significant benefits relative to the use of ethanol. The increased annual cost resulting from a ban of MTBE in California when ethanol

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replaces MTBE ranges on an annual basis, as I just indicated, from

a little less than a billion to about $1.3 billion with an expected or

median value of $1.24 billion.

These results are robust to any possible ranges on uncertainty.

Even if you take the worst case for MTBE and the best case for

ethanol, it still follows that banning MTBE and substituting with

ethanol imposes significant costs on society where society is measured not only in terms of the citizens of the State of California, but

the citizens in the rest of the United States.

The potential impacts from significantly changing the manufacture of a product as important and pervasive as gasoline is quite

obviously and predictably complex. As a result, the cost/benefit

analysis that we have conducted is also complex, but it can be decomposed into three major categories: the impacts on fuel costs, the

impacts on air quality, and then finally and most importantly, in

terms of the general view of the public with regard to MTBE use,

the impacts on water quality.

First, the impacts on fuel costs: Substituting ethanol for MTBE

in reformulated gasoline will result in increases in fuel cost.

Changes in fuel cost can be categorized into six different consequences.

The first and perhaps the most important is an increase in the

cost to the U.S. economy due to the increased oil imports to make

up the fuel volume lost when switching from MTBE to ethanol.

Also there is an increase in cost to refiners to manufacture reformulated gasoline.

There is an increase in the ethanol tax subsidy payments.

Fourth, there is an increase in gasoline demand due to lower fuel

mileage efficiency.

And fifth there is a consumer surplus loss attributable to reduced

fuel consumption.

And, finally, there are changes in the market for natural gas that

actually work in favor of ethanol as opposed to MTBE.

But if you take all six of those impacts and summarize them, you

end up with an expected incremental cost of $1.33 billion per year

if you substitute ethanol for MTBE.

The impacts on air quality are basically commensurate. There is

a bit of difference in terms of the air toxics associated with reformulated gasoline with MTBE versus ethanol, but the differences

are not dramatic.

On the water quality side, here, as I indicated, the focus has to

be on the incremental response costs going forward.

Mr. OSE. Dr. Rausser, you need to summarize.

Mr. RAUSSER. Yes.

And looking at those incremental costs and sorting those out, we

also have to recognize that there is some recent science suggesting

strongly that ethanol has an adverse impact on water quality as

well as in terms of delaying the biodegradability of BTEX plumes.

If you take all of that into account, the costs that are incurred by

banning MTBE and switching to ethanol results in a benefit that

ranges anywhere from 5.2 million to 296 million, with an expected

value of 59 million.

Now, those results may be a bit surprising for those who think

about all of the past consequences and, instead, don’t focus on the

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incremental cost. If you look at the incremental costs, then the

numbers I have presented to you are reasonable estimates.

In addition, it also says that the fundamental problem is source

control of underground storage tanks.

Thank you very much, Mr. Chairman. This concludes my brief

remarks.

Mr. OSE. Thank you, Dr. Rausser.

[The prepared statement of Mr. Rausser follows:]

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Mr. OSE. Our fourth panelist on this panel is A. Blakeman Early,

an environmental consultant with the American Lung Association.

Welcome. You are recognized for 5 minutes.

Mr. EARLY. Thank you. I am here because the American Lung

Association strongly supports the use of clean fuels to reduce air

pollution; and we are very concerned that the current situation is

untenable, the status quo is untenable, and it is impacting public

support for clean fuels programs. And, of course, it is contributing

to the whole concern about the price of gasoline.

The American Lung Association participated in a Blue Ribbon

Panel on Oxygenates in Gasoline and endorsed their recommendations. And those recommendations, we think, are really a blueprint

for the kinds of changes that should be made to RFG and conventional gasoline. Those recommendations start with your getting rid

of MTBE.

You can debate the value of MTBE in fuel. It is clearly a valuable product, but the public wants MTBE out of fuel. They don’t

want to hear any more debate about it; they want it out. That is

why 14 States have already banned it, including the State of Connecticut and the State of California, and five more Northeast

States are likely to follow suit.

We beliver the existence of MTBE in reformulated gasoline contributes to the proliferation of boutique fuels. According to an EPA

study, people want a fuel without MTBE, so they make up their

own fuel formula.

If you take MTBE out of gasoline, you are going to have a significant cost hit. To get back to, Mr. Chairman, your opening statement, a fair comparison has to be banning MTBE, which 14 to 19

States have already done, and what that cost is versus S. 517. If

you look at figure 17 and 18 in the EIA analysis, half to threequarters of the costs that they are discussing are from banning

MTBE, not from the renewable fuel standard and the other requirements of S. 517. So that is where the cost is, and it is not

going to be insignificant.

A very key element that has to be adopted in legislation has to

be the elimination of the oxygen requirement, because if you don’t

eliminate the oxygen requirement, you are back to the status quo

of banning MTBE. And in the States that use reformulated gasoline, they are going to have to use massive amounts of ethanol.

Under that scenario, if we don’t get rid of the oxygen requirement, California needs 800 million gallons of ethanol every year.

The Northeast needs over 700 million gallons.

Now, under the compromise in S. 517, which the American Lung

Association supports with one exception, we get rid of the oxygen

requirement, we ban MTBE, and we have a renewable fuel standard which enables refiners to use ethanol where it is produced and

where it is already used. Rather than forcing massive amounts of

ethanol to the East Coast and the West Coast. We think this is a

practical approach to dealing with a very difficult political problem,

which is maintaining ethanol use, but doing it in a way that has

the least adverse impact both on price and the environment.

If you adopt the changes in S. 517, even if every gallon allocated

under the renewable fuel standard for ethanol was used in California and in the Northeast, the amount of ethanol used in those two

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areas would be one-third the level that would be required under

the status quo where you ban MTBE and you maintain the oxygen

requirement—one-third the usage.

But, of course, under S. 517, there is a credit trading and banking program which would enable refiners who supply both the

Northeast and California to use another substitute instead of ethanol. Our belief is significant amounts of alkylate and iso-octane

would be substituted for ethanol, and refiners could meet their RFS

requirements by buying credits. That will moderate the price cost

impact of the RFS.

To sum up, Mr. Chairman, the Congress has been deadlocked

over legislation to eliminate MTBE and improve Federal requirements for RFG and conventional gasoline for years. With the exception of the liability safe harbor in S. 517, we think this legislation

represents a compromise that addresses a wide variety of concerns;

and the American Lung Association hopes that Congress will grasp

this unique opportunity to move ahead and make constructive

changes that we need in the law.

I also wanted to introduce for the record an endorsement of the

changes in S. 517 by the association of Northeast States air officials. Thank you, Mr. Chairman.

Mr. OSE. Hearing no objection, we will enter that into the record.

Thank you, Mr. Early, for your testimony.

[The prepared statement of Mr. Early follows:]

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Mr. OSE. Mr. Economides, in your testimony, you state that you

think that the EIA analysis understates the cost to consumers; and

that is referring to the cost of having ethanol as the oxygenate in

the fuel.

In your opinion, how much more will consumers pay at the pump

if Senator Daschle’s proposal on fuel provisions is passed and

signed by the President?

Mr. ECONOMIDES. At the pump, sir, is clearly a matter of gasoline supply and impact, shrinkage or shortfall. The numbers from

EIA and from our organization have dealt almost exclusively in the

differences to produce gasoline. And we are higher than EIA; we

think that a number of factors involved in the assumptions that

EIA has made tend to produce an estimate on the low side.

Mr. OSE. EIA was at $6.37 billion. You were at $8.4?

Mr. ECONOMIDES. We were at $8.4. And that was again in the

difference in cost to produce gasoline.

Your inquiry regarding at the pump, you need to factor in things

such as the potential shrinkage in gasoline supply of having a

switch from MTBE to ethanol, which could be as much as 5 or 10

percent of gasoline at that point, depending on the area that we are

talking about.

That will dwarf anything that we are talking about from a production cost difference for refiners.

Mr. OSE. Let me make sure I understand what you said. What you just said is, the cost would be about $6.37 to $8.4 billion, based on these estimates to manufacture the fuel; and that

the cost in the marketplace to the consumer will dwarf that?

Mr. ECONOMIDES. Yeah. I think what you are going to see in the

marketplace—— Mr. OSE. So it will be higher?

Mr. ECONOMIDES. Will be a function of the overall further shrinking and tightening of gasoline supply, which will create the kinds

of spikes and volatility that we heard Mr. Montgomery talking

about, which is the type of periods where refineries have traditionally been profitable.

The issue here is not so much production costs. Production cost

is significant directionally and it does amount to that large number. I don’t want to underestimate the significance of that number.

But I am afraid in terms of retail, in terms of what the consumer

might see, we might be looking at something substantially higher

than that if we shrink gasoline supply even further.

Mr. OSE. Are you suggesting that people who might otherwise

produce or refine the product may incur $6.37 to $8.4 billion in

added costs and reap multiples of that in added revenue?

Mr. ECONOMIDES. The market will bear the cost to equilibrate demand with supply. The more we shrink supply, the higher the likelihood that prices will go up, more than offsetting whatever the incremental cost to produce the fuel is.

I called it ‘‘dwarfing’’ a second ago. I still think that is the case.

Mr. OSE. Is that like a 3 to 1 ratio, 2 to 1?

Mr. ECONOMIDES. Well, if we argue about items——

Mr. OSE. I am trying to get a sense.

Mr. ECONOMIDES. Ten cent gasoline, cost to produce, increase, or

less 2, 3, 4, 5 for conventional. We can turn to California during

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periods of supply shortages. We turned to the Midwest during the

year 2000 summer shortage, and you can easily see 35 and 50-cent

price increases out there where, you know, your factor becomes obvious at that point.

Mr. OSE. Just the logic that you put forward indicates that the

people who would otherwise produce the formulated gasoline would

make a pretty good rate of return on that $6.37 to $8.4 billion in

added cost.

Mr. ECONOMIDES. For that period of time. For every one of those

periods of times, you need to factor the other ones where they’re

barely keeping their noses above water.

Mr. OSE. I understand. All right. You have already answered my

next question, and that is whether there is a price difference between RFG and conventional gasoline, and you said in California

it is 10 cents add-on versus 5 cents add-on. Will some people in this

country, because they live in areas where reformulated gasoline is

required pay more at the pump than others might pay? I think

your answer would be yes.

Mr. ECONOMIDES. The answer to that is yes. Most of the studies

we’ve done have identified a broad brush cost for reformulated gasoline and they make a distinction between those two categories,

conventional versus reformulated. Within the category of reformulated gasoline, that could very well be a difference in the cost to

produce, and in the retail price of that product, depending on what

market we’re talking about. Clearly California has historically been

above the rest of the Nation. Its reformulated gasoline requires additional emissions reductions above and beyond those provided for

in the Federal—— Mr. OSE. OK. So we have got all these different provisions in this

bill that Senator Daschle has put forward. What is the total price

tag?

Mr. ECONOMIDES. We have taken a shot at this point to try to

identify the cost of getting MTBE out of the fuel, the cost of getting

that much ethanol into the fuel, and partially offsetting that by the

benefit of having the oxygen standard be relaxed as a constraint

on the system. We have tried to do this at constant environmental

performance, because we believe that none of this discussion of taking MTBE out, bringing ethanol in, was ever to be done under the

assumption that air quality would deteriorate in any part of the

country.

Having done that, the number that you have in front of you represents our mid-case scenario.

Mr. OSE. The $8.4 billion?

Mr. ECONOMIDES. That’s correct. However, we at this point do

not have factors in there including potential ethanol pricing impacts in the market that is as concentrated as it is and, as we

heard earlier, you know, you are really moving into an environment where you have a subsidized ethanol tax subsidy mandated

and liability-protected environment. The combination of the three

does not speak very well as to what the potential price impact

could be, and I hate to take a shot at the high side. I’ve in fact purposely avoided doing that so far.

Mr. OSE. My time has expired. The gentleman from Massachusetts.

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Mr. TIERNEY. Thank you. Mr. Economides, I am not sure about

your organization. You represent individual clients?

Mr. ECONOMIDES. Our organization has affiliations with different

stakeholders in the air quality emissions arena.

Mr. TIERNEY. Are any of them in the MTBE industry?

Mr. ECONOMIDES. Yes. We have clients in the MTBE industry.

We have automaker clients. We have refining industry clients. We

have regulatory agency body——

Mr. TIERNEY. Anybody from the ethanol industry?

Mr. ECONOMIDES. Yes.

Mr. TIERNEY. So you cover both of those?

Mr. ECONOMIDES. Yes.

Mr. TIERNEY. Thank you. Mr. Rausser, I was trying to understand your study and, looking at that, and I would assume that in

the context of your work, you made some assumption regarding the

leaks on the upgraded gasoline tanks. Did you assume that they

would been constant or that they would diminish?

Mr. RAUSSER. No. The upgrading was increasing in the State of

California, and I took that into account, and there’s a different

leakage rate with regard to the nonupgraded tanks versus the upgraded tanks. But having said that, there’s still a leakage rate with

regard to the upgraded tanks as well.

Mr. TIERNEY. And I guess it is quite considerable, by recent accounts. Am I right?

Mr. RAUSSER. No, not in the State of California. The detection

rates have fallen rather dramatically over the course of the last few

years.

Mr. TIERNEY. You used something about 0.07 percent or whatever as the leakage rate in your analysis.

Mr. RAUSSER. Yes, for the upgraded tanks.

Mr. TIERNEY. Why do I see then that in California the results of

their State study found that two-thirds of the upgraded tanks in

pipes that were tested in certain counties were leaking MTBE, and

in other counties at least a third were leaking? In Silicon Valley

at least 40 percent of the tested tanks were releasing MTBE, and

that is considerably higher than in fact what you used.

Mr. RAUSSER. No, I don’t believe it is because my rate is an annual rate, and the rate that you’re referring to is the accumulation

of a number of different prior years.

Mr. TIERNEY. Well, actually it cannot be too many prior years to

judge from. Right? These are relatively new tanks.

Mr. RAUSSER. Well, but no. The upgrading of underground storage tanks has been going on in the State of California since 1990.

Mr. TIERNEY. And so you say that 40 percent of the new tanks

really are somehow interpreted by you as a much smaller percentage?

Mr. RAUSSER. No. What I’m saying is that my rate is an annual

rate. If I take that annual rate and accumulate it over a period of

time, I’m going to get numbers that are close to those that you’ve

just quoted.

Mr. TIERNEY. You have lost me, but it seems to me if they are

leaking, they are leaking, and it is going to continue to leak into

the future because these new tanks are not stopping it.

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Mr. RAUSSER. The new tanks are decreasing the leakage rate,

but, yes, they are continuing to exhibit leaking rates, and that estimate that I gave you, or that I’ve used in my particular model, is

an estimate that’s based on a survey that was done at the University of California-Davis on the annual incidence of leaking, not the

accumulation of what’s been discovered already.

Mr. TIERNEY. So you based it on an older study?

Mr. RAUSSER. Pardon?

Mr. TIERNEY. The study you based it on is somewhat older?

Mr. RAUSSER. Yes, it’s 1997, to be precise.

Mr. TIERNEY. And this same report indicates that the cost of

MTBE contamination in the soil and water nationwide is going to

be at least $29 billion to clean it up.

Mr. RAUSSER. What’s the source of this study?

Mr. TIERNEY. This is the study from the State of California.

Mr. RAUSSER. Yes, but it’s for the entire United States.

Mr. TIERNEY. It is for the entire United States.

Mr. RAUSSER. I’ve seen reference to those numbers, and I don’t

believe that we’ve got the underlying analysis that they’ve conducted to see whether or not it can be duplicated, No. 1. But more

importantly, that is an estimate that refers to the prior cost of

cleanup for what’s already taken place. As I indicated, my analysis

focuses on the cost going forward—— Mr. TIERNEY. $29 billion to clean up and the new

contaminationsites continue to be discovered.

Mr. RAUSSER. That’s right.

Mr. TIERNEY. That is not going to end. So if you are at $29 billion now, you are going to have additional moneys to clean up as

the new sites are discovered.

Mr. RAUSSER. Right.

Mr. TIERNEY. So you compare that to your slightly $1.2, whatever it was, billion a year cost, that is a lot of money going out.

Mr. RAUSSER. Right. But much of what you just described is the

historical occurrence that’s already taken place, that is cost that’s

going to have to be incurred by those who are liable for the remediation. If we’re looking going forward and we’re comparing the different options that are available for reformulated gasoline, again

under the current regulations, the scenario on those costs are much

lower than they have been historically, because of the detection

methodologies that are out there, because of learning that natural

attenuation can work in some cases——

Mr. TIERNEY. I am sorry, but you are still assuming that some

0.07 percent is what is going to leak. Right?

Mr. RAUSSER. Each year the probability is 0.07 that a particular

underground storage tank will leak, that’s correct.

Mr. TIERNEY. But the recent studies indicate that it is much

higher than that.

Mr. RAUSSER. No, I don’t believe they do. I don’t think that’s——

Mr. TIERNEY. All right. So these people are smoking something?

Mr. RAUSSER. No, all I’m saying is that if you look at the data

that has been collected by exponent, it’s done a lot of analysis with

regard to each of the regional water quality districts in the State

of California, and they’ve gone out and estimated the differential

leaking rate between upgraded versus nonupgraded tanks. And

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they have confirmed the Couch, et al, study that was done that you

referred to a moment ago in 1997.

In fact, the detection rates are lower than what that particular

study would suggest as of today.

Mr. TIERNEY. I think we disagree, but I am not going to keep

going back and forth with you. I mean, I think their indication, the

way I am reading it, is that they are still getting significant leakage, and they anticipate continued leakage on well into the future,

and that is a cost that is not going to go away and is not going

to diminish.

Mr. EARLY. Mr. Tierney, what I’d also—— Mr. OSE. Thank you. Mr. Early, go ahead.

Mr. EARLY. What I’d like to observe, Mr. Tierney, is we learned

in participating in the Blue Ribbon Panel that the public wants

zero percent leakage of MTBE in the groundwater. The 0.07 is a

low number, but it’s not low enough in terms of what the American

public demands.

And the other thing I would observe is that California has one

of the best tank programs in the country. You’re not going to

achieve this kind of low leakage level in other States.

Mr. TIERNEY. Thank you. Do you want to go back to questioning?

Mr. OSE. I thank the gentleman. Mr. Economides, if I may, I

want to return to your testimony, which says, ‘‘Ethanol, if used to

replace MTBE in summer,’’—I love these acronyms—I’m going to

say it in English. ‘‘Ethanol, if used to’’—except for MTBE. ‘‘Ethanol, if used to replace MTBE in summer reformulated gasoline at the minimum level of oxygen currently required in reformulated gasoline, will actually shrink the current gasoline pool by approximately 11 percent.’’ Can you explain how that math works

out?

Mr. ECONOMIDES. Well, very simply, if you start with a base gasoline that doesn’t contain oxygen—and we call that 100 percent— and we add 11 percent to MTBE, which is basically what is required to satisfy the 2 percent minimum oxygen requirement in

RFG, we wind up with a volume of about 111 percent.

Now, if we take out that 11 percent MTBE and we instead insert

5.7 or 6 percent ethanol, which is roughly the amount that you

would need to get the same oxygen content of 2 percent, we need

to remove roughly the same amount of like components, pentanes

and lighter, from the gasoline in order to accommodate the

ethanol’s volatility characteristics. So you wind up in a 98 point

something or 99 point something environment versus your 100 percent starting point as opposed to the 111 percent volume expansion

that you have with the addition of MTBE.

Now, the counter argument to that, of course, from an ethanol

proponent standpoint is why don’t you put the maximum amount

of ethanol that one can put in the fuel? And if you do that, then

you’re talking about adding 10 percent ethanol in. You still need

to remove that 5, 6 percent of volatile gasoline components to allow

that. So you get a modest expansion at that point, 102, 103, 1031⁄2

volume percent. But still that pales by comparison to the 111 that

you are currently operating under.

Mr. OSE. So you are doing a comparative volume analysis

between——

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Mr. ECONOMIDES. Right, right, trying to figure out how much the

gasoline pool will shrink.

Mr. OSE. OK. Now, does that mean that the United States is

going to have to find more fuel?

Mr. ECONOMIDES. We certainly think that imports are looming

larger in our future. They represent 5 percent of our supply now.

We think roughly a much larger percentage for the local areas like

the Northeast.

Mr. OSE. Talking about refined products?

Mr. ECONOMIDES. Yeah. Refined gasoline imports in the Northeast likely to increase, particularly if the ethanol credit trading

provision, which will be required to keep the economics of ethanol

in some kind of a reasonable ballpark, keep the ethanol in, what

we have called PDDs 2 and 4. If that happens, then to make up

the volume shortages, we’ll have to be talking about imports hitting New York harbor in much larger quantities than they have in

the past.

Mr. OSE. All right. These imported refined products, are they refined from crude produced in the United States?

Mr. ECONOMIDES. Doubtful.

Mr. OSE. So they do not drill here, pump it, ship it overseas, refine it and ship it back?

Mr. ECONOMIDES. Doubtful. We’re talking about—— Mr. OSE. Foreign sources of oil.

Mr. ECONOMIDES. Foreign sources of crude being refined most

likely in foreign refineries and being brought in tankers.

Mr. OSE. Can I accurately characterize your statement then to

be that an ethanol mandate will make the United States more dependent on foreign oil?

Mr. ECONOMIDES. I certainly disagree with a blanket statement

that has been made that one of the reasons why we need an ethanol mandate is to reduce our reliance on foreign oil. I see no sanity

in that statement.

Mr. OSE. You punctured that logic.

Mr. ECONOMIDES. Well, yeah. Whether or not it will significantly

increase our reliance on foreign oil, I think that remains to be seen

at what level ethanol will be added or what level refiners will get

over their hesitance in expanding their capacity. As I said earlier,

we’ve had a period, Mr. Montgomery pointed out, of underperforming assets and very, very depressed market conditions, and they

have been hesitant. We will see a period of increased prices demonstrated consistently before those purse strings are loosened and

massive investment takes place.

Mr. OSE. All right. Mr. Montgomery, in your testimony, you state

that policies that increase oil imports impose harm on the U.S.

economy. Direct quote. Do you agree or disagree that Senator

Daschle’s fuel provisions will increase our reliance on foreign oil?

Mr. MONTGOMERY. Yes. We’ve performed essentially the same

type of analysis that Mr. Economides described, and I certainly

agree with him that the shrinkage—removing MTBE from gasoline,

whether it’s replaced with enough ethanol to satisfy the requirements for reformulated gasoline or not is going to substantially

shrink the gasoline pool. It will, as he stated, require use of additional crude oil to produce the product, the blending products that

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are needed to get the volume back up that is lost in MTBE. What

that will do is increase oil imports, and the harm that will produce

for the U.S. economy will put upward pressure on world oil prices,

and it will also put upward pressure on prices by tightening the

market and resulting in prices essentially going up, probably more

than costs.

Mr. OSE. Will it dwarf the cost?

Mr. MONTGOMERY. Well, actually, there are two pieces to it. Let

me try to separate them out.

Mr. OSE. Mr. Montgomery, my time is expired. We are going to

come back to that question.

Mr. Tierney.

Mr. TIERNEY. Thank you. I guess this is the wrong panel to talk

about just not using as much gasoline, which might not be a bad

way of approaching some of this. But since this is not the right

group to talk about that, Mr. Early, enlighten me, if you will. The

oxygenate requirement, 2 percent, is that absolutely necessary?

Mr. EARLY. No.

Mr. TIERNEY. Why not?

Mr. EARLY. Well, the refiners have demonstrated that they can

make reformulated gasoline that reduces air pollution without any

oxygen and certainly without a 2 percent oxygen requirement.

Mr. TIERNEY. Why don’t they do it?

Mr. EARLY. Because under the Clean Air Act they’re required to

put 2 percent oxygen in the fuel, and that requirement is at the

heart of the problem that we have right now. We need to get rid

of that requirement—— Mr. TIERNEY. So if we eliminated that, your belief is that the refineries could produce a clean enough oil to meet the requirements

that we are trying to meet with the oxygenate?

Mr. EARLY. Well, you would also have to ask them to make sure

that they produce as clean a fuel. The Blue Ribbon Panel included

a so-called antibacksliding recommendation that made sure that

when refiners take MTBE out of reformulated gasoline, they didn’t

put something bad back in. In fact we are getting a reduction in

air toxics from existing reformulated gasoline that substantially exceeds the requirements of the Clean Air Act. One of the things that

Senator Daschle’s legislation does is lock in those gains. Those

added air toxics reductions are locked in so that refiners under the

Senate bill have to meet the same level of air toxics reduction as

they do right now, while phasing out MTBE, and that’s a very important element of the Senate bill.

Mr. TIERNEY. If we could do that, then why do we bother with

ethanol at all?

Mr. EARLY. We bother with ethanol in terms of a renewable fuels

standard, mostly because there is a bipartisan block of senators,

ranging from Senator Wellstone on the left to Senator Grassley on

the right, who will not agree to getting rid of the oxygen requirement unless you replace that requirement with a renewable fuels

standard.

Mr. TIERNEY. You are being very polite, extremely polite. But the

fact is substantially is there any scientific need to do this? Are we

doing politics, which I will save you from saying——

Mr. EARLY. No. I’m happy to say we are talking politics here.

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Mr. TIERNEY. Because there is no legitimate reason to have ethanol in there as a clean—— Mr. EARLY. I mean, the bottom line is we can buy ethanol easy,

or we can buy ethanol hard. Under the status quo, we’re going to

buy ethanol hard. We’re going to take the ethanol which is made

in the Midwest and we’re going to ship it to California, and we’re

going to ship it to the Northeast where it isn’t made, at considerable cost and put it in RFG, in order to meet the 2 percent oxygen

requirement in existing law.

Mr. TIERNEY. But if we—— Mr. EARLY. The alternative scenario is to get rid of the 2 percent

oxygen requirement and have a national ethanol requirement

where refiners can use ethanol where it makes sense to use ethanol

and they don’t have to ship it to California and they don’t have to

ship it to the Northeast unless they find that it’s economically advantageous to do so.

Mr. TIERNEY. Well, if we do not have any real need on the

science for ethanol as an additive, where would it make sense to

use it other than politically?

Mr. EARLY. Octane. My testimony contains a tab in the appendix,

one which shows that when you take MTBE out, refiners have a

major loss of octane, and they don’t have a whole lot of alternatives. One of the things they can do is convert MTBE manufacturing facilities to produce two substitutes, one of which is called

alkylate, and the other is called isooctane. And we believe a lot of

refiners and merchant MTBE manufacturers will do that. Senator

Daschle’s bill actually has a grant program to encourage them to

do that. But even if you do that, you lose volume. The net result

of the substitute is there’s less of it than there is of MTBE.

Mr. TIERNEY. You are back—— Mr. EARLY. And ethanol is basically the only other clean octane

substitute. So under any scenario when you’re taking MTBE out,

ethanol is going to be playing a very important role, and that role

all revolves around octane.

Now, I’ve in the past suggested to the refiners that they do something really innovative and stop making 93 octane fuel for high test

and only make 91 octane fuel, and we would reduce substantially

the octane demand that you would need, but the refiners don’t

think that’s a very good idea because, of course, they get top dollar

for 93 octane gasoline.

Mr. TIERNEY. You know, I am showing some of my ignorance in

this field, so again bear with me, but if we do not need MTBE—

I assume we do not need ethanol—to meet the Clean Air standards,

that they can refine it without either one of those products, and it

would be OK. Right?

Mr. EARLY. Well, both MTBE and ethanol are an important

source of clean octane, and refiners need octane. They need octane—I’m sorry?

Mr. TIERNEY. They are not the only source of octane?

Mr. EARLY. That’s correct.

Mr. TIERNEY. And the industry could go to other sources of octane and produce and refine——

Mr. EARLY. Right, but there are not enough of them. I mean, in

the short term the reason ethanol will play a role is there just isn’t

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enough alternatives unless, of course, the refiners were to go to polluting sources of octane which, of course, we all agree we don’t

want them to do.

Mr. TIERNEY. And is nobody exploring all the new sources of octane?

Mr. EARLY. Well, there’s little question that if we enact legislation that eliminates MTBE and updates the reformulated gasoline

requirements, refiners will have a major incentive to engage in research to develop MTBE substitutes that are not ethanol.

Mr. TIERNEY. Of course, if we put the language in that Senator

Daschle has about absolving people from liability, we run the problem that they are going to come up with new sources that are in

fact not clean.

Mr. EARLY. Yes. We would agree that this particular provision is

not very useful in terms of safeguarding public health and the environment.

Mr. TIERNEY. It just gives a free fall for the industry to go out

and do whatever they want to do and not have any concern.

Mr. EARLY. Well, the attempt was to draft it narrowly, but I

think the attempt did not succeed.

Mr. TIERNEY. I would agree. Thank you. Thank you for the extra

time.

Mr. OSE. Gentlemen, Mr. Montgomery, why would we not just

eliminate the 2 percent oxygenate requirement? It seems to me it

would solve a lot of the issues, let science figure out how to calibrate what comes out of the tailpipe, and be done with it.

Mr. MONTGOMERY. Mr. Chairman, that has always struck me as

being an excellent proposal, and I have for decades agreed with

your description of how we should be designing environmental policy, which is to focus on the emissions and give industry the maximum flexibility to bring those emissions down to what we care

about. I do not see that the oxygenate requirement has any role in

doing that.

On the other hand, I’m not convinced that we can save a lot of

money by getting rid of the oxygenate requirement if at the same

time we are imposing a ban on MTBE, because we have to replace

that 11 percent of gasoline with something, and whether we replace it with ethanol or alkylates or ETBE, we are looking at very

expensive blend stocks. They’re all going to add to the cost of gasoline. The choice is really among which is the lesser of two evils and

which do we have enough capacity in the short run to produce. But

may not save as much money as people think by——

Mr. OSE. Well, why should the Federal Government decide which

solution? I mean, there have to be multiple types of chemical compounds that can give you what you need to calibrate out of the tailpipe.

Mr. MONTGOMERY. And I think that is a very good argument for

why we should not have the oxygenate requirement. I’m just cautioning against expecting that by eliminating the oxygenate requirement, we can remove a significant part of the cost of moving

away from MTBE—— Mr. OSE. Because you would probably bring something else?

Mr. MONTGOMERY. Yes.

Mr. OSE. Dr. Rausser, do you agree with that?

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Mr. RAUSSER. I certainly agree that at this juncture, the motivation for the original requirements are not the same today as they

were in the year 1990. The vehicle upgrades that have taken place

have changed the emissions that otherwise would have occurred

with conventional gasoline even today. But, still, coming back to

the points that have been made already, once you’ve displaced that

11 percent of volume and you have to make it up from some other

place, what is the incremental cost of those other potential blending ingredients and what are the consequences of those incremental costs on the ultimate price and cost to the consumers who are

purchasing gasoline?

Mr. OSE. Mr. Economides, any thoughts on this?

Mr. ECONOMIDES. Yeah. Trading in one set of concerns for another set of concerns from—let’s take the environmental area. If

you’re looking for no backsliding or equivalent environmental performance in a post-MTBE world and you turn to ethanol for help,

then you have volatility concerns regarding its characteristic to

evaporate readily. You have driveability concerns, distillation concerns. All these are fixable. They involve additional controls, which

bring on additional costs, as Mr. Montgomery indicated.

If, in turn, you go to a nonoxygenated fuel, the oxy standard is

gone and we don’t have an RFS, let’s say, and we go to that world,

then we need to protect against what—allow me the liberty to call

dirty octane. And dirty octane is aromatics and olefins and, you

know, for the benefit of those who have not perhaps settled on this

thought, olefins is a real, real cloud in the horizon in that eventuality, I mean, a very active species contributing to summertime

smog. So are aromatics, and they are high octane compounds. So

are aromatics. Aromatics, of course, are a major culprit on the toxic

side because they combust into benzene out of the tailpipe.

So we have a set of concerns that need to be addressed, and one

thing I want to emphasize again is that in the work that we are

trying to do in this arena, we’re trying to keep the environmental

bar as level as possible between where we would have been if a bill

like 517 was not adopted versus where we may be heading if that

bill and its attendant consequences come to pass.

Mr. OSE. From a logical standpoint, it would seem to me that

rather than mandate the inputs into the engine chamber that are

combusted, you can in turn mandate the exhaust coming out of the

tailpipe, including the volatile organic compounds and let—— Mr. ECONOMIDES. Yes.

Mr. OSE [continuing]. Science——

Mr. ECONOMIDES. But there is one small problem. It’s called

models, and they are not perfect. They are not perfect by any

means. They’re useful. Some of them are very good in terms of certifying fuels and providing directional guidance, but ultimately

what we need to protect is ambient air quality levels, and by the

time we get that correlation of fuel quality all the way out to ambient air quality, San Joaquin Valley, New York City, or anywhere

else, then we have made a certain number of jumps in that process

which make science become less stable than you would have expected or assumed in your statement.

Mr. OSE. Do we not have those problems attaining ambient air

quality regardless?

259

Mr. ECONOMIDES. We do. However, we have a demonstrated

record of success with the current reformulated gasoline program

which most stakeholders, if not all, rapidly will step forward and

say that from an air quality standpoint, the program has done its

work. It has done a yeoman’s job.

Mr. OSE. That is $6 to $8 billion a year transfer. My time is—— Mr. ECONOMIDES. No, I’m talking about the existing RFG program now.

Mr. OSE. My time is expired. Mr. Tierney.

Mr. TIERNEY. Thank you. I cannot stay much longer, but I do

want to ask Mr. Early some questions here. What did the Blue Ribbon Commission recommend with respect to MTBE?

Mr. EARLY. They recommended a phasedown, and most members

have recommended a phaseout of MTBE. The thing that’s important to focus on is that the concern that the public has about

MTBE has eroded the public support for clean fuels programs for

a reformulated gasoline program. Part of the reason the Lung Association is here today is we need to make changes in order to increase public support for reformulated gasoline. Because this is a

program, as Mr. Economides just said, that has a proven record of

effectiveness in reducing smog. We would like to see more communities adopting RFG rather than going to a boutique fuel alternative.

Mr. TIERNEY. What did the Blue Ribbon Commission recommend

with respect to ethanol?

Mr. EARLY. The commission acknowledged the fact that there are

other reasons for using ethanol and basically punted the question

of whether ethanol should be required to Congress.

Mr. TIERNEY. Could we not have one national standard if we

really desired to have one?

Mr. EARLY. Well, we could have a national standard. There’s no

question. But I’m sure that the other gentlemen at this table would

observe that if that standard were as effective at reducing air pollution as the Lung Association would like to see, we would shrink

our gasoline supply even further, and even the Lung

Association——

Mr. TIERNEY. Unless, of course, we stop using as much of it?

Mr. EARLY. I’m sorry?

Mr. TIERNEY. Unless, of course, we stop using as much of it.

Mr. EARLY. Well, of course. But you could also make an argument in areas where you don’t have large population concentrations, that you don’t have to use the cleanest gasoline that’s available. Because you don’t have an air pollution problem. We ought

to be targeting our resources in the places where the problems are,

which is essentially what the Clean Air Act has attempted to do.

Mr. TIERNEY. How do you get away from the boutique fuel problem? I mean, I read studies that tell me that the industry is sort

of trying to encourage the States to get into as many boutique situations as they can. Others disclaim that. How do we do what you

are saying and have the flexibility—— Mr. EARLY. Well, one of the most important things you can do

is get rid of the MTBE in all gasoline. I mean, as an example of

how powerful an issue this is, the State of Texas adopted a boutique fuel for the entire eastern half of the State that prohibited

260

refiners from increasing MTBE levels in the fuel above the levels

that were being used at the time of adoption. So MTBE isn’t even

popular in Texas, let alone anywhere else. So it gives you an idea

of how powerful an issue this is and why we need to get rid of

MTBE as a starter, and then areas will, I think, look to reformulated gasoline.

The other thing you can do is change some of the other provisions to make RFG more uniform, and we think that the changes

in S. 517 move in that direction and will result in a more uniform

reformulated gasoline across the country and help relieve some of

the price spikes.

For instance, I don’t think in the future if you adopted the provisions that are in Senator Daschle’s bill that you would see the price

spikes that occurred in the Chicago, Milwaukee reformulated gasoline market last summer and the summer before. Because there

will be a larger overall national pool of fuel that can be sent to that

area in case of a temporary shortage.

Mr. TIERNEY. Thank you. I am going to yield back the balance

of my time because I have to go, but I want to thank the panel for

their testimony, and thank you, Mr. Chairman.

Mr. OSE. I thank the gentleman.

Mr. Tierney’s questions spurred one of mine. I think, Dr.

Rausser, you talked about this in your written testimony. In a comparative sense, the air quality improvements that are achievable

using ethanol at an 81⁄2 to 10 cent gallon increase in price, are

those air quality improvements attributable to the ethanol additive,

or are they attributable to the price increase that causes a reduction in use of fuels?

Mr. RAUSSER. They’re certainly attributable to the latter. That is

to say, with ethanol, the price goes up. There is some response on

the demand side. There is a diminution in demand, and with that

comes a lower air quality effect or an improved effect in terms of

the reduction of air toxics. So that’s one effect. But there is a second effect——

Mr. OSE. Before I lose my train of thought. So ethanol creates

a benefit of X?

Mr. RAUSSER. Yes.

Mr. OSE. What would have to be the incremental increase in

price alone to achieve the same air quality impact that ethanol

achieves?

Mr. RAUSSER. With regard to just this component of the increase,

or generically?

Mr. OSE. Generically.

Mr. RAUSSER. Generically.

Mr. OSE. If you are going to tell me 81⁄2 to 10 cents a gallon, I

am going to say why are we adding ethanol. I mean, that is my

question. In terms of a price increase to achieve the same benefit

we get from having ethanol as the oxygenate—how much of a price

increase do we have to get?

Mr. RAUSSER. Well, that would depend on lots of other factors

that I don’t believe I have the precise answer for you.

Yes, and I can get an answer for you, but that’s not something

that we’ve asked the model to answer, but we could. To get the

same effects, are you suggesting through an alternative mechanism

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like taxing the gasoline price? That would lower the demand and

you would get then as a result of the reduced driving——

Mr. OSE. If I understood your testimony here a minute and a half

ago, it was that you raise the price, you reduce the amount of gasoline being used. You achieve air quality improvements because you

have less hydrocarbons being combusted.

Mr. RAUSSER. That is correct.

Mr. OSE. All right. Now, compare that without ethanol to the

case with ethanol. How much of a price increase do you have to

have to achieve the same air quality benefits solely from a price

increase——

Mr. RAUSSER. Just that portion of the benefits, not the rest of the

air toxic reductions?

Mr. OSE. Right. That is the question I am going to put to you

in writing.

Now I want to go back to your second point.

Mr. ECONOMIDES. And while you’re doing that analysis, remember to take into account the fact that you use more gallons of ethanol contained in gasoline——

Mr. RAUSSER. Yes.

Mr. ECONOMIDES [continuing]. To travel the same number of

miles.

Mr. RAUSSER. I’ve got that in the model, namely the reduced efficiency, the vehicle fuel efficiency.

Mr. OSE. You also have an improvement in hydrocarbon emission

on cold start issues?

Mr. ECONOMIDES. Yes.

Mr. RAUSSER. The second component is the differential between

ethanol versus MTBE versus conventional gasoline, and as I indicated in my testimony, the differential between ethanol and MTBE

is only with regard to some particular toxics. Formaldehyde, for example, increases with MTBE. Acetaldehyde increases with regard

to ethanol, and that results in a differential, too, with regard to the

ultimate monetization of the air quality benefits of each of these

two different blends.

Mr. OSE. Mr. Economides.

Mr. ECONOMIDES. I’m trying to get into this discussion, because

the pollutant that we’re talking about comparing these two compounds has a very, very significant impact. If we’re talking about

organics, hydrocarbons, volatile organics [VOCs], I don’t think I

would even go so far as to say that ethanol use in summertime gasoline has any benefit whatsoever. If we go now in turn to nitrogen

oxides, NOx kinds of compounds, I think both compounds are in essentially wash versus nonoxygenated gasoline until we get to about

2 percent oxygen content. But ethanol does have a big downside on

the NOx side. When you start increasing ethanol toward the maximum of 10 percent, you’re looking at substantially increased NOx

emissions.

In fact, some of those are serving as the basis for California’s application on the waiver. The doctor’s assessment on the toxic side

is on point. However, again, even there you get more dilution when

you’re adding 11 percent of MTBE versus the 6 percent for ethanol.

So you have a differential toxics impact as well as a difference beVerDate 11-MAY-2000 11:14 Dec 13, 2002 Jkt 000000 PO 00000 Frm 00265 Fmt 6633 Sfmt 6633 C:\DOCS\82633.TXT HGOVREF1 PsN: HGOVREF1
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tween more acetaldehyde versus formaldehyde being emitted by

the two.

So all in all, I think from an environmental standpoint, you’re

looking at a rather imbalanced picture here between what one is

doing versus the other. Adding that much ethanol to gasoline,

frankly, in a simplified condensed way means higher gasoline

prices for, at best, equivalent air and most likely dirty air, unless

we take the right precautions.

Mr. OSE. Now, this information on MTBE and the implications

of its use or ethanol and implications of its use, I mean, we are not

talking about new science here?

Mr. ECONOMIDES. I don’t believe it is.

Mr. OSE. So it has been in the public domain for a number of

years. For instance, the impacts of MTBE probably have been

known for at least 4 or 5 years. The situation with ethanol and the

consequence of adding it to fuel have been known for a number of

years, the pros and the cons. Am I accurate in that?

Mr. EARLY. Well, there’s still a lot of argument about the pros

and the cons. I mean, obviously if you had an ethanol industry representative here, they would claim greater air quality benefits than

have been described by this panel, but generally speaking, you’re

correct. The bottom line is we’ve learned a lot since the 1990 Clean

Air Amendments required certain components in reformulated gasoline. What we’ve learned points in the direction that you, Mr.

Chairman, have already mentioned, which is the best approach is

to mandate the outcome of reformulated gasoline and not how you

get to the outcome.

I think there’s a much broader consensus that’s an approach to

take than there was in 1990 when these provisions were adopted.

I would only make one observation as part of this discussion,

which is that when EPA evaluated California’s waiver request for

the oxygen requirement, they determined that even if they had

granted the oxygen waiver so that reformulated gasoline could be

sold in California and not meet the 2 percent oxygen requirement,

60 percent of the reformulated gasoline sold in California would

contain ethanol mostly to provide octane. So I raise that only to

point out that the benefits that ethanol brings to gasoline formulations don’t have to do with air quality. They have to do with other

elements that refiners need also to meet when they’re producing

gasoline.

Mr. OSE. Mr. Early, some time ago you were over before the Senate Energy and Natural Resources Committee on EPA’s renewable

oxygenate program, which as near as I can tell from a comparative

standpoint is very similar to Senator Daschle’s energy bill, and at

that time the quote that is in front of me is in sum, we see the

renewable oxygenate program as potentially increasing global

warming, increasing smog, increasing air toxics, and increasing

water pollution and damage to erodible and sensitive habitat areas,

all of this at an increased cost to the reformulated gasoline consumer and a significant decrease in Highway Trust Fund revenues.

I assert that this proposal is fatally flawed. It is time to focus on

the main goal of the reformulated program, which is reducing air

pollution, and stop trying to manipulate it for other purposes such

as increased ethanol demand.

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Now, the thing that I am confused about is that you refer to Senator Daschle’s fuel provisions today as constructive changes to RFG

and conventional gasoline. I guess my question is, do you believe

in mandating the use of ethanol in gasoline as good for the environment? And I think I hear you saying something very similar to

what I am saying, which is not that you mandate but that you actually say what your goal is and let people go find a way to it.

Mr. EARLY. Mr. Chairman, I’ve been pretty consistent in my position on this. I don’t believe that an ethanol mandate is necessary

for air quality, and I’ve never supported an ethanol mandate for air

quality. There are other reasons to support an ethanol mandate

under the circumstances that we’re talking with respect to Senator

Daschle’s bill. One of the most important purposes, from my perspective, is to garner 60 votes.

Mr. OSE. See, what my purpose is, is the past legislation that

makes good policy, not good politics.

Mr. EARLY. The Senators who represent the agricultural States

would forward other arguments. I’m really not in a position to be

judgmental on those arguments regarding the benefit that an ethanol mandate provides.

Mr. OSE. California is the largest agricultural——

Mr. EARLY. To the agricultural economy, to the reduction in oil

imports and to global warming. Let me make one note, which is

that recent studies would seem to indicate that because of improvements in ethanol production, it is not a global warming loser, and

at the time that I testified, the testimony that you have taken, that

was not true. There have been some improvements in technology

so that you can make modest global warming gains from substituting ethanol for gasoline, but they are, I have to observe, rather

modest.

Mr. OSE. All right. Dr. Rausser.

Mr. RAUSSER. Just a clarification. Under the current oxygenated

requirements and moving to ethanol as the choice blending ingredient to satisfy those requirements does not reduce oil imports. It increases oil imports. I think that testimony has already been revealed here.

Mr. OSE. I want to thank this panel for coming today. This has

been highly educational, and I am appreciative of you taking the

time to come down. The facts of the matter are that from where

I sit today, it appears that there is a group that got together with

somebody in Senator Daschle’s office or the Senator himself and

cooked up something to basically impose on the rest of the country,

mandate to use 5 billion gallons of ethanol over the next number

of years at a cost to the American consumer of $6.37 to $8.4 billion

a year. That can be good policy, or it can be good politics, or it

might be neither. But the fact of the matter is it is money out of

the pockets of Californians. It is money out of the pockets of people

up in the Northeast, like those that may live in Mr. Tierney’s district. It is money out of the pockets of the people who may live in

Mr. Shays’ district, and it does not have one single thing to do with

getting cloture in the Senate. Compromise on bad legislation gives

you bad legislation.

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Gentlemen, thank you for joining us today, and I appreciate your

testimony. If we have questions, we will leave the record open for

a period of 10 days.

Timely responses are appreciated. Again, thank you. We will see

you again. This hearing is adjourned.

[Whereupon, at 4:43 p.m., the subcommittee was adjourned.]

[NOTE.—The report entitled, ‘‘Achieving Clean Air and Clean

Water: The Report of the Blue Ribbon Panel on Oxygenates in Gasoline,’’ may be found in subcommittee files.]

[Additional information submitted for the hearing record follows:]

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