U.S. GOVERNMENT PRINTING OFFICE

68–115 CC WASHINGTON : 2000

S. HRG. 106–830

THE MTBE CRISIS AND THE FUTURE OF

RENEWABLE FUELS

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

THE MTBE CRISIS AND THE FUTURE OF RENEWABLE FUELS

APRIL 11, 2000

Printed for the use of the

Committee on Agriculture, Nutrition, and Forestry

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAUL COVERDELL, Georgia

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CHARLES E. GRASSLEY, Iowa

LARRY E. CRAIG, Idaho

RICK SANTORUM, Pennsylvania

TOM HARKIN, Iowa

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

J. ROBERT KERREY, Nebraska

TIM JOHNSON, South Dakota

BLANCHE L. LINCOLN, Arkansas

KEITH LUSE, Staff Director

DAVID L. JOHNSON, Chief Counsel

ROBERT E. STURM, Chief Clerk

MARK HALVERSON, Staff Director for the Minority

(II)
(III)

C O N T E N T S

Page

HEARING:

Tuesday, April 11, 2000, The MTBE Crisis and the Future of Renewable

Fuels ...................................................................................................................... 1

APPENDIX:

Tuesday, April 11, 2000 .......................................................................................... 57

Document(s) submitted for the record:

Tuesday, April 11, 2000 .......................................................................................... 157

Tuesday, April 11, 2000

STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 9

Grassley, Hon. Charles E., a U.S. Senator from Iowa .......................................... 33

Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 11

Daschle, Hon. Tom, a U.S. Senator from South Dakota ...................................... 13

WITNESSES

Overview

Woolsey, Ambassador, R. James, Washington, DC. .............................................. 1

Panel I

Collins, Keith, Chief Economist, U.S. Department of Agriculture ...................... 20

Perciasepe, Robert, Assistant Administrator for Air and Radiation, U.S. Environmental Protection Agency .............................................................................. 18

Mazur, Mark, Director, Office of Policy, U.S. Department of Energy ................. 21

Panel II

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

Use Management (NESCAUM), Boston, Massachusetts .................................. 45

Guthmiller, Trevor, Executive Director, American Coalition for Ethanol, Sioux

Falls, South Dakota ............................................................................................. 37

Kimpel, Nathan, President, New Energy Corporation, South Bend, Indiana .... 41

Miller, Rus, Chief Operating Officer, Arkenol, Inc., Mission Viejo, California .. 43

Morris, David,, Vice President, Institute for Local Self Reliance, Minneapolis,

Minnesota ............................................................................................................. 48
Page

IV

Vilsack, Hon. Thomas, Governor of Iowa, Chairman, Governors’ Ethanol Coalition ...................................................................................................................... 15

APPENDIX

PREPARED STATEMENTS:

Lugar, Hon. Richard G. .................................................................................... 73

Fitzgerald , Hon. Peter G. ................................................................................ 70

Baucus, Hon. Max ............................................................................................ 152

Kerrey, Hon. J. Robert ..................................................................................... 65

Johnson, Hon. Tim ........................................................................................... 154

Collins, Keith .................................................................................................... 89

Grumet, Jason S. .............................................................................................. 130

Guthmiller, Trevor ........................................................................................... 111

Kimpel, Nathan ................................................................................................ 117

Mazur, Mark ..................................................................................................... 101

Miller, Rus ........................................................................................................ 127

Morris, David .................................................................................................... 143

Perciasepe, Robert ............................................................................................ 82

Vilsack, Thomas ................................................................................................ 75

Woolsey, R. James ............................................................................................ 58

DOCUMENT(S) SUBMITTED FOR THE RECORD:

The Executive Summary of the report, ‘Evaluation of Biomass-to-Ethanol

Fuel Potential in California,’ published by the California Energy Commission, submitted by Rus Miller, Chief Operating Officer, Arkenol ....... 158

A set of six editorials from newspapers in Nebraska and Iowa commenting on state efforts to mandate the use of ethanol over the last year,

submitted by Jason S. Grumet, Executive Director, (NESCAUM) ........... 168

Position statement, on behalf of Sunoco Inc., submitted by Robert H.

Campbell, Chairman, Chief Executive ........................................................ 186

Position statement, submitted by William C. Holmberg, President, Global

Biorefineries, Inc. .......................................................................................... 188
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THE MTBE CRISIS AND THE FUTURE OF

RENEWABLE FUELS

TUESDAY, APRIL 11, 2000

U.S. SENATE, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY, Washington, DC.

The Committee met, pursuant to notice, at 10:11 a.m., in room

SR–328A, Russell Senate Office Building, Hon. Richard G. Lugar,

(Chairman of the Committee,) presiding.

Present or Submitting a Statement: Senators Lugar, Fitzgerald,

Grassley, Harkin, Daschle, and Kerrey.

The CHAIRMAN. Let me ask the permission of the distinguished

Ranking Member and others for Mr. Woolsey to testify before we

give our opening statements. He has a plane and will need to leave

us about 10:30. So in order to utilize our expert witness to give us

an overview, as he has so adeptly on past occasions in this area,

I would like to call upon Mr. Woolsey now.

It is great to have you before us again.

STATEMENT OF R. JAMES WOOLSEY, WASHINGTON, DC.

Mr. WOOLSEY. Mr. Chairman, thank you very much for indulging

me, and also I thank the other witnesses. I have a trial tomorrow

in Los Angeles and I really can stay until about 10:45, I suppose,

but I do need to get to the airport and I really appreciate the Committee’s consideration.

I testify most definitely in support of Senator Daschle’s bill, but

I would like to try to put it in some sort of a strategic context, if

I might. And rather than read from my 5-page statement which I

would ask to be submitted for the record, I will just speak from a

few notes on the general subject.

The CHAIRMAN. It will be published in full.

Mr. WOOLSEY. Politics, I think, often in this country, Mr. Chairman, and I suppose elsewhere as well, involves using events to create an opportunity to make lasting, positive changes, and I would

emphasize the word ‘‘lasting.’’ I was in high school when the Russians launched Sputnik, and at the end of the Eisenhower and beginning of the Kennedy administration, legislators on the Hill took

that opportunity of concern by the American people to begin a fantastically successful space program for the United States. They

used that event to create an opportunity for the country. Now, today, with gasoline and diesel fuel nudging toward $2.00

a gallon, truckers’ strikes, the taxi driver who brought me here this

morning complaining about cost of gasoline, and the country having

discovered, I think somewhat belatedly, the toxicity of MTBE in
2

groundwater, we have a series of events that produces an opportunity for the Congress to take action for a very lasting and positive change, one that would move this country, and I think ultimately the world, away from what is in many senses a costly and

dangerous and increasing dependence on Mideastern oil for our

transportation fuel.

My hope is that a decade or more from now when we have begun

to make a substantial dent in our own oil dependence by using

principally biomass-based ethanol, the country will look back on

this committee’s contribution and Senator Daschle’s bill as it

looked back in 1969, when our astronauts walked on the moon, toward the legislators who made very substantial contributions to

that program in the late 1950s and early 1960s.

The reason I mention particularly biomass ethanol is that I believe it is for a major substitution for petroleum products in this

country the fuel of the future, and I say this for several reasons.

Let me put it this way: I refer at the end of my statement to a possible coalition between cheap hawks, tree-huggers, do-gooders, and

farmers. In the interest of parallelism, I almost said sodbusters,

but before the Agriculture Committee I didn’t want to say anything

that might remotely be taken as derogatory of farmers.

I am a member of the first three of those groups, Mr. Chairman.

I once worked on a farm for a summer, but I certainly can’t claim

to be a farmer. But in the 3 1⁄2 years since you asked me to testify

here on this issue, I have become increasingly familiar with some

of the issues in rural America and I think I understand them a lot

better than I did then.

Let me say why I think each of these four groups, which I think

encompasses a very substantial share, in toto, of the American population, should have an interest in moving toward biomass ethanol

as a substitute for petroleum-based products.

First, the cheap hawks, those of us who are interested in national security but don’t want to fight any more wars in the Mideast than are absolutely essential. The Mideast, the heart of twothirds to three-quarters of the world’s proven oil reserves, is the

home principally of two types of regimes—pathological predators

and vulnerable autocrats.

And in 1990–91, we went to war because one pathological predator, Saddam Hussain, conquered a vulnerable autocrat, the ruler of

Kuwait. When Saddam stopped at the Kuwait-Saudi border, he

was about 100-miles from controlling over half of the world’s proven oil reserves.

Increasingly, in years to come, the rest of the world will depend

on the Mideast. The King Hubbert models of petroleum exploitation, which I think history has proven to be the best and most

objective, increasingly point to world oil production beginning to

turn down sometime between 2010 and 2020, which is just barely

tomorrow in the world of resource allocation. The longest-lasting

reserves, however, and those that the rest of us will increasingly

come to depend on are those in the volatile Mideast.

The tree-huggers should have two major concerns in this area—

global warming gases and air and water pollution. Now, certainly

with respect to the emission of CO–2, biomass-based ethanol beats

virtually all other fuels hands down. The DOE five laboratories’
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study a year-and-a-half ago put biomass-based ethanol at approximately a hundred times better than electric vehicles in terms of

CO–2 emissions.

The reason is, of course, that although you are driving an electric

vehicle in Los Angeles and you are not putting any CO–2 out the

tail pipe, CO–2 is certainly going up into the atmosphere from the

natural gas or coal that is being burned at Four Corners to supply

that electricity.

On global warming gases, it is a debate whether, depending on

exactly how it is done, biomass ethanol in its overall life cycle either adds a tiny share of CO–2 to the process or is a slight sink.

But it is so many more times better than any other solution in

terms of global warming gases that alone, I think, is a major argument in its favor.

As most everyone in this room knows, there is a problem at mixtures of ethanol and gasoline below 22-percent ethanol with a

slightly higher vapor pressure in the tank which leads the slightly

higher pressurization to lead to not emissions out the tail pipe increasing, but rather evaporation carrying some pollutants into the

atmosphere, particularly in summer and particularly in circumstances in which air pollution involving ozone is a serious problem.

There are several ways to deal with this problem for ethanol.

One is to encourage oil producers, as I understand Getty and Tosco

are now beginning to do, to remove butane and pentane, which is

what creates this somewhat perverse effect of adding ethanol below

22-percent in hot weather.

Another possibility is for RFG areas such as California and New

England not to add ethanol in summer months, but to be permitted

some type of credit trading, as I understand is envisioned in Senator Daschle’s bill. And a third possibility, of course, is continuing

to give incentives through the CAFE standards and otherwise for

the production of flexible-fuel vehicles. Many, for example, of the

Ford Tauruses that now come off the line can burn up to 85-percent ethanol, and indeed all automobiles in Brazil are of this type.

It is not rocket science; it is a slightly different type of plastic in

the fuel line and a computer chip in the fuel system. And it is free;

it doesn’t cost you anything extra if you want an FFV from the

automobile manufacturers that do that. Certainly, with respect to

groundwater, given the toxicity of MTBE, again, ethanol of any

type is a slam dunk improvement over MTBE for a fuel additive.

The third area, the do-gooders, is what I refer to as those who

are particularly concerned with Third World poverty. Most Third

World nations, such as in Sub-Saharan Africa that are heavily in

debt, are heavily in debt very much because of their oil bills. They

have to import expensive dollar-denominated oil and they have

only agricultural commodities, which suffer from the same low

prices as our farmers do in this country, to export.

As a result, the countries are heavily in debt and the individual

subsistence farmers are heavily in debt. If they can sell their field

residues to a local ethanol producer as a way of making some extra

money, and incidentally supplying transportation fuel for the regions around them, the economics of many Third World countries,

and particularly the poorest parts of them, turn around.
4

And, finally, farmers and those in rural America generally here

in the United States. We spend many tens of billions of dollars a

year importing petroleum and petroleum products into the United

States. Each $1 billion worth that we could replace with ethanol

in this country is something on the order of 10,000 to 20,000 jobs

in rural America. I believe that there can and should be some

growth in the use of corn-derived ethanol as well, and that will be

a positive thing.

On many of these fronts, corn-derived ethanol is as good as biomass. But for a really substantial increase, one will need to be

talking about biomass-based ethanol. And I was particularly

pleased to see last year Senator Harkin introduce a bill permitting

the use of grasses, for example, from CRP lands to be used solely

for energy purposes, a step which could lead to very substantial

biomass being available for ethanol production.

Let me close, Mr. Chairman, with just a quick word about ethanol producers and oil companies. Both of these institutions do a

wonderful job for America in producing many, many products.

Both, I think, face a choice as the genetic engineering of biocatalysts and production improvements in biomass ethanol begin to

make possible the very substantial use of biomass ethanol as a substitute not only for MTBE but for gasoline generally.

If I could draw an analogy, in 1964–65 when the first silicon chip

came off the production lines and it began to be possible to make

transistors essentially out of sand rather than out of metal and

plastic, IBM, as the dominant computer company in the United

States, indeed in the world, used some chips. It mainly used them,

though, in mainframes and it saw itself as the mainframe computer company for the United States and the world, and for some

several years it prospered in that world.

In the meantime, however, at Xerox PARC and at Apple and

some other places, people were beginning to use sand-based transistors in a rather new and more creative way. And although IBM

prospered in the late 1960s and early 1970s, it fell on hard times

shortly thereafter because it took it some years to realize that

being able to make transistors and integrated circuits out of sand

had fundamentally changed everything.

Now, it would be my very strong hope that those excellent companies that produce ethanol from corn in the United States today,

as well as American oil companies, would see that over the long

run that transition is best made sooner rather than later, and

would be not reluctant but rather enthusiastic participants in the

transition to what my friend David Morris calls a world oriented

toward an economy based on carbohydrates rather than hydrocarbons.

Thank you, Mr. Chairman.

The CHAIRMAN. Well, thank you very much, Ambassador Woolsey. In your longer statement, you have mentioned—and I appreciate our collaboration on the article for Foreign Affairs on this

issue. In that article, we called for more research and development.

Could you outline what needs to happen? Under what conditions

is biomass ethanol economical? What is the status of research, as

you see it, in industries quite apart from the Federal legislation
5

that has passed the Senate which we hope will pass the House that

might give some spur to this?

Mr. WOOLSEY. It is my understanding, Mr. Chairman, that improvements in the use of various processes have led to biomass ethanol now or in the very near future being able to be produced for

something just over a dollar a gallon. One really needs another

substantial reduction of something on the order of 50-cents a gallon

in order to begin to make ethanol competitive on a more or less

equal basis to gasoline, since gasoline has about 30-percent more

energy on a volume weight basis than ethanol does.

And one can’t count on these oil prices staying up at $25, $30 a

barrel forever. I think they are likely over the long run to go up

from where they are now, but there could be panic-inspired increases in production and cuts in oil prices as the oil-producing

countries of OPEC especially begin to see the United States and

other countries turn toward alternative fuels. One of the best ways

to get their attention to reduce oil prices, by the way, is to promote

things like biomass ethanol.

In any case, to get that 50-cents or so a gallon out of cost, one

really needs to be able to do two things, one of which has already

been accomplished. One needs to be able to use both cellulose and

hemicellulose, which together account for something on the order

perhaps of 80- to 85-percent of what grows, rather than only being

able to use starch, which is a tiny share of what grows.

In order to be able to use 80-percent or so of what grows or has

grown, including waste paper, one needs to be able, first of all, to

use the chain of hemicellulose, the a polymer of C5 sugars molecules. C5 sugar cannot be naturally fermented by baker’s yeast,

so even though it is easy to break that polymer down, that chain

of sugars, by heat and otherwise, even when you have the C5

sugar, up until relatively recently you couldn’t do anything with it.

There have now been genetically-engineered biocatalysts, several,

that are able to ferment C5 sugar and turn it into beer, then distilled into ethanol. So one of the two problems is now solved.

A second problem—and the one that I take it your bill and President Clinton’s executive order of August and a number of other efforts at the National Renewable Energy Laboratory, at several universities and at several companies are now focusing on—is how to

break down these long chains of cellulose quickly and easily in

order to get the molecules of C6 sugar which, of course, can be fermented by baker’s yeast, just as human beings have been doing for

thousands of years.

It is breaking that polymer, that long chain of cellulose, probably

with a genetically-engineered enzyme, that remains to be done. I

understand there is substantial progress on it. I also understand

there are some light acid solutions and steam solutions and otherwise that can make progress toward breaking that chain down.

But once that chain can be broken quickly and efficiently by an

enzyme—there are enzymes that will break it today, but they don’t

do it quickly and efficiently enough—I think one will begin to see

some very long faces over in the Persian Gulf. And I don’t know

whether that is months away or a year or two or three away. In

the meantime, even based only on the process improvements that

have been made to date, it is my understanding one ought to be
6

able to look toward production costs of maybe another 20, 25-cents

lower per gallon for ethanol. But the really big breakthrough, being

able to hydrolyze cellulose cheaply and efficiently, is really still to

come.

The CHAIRMAN. Senator Harkin, do you have a question for the

witness?

Senator HARKIN. Thank you, Mr. Woolsey. I thank you for your

interest in this area and your leadership in this area. Just a couple

of things. The issue of fuel cell technology is another exciting development, and every time we are talking about ethanol and starchbased and cellulose-based—I am glad you pointed out that we are

not quite there yet—most people think in terms of the internal

combustion engine.

Have you thought about how you might use renewable resources

to extract hydrogen for use in fuel cell technology?

Mr. WOOLSEY. Yes, Senator Harkin. It is an excellent question.

Arthur D. Little, which, is involved in the development of one of

the leading fuel cells, held a press conference the day after the executive branch announced that they would be able to use gasoline

in their fuel cells. A.D. Little held their press conference and said

that the fuel of choice for their fuel cell was ethanol because of its

environmentally sound characteristics.

Indeed, for most fuel cells, as I understand it, it is a relatively

simple matter to be able to use ethanol in them as an alternative

to gasoline either for mobile fuel cells or the stationary ones, such

as will apparently go on the market within a few months from Plug

Power, along with General Electric. Those uses of ethanol in fuel

cells raise the possibility that using switchgrass from the CRP

lands of some 30-million acres, as the bill you proposed last year

suggested might be done, could have a huge impact on our ability

to fuel the entire American transportation system with carbohydrates instead of hydrocarbons.

Professor Lee Lynd at Dartmouth has estimated that using a

percentage of the agricultural wastes and using the switchgrass

from the CRP lands, even at today’s mileages one could replace 25-

to 30-percent of the gasoline in the country. And if you have fuel

cells in cars getting 70- to 80-miles a gallon instead of the some

20-miles a gallon that one gets on the average today, then biomass

ethanol used in the fuel cells in those vehicles from 30-million

acres ought to be able, according to his calculations, to replace all

of the gasoline that we currently use in the transportation fleet.

So fuel cells, and indeed hybrids even before fuel cells, create the

increasing ability to use biomass ethanol in very large volumes to

replace gasoline more and more as the mileage increases on carswithout putting new land into cultivation, without putting marginal land into cultivation, without replacing any farm land that is

now used for feedgrains or food crops, and without damaging the

environment.

Senator HARKIN. Thank you very much. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Daschle?

Senator DASCHLE. Thank you, Mr. Chairman.

Mr. Ambassador, I appreciate, given your schedule, that you

have been able to come today. I viewed you as a national security
7

witness, but you are every bit as good a technical witness, and we

are very pleased with your contribution this morning.

I like your categorization of cheap hawks and tree-huggers and

do-gooders and farmers, and was especially appreciative that you

rolled into that consumers and oil companies because I think there

are both of those categories as well.

Could you, in the short time that you have, go back to that first

point you made about national security and disruptions and pathological predators, as you have indicated? If you could look into your

crystal ball, what do you see happening in the Middle East in the

future? Do you expect more price hikes, more possible disruptions,

given the leadership in the Middle East, especially in certain countries upon which we are dependent for sources of energy today?

Mr. WOOLSEY. Well, I do, Senator Daschle. I wish I didn’t see

such things, but I have a hard time seeing anything else. Saddam

unfortunately is going to be around for a good deal of time, I am

afraid. And in Iran, although there have certainly been positive developments in the elections with President Khatemi, Iran is still

the number one international sponsor of world terrorism. And the

Iranian military and security services and the like are still solidly

in the hands of the very hard-core mulllahs that are the real power

in Iran.

I think that both because of the situation in those two countries

and because of the overall history of the Mideast and the Persian

Gulf, it is highly likely that sometime within the next decade or

two we will see, together with oil price increases, some type of

threat utilized against us in terms of very, very sharp-almost penal

from their point of view-price increases on the one hand, or oil cutoffs on the other.

Certainly, even Saddam and even those who rule Iran need to

sell their oil. And people say, well, we don’t really need to worry

about this because even if they are bad folks, they will have to sell

it to us. Yes, but being as wealthy as those countries fundamentally are, they can afford to have substantial periods of time in

which they pump low amounts or in which they use pressure on

us to try to threaten, for example, our support of Israel or Turkey

or any of the moderate regimes in the area.

I think it is really very foolhardy for anyone to assume that we

are going to go through the next decade or two without one or more

major crises in the Mideast, including ones that could lead to a cutoff or very, very sharp increases in oil prices as essentially a penalty leveled on the West.

The King Hubbert models that I referred to-that I think most objective outside analysts use to assess the state of things in oil reserves—the optimistic versions tend to say it will be 2020 before

world production tips down, and at that point production costs tend

to go up very sharply. The pessimists tend to say 2010.

The only outlying estimates that are more optimistic than that,

that I am aware of from an objective institution are those from the

U.S. Department of Energy. I have said in the past that they don’t

use other peoples’ models. They use the Julie Andrews’ model, as

in ‘‘I am Just a Cockeyed Optimist.’’ And there are, of course,

OPEC estimates that are different. There are oil company estimates that are different. And there are people who look at the tar
8

sands and heavy oil deposits and say, ‘‘look how much of that there

is.’’ But those latter have substantial environmental and economic

costs in exploitation.

So if you are looking at regular crude, I think most objective assessments would say sometime between 2010 and 2020, world production starts to turn down. And the Mideast will be the last place

where it will turn down, so it will be the place that we will all have

to go.

Senator DASCHLE. Well, over the last couple of decades, I think

those of us who have advocated ethanol have looked at it from the

tree-hugger environmental point of view, from the do-gooder or

what is the right thing to do from an energy perspective, and we

have certainly looked at it from the farm point of view.

But the essence of your testimony from my perspective is what

you have just said about national security and about the predictions about disruptions and price hikes and the lack of continuity in available supply in the future. That is what is really the

premise of this new legislation, that we look at national security

issues and our dependency upon foreign sources a lot more carefully than we have in the past, and that too ought to be a motivation in our creation of good energy public policy.

So from that perspective, especially, but also from the other perspectives that you so adroitly addressed this morning, let me thank

you. I thought it was very, very good testimony. I appreciate your

being here.

Mr. WOOLSEY. Thank you, Senator Daschle.

The CHAIRMAN. Well, thank you, Senator Daschle.

Let me just say that Senator Daschle’s legislation you have commended, and properly so, and Senator Harkin’s efforts. When you

last appeared and when we wrote our article, we predicted OPEC

would strike again. Now, our constituents out at the pump now put

that as the major issue in American life, and they say why was

there no leadership, why was there no vision? Well, right here in

the Ag Committee, a lot of vision and a lot of leadership. The problem is that we have not made the headway we need to make.

Now, fundamentally, Senator Daschle’s question on national security is critical. It is as clear as any of us can see right now we

are going to have spikes of oil that will disrupt our economy, and

it may or may not be controllable and it will happen before 2010.

It may happen as soon as next week, as OPEC discovers that the

price of oil has gone down 31-percent and they say, we are tired

of this and we are going to turn off the spigot, despite the meeting

we just had.

If we are so short-sighted as not to be able to meet this in an

environmentally-satisfying way and in a way that helps our farmers and our producers, shame on all of us. It is absolutely as clear

as it could be. So this is why we will continue to have these hearings, and I hope that Foreign Relations and the national security

committees and what have you will take it as seriously as we do.

We appreciate your recurring voice of wisdom, and I call upon

the distinguished Ranking Member.

Senator HARKIN. I just wanted to add to that. You know, we talk

about the price spikes and stuff, but there is another side of this,

too, that bedevils us, and that is because of the OPEC nations’ abil-
9

ity to control their output, any time that we start investing a lot

of money into new plant and renewable energy, they can drop their

price and increase their output.

So they always make it so that the market doesn’t quite meet

what we want to do. So then we hold back, we don’t invest, and

they spike the price up again. Well, then we make motions like we

do to have more production of renewable energy, and they drop it

back down again. And so somehow it seems to me that we have

just got to bite the bullet, so to speak, to use that colloquialism,

and we have just got to forge ahead in this regardless of what they

do with their output at any given point in time.

Mr. WOOLSEY. Senator Harkin, I think that is exactly right. We

are Charlie Brown and they are Lucy with the football.

Senator HARKIN. That is right.

Mr. WOOLSEY. And it has been that way for a long time.

Senator HARKIN. I like that.

Mr. WOOLSEY. And I think, Mr. Chairman, if the complaints from

my taxi driver this morning about gasoline prices are any indication—that is my polling, Washington taxi drivers—once the taxi

drivers join the Agriculture Committee on this issue, I think we are

going to win.

The CHAIRMAN. Well, we thank you again very much for coming

to take part in this hearing.

Mr. WOOLSEY. Thank you, Mr. Chairman, Senator Harkin, Senator Daschle.

[The prepared statement of Mr. Woolsey can be found in the appendix on page 58.]

The CHAIRMAN. Let me mention again that a statement from

Senator Kerrey has been received by the Chair and it will be included in full in the record.

[The prepared statement of Senator Kerrey can be found in the

appendix on page 65.]

Likewise, a statement by Senator Fitzgerald will be included.

Senator Fitzgerald will Chair a subcommittee field hearing on

MTBE and ethanol next week in Illinois, in his home State. So I

want to make note of that.

[The prepared statement of Senator Fitzgerald can be found in

the appendix on page 70.]

Now, I know, Senator Daschle, you will need to leave at some

point.

Senator DASCHLE. I am going to be able to stay for a little longer

than I expected.

The CHAIRMAN. I thought we would give our opening statements,

and so I will now give mine. I will call upon the Ranking Member

or Senator Daschle, as the case may be, in terms of time.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S.

SENATOR FROM INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

In July of 1999, an independent Blue Ribbon Panel on

Oxygenates in Gasoline called for major reductions in the use of

MTBE as an additive in gasoline. They did so because of growing

evidence and public concern regarding pollution of drinking water

supplies by MTBE.
10

Evidence of water contamination by MTBE was highest in those

areas of the country required to adopt, or who had voluntarily

adopted, the Reformulated Gasoline Program established by the

Daschle-Dole amendment to the Clean Air Act. The RFG program

was designed to reduce smog, as well as air toxics, and contained

a minimum 2-percent oxygen content to facilitate those reductions.

The Reformulated Gasoline Program was established by the

Dole-Daschle amendment to the Clean Air Act, an amendment and

an Act which I strongly supported, as did most members of this

committee, having participated in meetings convened by Senator

Mitchell, Senator Dole, and the Bush administration to draft clean

air amendments which were strong and yet cost-effective.

The acid rain provisions of the Clean Air Act have been a huge

success, with the environmental economists at the independent and

widely respected Resources for the Future estimating public benefits outweighing costs by a ratio of 66 to 1.

The Reformulated Gasoline Program also has proven to be a success in reducing smog, and has exceeded expectations in reducing

dangerous and carcinogenic air toxics in gasoline. The second stage

of the Reformulated Gasoline Program will commence this summer

and will have an even greater effect in reducing ozone pollution

and air toxics.

A largely unanticipated effect of the Reformulated Gasoline Program was that MTBE, rather than ethanol, became the oxygenate

of choice outside of the Midwest to meet the 2-percent oxygen requirement in the Reformulated Gasoline Program. The reasons

why refiners have preferred to use MTBE as an oxygenate rather

than ethanol are said to relate to issues of cost and transportation,

but they also result from a natural preference by oil companies for

a product which they themselves make, namely MTBE, rather than

one which they purchase from others, namely ethanol.

Because of concerns regarding water pollution, it is clear that the

existing situation regarding MTBE is not tenable. The Governor of

California has called for a 3-year phase-out of MTBE in California,

and the California Air Resources Board has adopted regulations to

that effect. Environmental officials from 8 Northeastern States

have proposed a phase-down and a capping of the use of MTBE in

gasoline in their States.

Retaining the current oxygenate requirement for reformulated

gasoline is certainly a viable solution. A USDA study has shown

that it is technically and economically feasible to replace all of the

MTBE currently used in reformulated gasoline with ethanol over a

4-year period. A study by the Governors’ Ethanol Coalition has projected major benefits to rural economies, farm income and jobs, if

ethanol is allowed to replace MTBE as MTBE use is phased out.

Officials from California and the Northeast are requesting legislation to repeal or at least to facilitate waivers of the oxygenate requirement. This alternative would sacrifice some of the energy security and economic benefits of increased ethanol use.

Senator Daschle has presented a compromise proposal which

would allow for legislative authority to waive the oxygenate requirements, provided that such authority was accomplished by

strict anti-backsliding provisions regarding air toxics and a renewable fuel standard to ensure that markets for renewable fuels will
11

continue to expand as a result of the MTBE crisis. He includes a

biofuels credit in his draft legislation.

As concerns over energy security mount, there is growing recognition of the importance of adopting a national energy strategy

which will address the development of alternative fuels. It is clear

that MTBE is on its way out. The question is what kind of legislation is needed to facilitate its departure and whether that legislation will be based upon consideration of all of the environmental

and energy security issues involved.

[The prepared statement of Senator Lugar can be found in the

appendix on page 73.]

I look forward to the testimony of our well-informed and expert

witnesses, and I call now upon the distinguished Ranking Member,

Senator Harkin, for his opening comments.

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM

IOWA, RANKING MEMBER, COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

Senator HARKIN. Thank you very much, Mr. Chairman. It is hard

to imagine a more timely or important subject than the serious environmental problems caused by MTBE and how solving those

problems may affect the future for renewable fuels like ethanol. So

I commend you for holding this hearing and for your strong support

for renewable energy. I look forward to continuing to work with you

in that effort.

I want to welcome our witnesses today, and especially want to

thank the Governor of my State of Iowa, Governor Tom Vilsack,

who is the Chair of the Governors’ Ethanol Coalition, for being

here.

I remember well working with my colleagues, Senator Daschle

and Senator Dole, in 1990 to get the amendment adopted requiring

a minimum oxygen content in reformulated gasoline. Senator

Daschle and Senator Dole truly led a magnificent effort in getting

that done. The Reformulated Gasoline Program has delivered very

substantial air quality benefits, and the oxygen requirement has

been an important part of RFG’s success.

I believe the RFG oxygen standard continues to have value in

cleaning up our air. Frankly, though, the oil companies hijacked

the RFG program, the RFG oxygen requirement. They rejected ethanol, an oxygen derivative that is renewable, domestically produced, and environmentally-friendly. Instead, for nearly 90-percent

of the RFG market, they chose MTBE, which is derived from petroleum, substantially imported, and high toxic and polluting. In just

this short time, in one decade, MTBE has become our second most

common groundwater contaminant. It has been detected in the

groundwater of 49 States, including to a shocking degree in my

own State of Iowa.

Now, Mr. Chairman, I have here a jar that has got a clear liquid

in it. This is water that was drawn from a well in Santa Monica,

California. It has got 600 parts per billion in Santa Monica well

water, and I am told that Santa Monica has been forced to close

71-percent of their wells because of this.

Smell it, just take a whiff of that. Let me shake it up a little bit

more and get it out of there.
12

The CHAIRMAN. Get the full benefit.

Senator HARKIN. Just take a whiff of that. That is water from a

well. I am going to pass this down. It says ‘‘don’t drink,’’ but you

ought to smell it. It is the craziest thing. This is just water that

came out of a well and that is what we are facing, that kind of contamination. Well, MTBE is now on its way out, thank God, because

of things like this. National legislation should be passed to ban

MTBE forever.

In my view, there are two critical tests for any legislation. First,

it must maintain, and preferably exceed, all of the clean air, public

health, and environmental benefits in the present law on RFG. second, it must ensure a future for ethanol use that is fully equal to

or greater than that provided under current law.

The recent sharp hike in oil and fuel prices, as we just heard

from the previous witness, has set the stage for serious discussion

about renewable fuels. We are now importing well over 50-percent

of our oil, and it may reach 75-percent in 10- to 15-years. Only 3-

percent of U.S. energy comes from renewable sources. Ethanol

makes up about 1.2-percent, so we haven’t even scratched the surface in using renewable fuels.

As important as the RFG oxygen standard is, we must be careful

not to place so much focus on it that we lose sight of the potential

for using far more ethanol than the RFG oxygen standard itself

would provide for. That is why I am so interested in the proposals

from Senator Daschle and the administration for establishing renewable fuels requirements. A renewable fuel standard crafted in

the right way could result in far more ethanol use than under current law. Renewable fuels hold tremendous promise for improving

air and water quality and energy security. They also promise to improve farm income and create jobs and economic growth in rural

communities.

So as we consider legislation here, I think of a work day I just

spent. In fact, I called you. I remember when you and I spoke that

day, I was working at the Sunrise Energy Cooperative in Benton

County, Iowa, a new ethanol plant that just came on line late last

fall. I spent a day working there. It is a farmer-owned cooperative.

It is improving the local farm economy. It is boosting that local

economy because they are also feeding that wet mill to cattle. That

is the type of enterprise I think we ought to be promoting. It has

all kinds of beneficial effects for our country.

So again, Mr. Chairman, I thank you for your leadership. I especially want to thank Senator Daschle for his many years of leadership. He was really the leader, I think, in 1990 in making sure we

had the oxygenate requirement in the Reformulated Fuels Program. And I don’t want to put words in his mouths, but I daresay

that neither one of us thought at that time that the oxygenate

standard would be hijacked by the oil companies and used for

MTBE.

But now we have seen, just as the oil companies polluted us before with xylene and toluene and benzene, and we got them to take

that out, now they have replaced that witch’s brew with MTBE and

now we have got a lot of contaminated water that we have got to

clean up in this country. Let’s not make that mistake again. So I

am very interested in Senator Daschle’s proposal. Again, if it
13

means that we are going to produce more ethanol in this country

and more bio-based fuels, then we are better off for it.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Harkin.

Senator Daschle.

STATEMENT OF HON. THOMAS A. DASCHLE, A U.S. SENATOR

FROM SOUTH DAKOTA

Senator DASCHLE. Well, thank you very much, Mr. Chairman.

Let me applaud both of you for excellent opening statements. As

you said, Mr. Chairman, earlier there is a good deal of wisdom

when it comes to energy and security policy right here in the Agriculture Committee, and I think your leadership and your eloquence

has demonstrated that again this morning.

I can recall, Senator Harkin, a hearing that we held about 10-

years ago where we were debating ETBE and MTBE, and we were

warning even back then about the implications of dependence upon

MTBE. And you had two samples; you had an ethanol sample and

an MTBE sample. You drank some of that ethanol that day and

walked out of the room in a straight line. I was really impressed.

But you dared everybody to even smell, much less taste, that

MTBE and nobody would.

Senator HARKIN. That is right.

Senator DASCHLE. And the point you made is so well taken today

again that we are still fighting that battle. We all knew back then

that it was going to be a serious problem, and it has now unfortunately come to fruition.

Mr. Chairman, I really appreciate your interest in exploring how

resolution of this MTBE water contamination problem will affect

the Nation’s gasoline market and the future use of renewable fuels,

and I applaud you for inviting so many excellent witnesses. Especially, I want to welcome Trevor Guthmiller, who is a very special

friend and has been a leader on this issue for a long, long time,

from Sioux Falls, South Dakota.

I think this debate will have consequences for our Nation’s farmers and our rural economy, in addition to, as the ambassador said,

those concerned about especially our national security as we look

to the future. Most observers agree that MTBE use will decline

substantially or disappear altogether in the near term. As a result,

Congress must now decide whether to allow the market to replace

that MTBE volume with imported oil or enact policies that will ensure that it is replaced with domestic renewable ethanol.

Ethanol advocates meanwhile face a strategic decision about how

best to respond to this market opportunity. Should they oppose any

weakening of the oxygen standard and try to capture the MTBE

market nationwide, or should they accept a renewable fuels standard that ensures long-term, predictable growth of the ethanol industry in exchange for allowing States to waive the RFG requirement? I favor the latter approach and I want to take just a moment

to explain why.

The MTBE crisis has left the RFG oxygen requirement open to

legislative attack. One only has to consider these factors: California

refiners have shown that clean-burning gasoline can now be pro-
14

duced without oxygen. EPA’s Blue Ribbon Panel has recommended

the oxygen requirement be repealed.

The RFG oxygen requirement is opposed by a diverse coalition

that includes the American Lung Association, the American Petroleum Institute, the New England States Coordinated Air Use Management Agency, the State of California, and the National Resources Defense Council. Moreover, support for the oxygen requirement is guaranteed to weaken even more over time.

As emissions control technology of automobiles improves, the air

quality benefits of oxygen in gasoline are declining, and the justification for the RFG oxygen requirement is consequently diminishing. Given this reality, our choice between defending the oxygen

requirement in the near term, realizing that its days are ultimately

numbered, or using the need to get MTBE out of groundwater to

leverage a long-term solution that guarantees the future growth of

the ethanol industry, in my view, is a simple answer.

In my judgment, a renewable fuels standard is the most effective

way to put both the ethanol industry on a steady growth path well

into the future and protect the clean air gains of the RFG program.

I know some within the ethanol industry advocate banning MTBE

and defending the oxygen requirement to the death. That option

unquestionably has appeal. It would create a huge new ethanol demand in RFG areas.

It is unlikely, however, that Congress will enact such a bill, particularly since rising gas prices have sensitized Members to the

need to avoid any further disruptions in the gasoline market. Moreover, this course presents the very real risk of precipitating a backlash against ethanol should supply shortages occur due to drought

or other uncontrollable circumstances.

In that event, ethanol opponents will seize on the public outrage

at supply disruptions and higher prices, blame ethanol as the culprit and dismantle the program. One only need envision a repeat

of the 1996 drought-induced ethanol shortfall in an environment

where ethanol is the sole oxygenate in a nationwide RFG program

to appreciate the potential downside of this approach.

I support a plan that directs EPA to regulate MTBE, allows

States to opt out of the oxygen requirement, preserves existing air

quality benefits, and establishes a nationwide renewable fuels requirement. This approach would ensure not only a steady growth

of ethanol over the next decade, but would also allow successful

RFG areas like Chicago and Milwaukee to remain in the oxygen

program.

Gradually increasing the use of ethanol in the near term through

the establishment of a renewable fuels standard would facilitate a

smooth transition from MTBE to ethanol, spreading its use over

the entire gasoline pool through a credit trading system, and avoiding price spikes and disruption of the gasoline market. This approach would provide a solid foundation for ethanol by shifting

from its declining value as an oxygenate to its value as a domestic

renewable resource that will reduce our dependence on foreign oil

and boost farm income. Finally, it will encourage the use of biodiesel fuel and biomass-based ethanol, which could play prominent

roles in America’s future fuels markets.
15

There is a bipartisan precedent for the establishment of a renewable fuels standard. Our colleagues, Senator Harkin and Senator

Grassley, have both been articulate supporters of a renewable fuels

standard for their home State of Iowa, as has another witness here

today, Governor Tom Vilsack.

Governor Mike Johanns has also been a strong advocate of a renewable fuels standard in Nebraska. The Minnesota experience,

where every gallon of gasoline contains renewable ethanol, has

proven beyond a shadow of a doubt that a renewable fuels standard

benefits consumers, the environment, farmers, the economy, and

after the ambassador’s testimony I would say cheap hawks.

I hope the members of this committee will join me in carefully

considering this approach. It is designed to complement the Chairman’s biofuels legislation, of which I am proud to be a cosponsor.

It will substantially expand the existing corn ethanol industry over

the next decade, while fostering development of a biomass ethanol

industry at the same time.

Again, Mr. Chairman, I thank you.

The CHAIRMAN. Well, thank you very much, Senator Daschle, for

your leadership and for that very strong statement.

The panel now before us includes Governor Vilsack of Iowa;

Keith Collins, Chief Economist of the USDA; Robert Perciasepe,

who is the Assistant Administrator of Air and Radiation of the U.S.

Environmental Protection Agency; and Mark Mazur, Director of the

Office of Policy of the U.S. Department of Energy.

I am going to call upon Governor Vilsack to give his testimony

because he has urgent time requirements which we certainly understand. We are grateful to have you, Governor, and honored to

have you here today.

I will ask each of you to try to summarize within 5-minutes, but

a little bit over if you cannot make that, because we want to hear

your testimony. We also want to have time for questions and backand-forth.

Governor Vilsack.

STATEMENT OF HON. THOMAS VILSACK, GOVERNOR, STATE

OF IOWA, AND CHAIRMAN, GOVERNORS’ ETHANOL COALITION

Governor VILSACK. Thank you very much, Mr. Chair. Good morning to you and to the Members of the Committee. I certainly appreciate the opportunity to testify about the future role of ethanol in

the Nation’s RFG program.

Today’s record high gasoline prices and record low commodity

prices underscore the need for expanded production and use of ethanol. Just as importantly, ethanol is the solution to many of the

environmental concerns which have been discussed this morning.

I am here also as Chair of the Governors’ Ethanol Coalition, a

group of 24 governors who support the increased production and

use of ethanol, which would decrease the Nation’s reliance on imported energy and create a cleaner environment.

Let me also say that as Governor of Iowa, the number one cornproducing State in the Nation, I am a strong believer in ethanol.

I have seen firsthand the positive impact ethanol has had on local

communities and the environment. In Iowa, we have worked diligently to develop ethanol production capacity because ethanol pro-
16

duction provides new markets for agricultural products and adds

value to those products through processing.

We also recognize that processing is an opportunity for farmers

to stay in business. With today’s low commodity prices, there is little profit in production agriculture, but there is profit and opportunity in processing. By allowing producers the opportunity to get

involved in value-added processing, our farmers and rural communities will benefit.

In Iowa, as Senator Harkin well knows, and as Senator Grassley

knows, we have a strong commitment to protecting and enhancing

our natural resources. Balancing the needs of an agricultural economy with environmental sustainability is a continuous responsibility that we take very seriously. We believe ethanol serves as a

bridge between those two goals.

I am here today to say that ethanol’s benefits to the economy and

the environment are clear, and we must continue to advocate

ethanol’s role as a clean-burning fuel in the RFG program. The

RFG program, with the oxygen requirement, has resulted in air

quality gains beyond the emission reduction goals in the Clean Air

Act of 1990. According to EPA, the emissions reduced from the use

of RFG are the equivalent of taking 16-million cars off the road

each year.

As the Committee knows, there are two oxygenates which are

widely used today—MTBE and renewable ethanol. We now know

that MTBE poses serious environmental risks. Even in Iowa, where

we are not required to use RFG and where MTBE is not currently

used or sold, the Iowa Department of Natural Resources recently

found that 29-percent of tested groundwater samples exceeded the

U.S. Environmental Protection Agency’s health advisory level of 20

parts per billion.

Oxygenates such as ethanol are added to gasoline to reduce

harmful exhaust emissions and improve air quality. In January,

the California Environmental Policy Council unanimously approved

reports finding that the use of ethanol as a replacement for MTBE

would provide no negative impact on air quality, water quality, or

public health. This report is similar to a report that the Governors’

Ethanol Coalition issued, a report entitled ‘‘The Fate and Transport

of Ethanol-Blended Gasoline in the Environment,’’ which confirmed

that ethanol is a safe, naturally-occurring substance that rapidly

biodegrades and poses no threat to groundwater or surface water.

In light of high gasoline prices, it is interesting to point out that

the California Energy Commission determined that a phase-out of

MTBE use and ethanol-blended fuel represents the least-cost option, and less costly than the use of fuels containing no oxygenates.

Last fall, Governor Graves, who was then Chair of the Governor’s

Coalition, and I signed a letter to Senator Daschle commenting on

his proposed legislation to address the MTBE water contamination

problem that would have imposed a blanket repeal of the oxygen

standard. In that letter, we endorsed the linkage of complementing

the minimum oxygen standard with a renewable fuels standard for

the Nation as a means of providing selective flexibility to certain

areas such as California that have been particularly impacted by

MTBE water contamination. We are pleased that Senator Daschle

was open to our suggestion.
17

Just last month, I issued a press release applauding the announcement of the administration’s principles addressing the

MTBE problem. While I am encouraged by the EPA’s decision to

phase out MTBE, I also believe that it is imperative that a statutory requirement also be put in place that a percentage of all motor

fuels be made from environmentally-friendly ethanol. I believe that

the renewable fuels standard meets this test and would provide the

ethanol industry and our hard-pressed farmers with a sustainable

growth environment for years to come.

In conclusion, I just want to comment, Mr. Chair, that just a few

weeks ago the Governor’s Ethanol Coalition released a report of

current and future ethanol production, responding to the concerns

that we may not have sufficient capacity to meet the demand. This

report, ‘‘The Ability of the U.S. Ethanol Industry to Replace

MTBE,’’ concludes that the U.S. ethanol industry does, in fact,

have the ability to double its capacity within 2-years and to

produce 3.5-billion-gallons a year by the year 2004. This would result in an excess supply of over 300-million gallons. I would like

to offer this report, with the Chair’s permission, for the Committee

to review.

The Nation’s 58 ethanol plants, located in 19 States, are well

prepared to meet the immediate demand for the oxygen replacement to MTBE. This increased capacity of ethanol production will

result from improved production efficiency, expansion of existing

facilities, new construction underway, and proposed facilities.

Let me point out just briefly the economic benefits that will result from expanded ethanol use. 47,000 new jobs will be created

across this Nation 2,300 jobs in transportation, 1,300 jobs in construction, 3,200 jobs in the retail sector, 11,000 jobs in service industries. This study projects that the industry’s expansion will re- sult in an additional $11.7 billion to real GDP by 2004, and increased household income of $2.5 billion. A recent letter from U.S.

Secretary of Agriculture Dan Glickman to Senator Harkin demonstrates that we not only have the capacity to produce the ethanol, we also have the ability to transport it to the market.

Given these facts, and in light of the vast economic and environmental repercussions associated with the issue, I support and recommend that the following principles be considered by this committee and the Nation as a whole: a nationwide phase-out of the use

of MTBE as a fuel additive within the next 3-years; a requirement

that fuel-dispensing systems be clearly labeled if MTBE is sold

through those dispensers; support for research and remediation of

groundwater contamination; a continuation of the oxygen standard;

prevention of any reversal of emissions reductions gained thus far

through the RFG program; the establishment of regulations providing at least a .5-pound credit for reduction in carbon monoxide

emissions realized from a 10-percent blend of ethanol in the Phase

II RFG; and encouragement of the production and use of renewable

fuels as an octane enhancer and as a replacement fuel for gasoline.

Thank you, Mr. Chair.

The CHAIRMAN. Thank you very much, Governor Vilsack, for your

leadership and for your testimony this morning.

[The prepared statement of Governor Vilsack can be found in the

appendix on page 75.]
18

Mr. Collins.

Mr. COLLINS. Mr. Chairman, Mr. Perciasepe has the most general statement among the administration witnesses, and perhaps

an organizing statement, and I wonder if we might let him go first.

The CHAIRMAN. We will be happy to yield to the gentleman.

STATEMENT OF ROBERT PERCIASEPE, ASSISTANT ADMINISTRATOR, OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION AGENCY, WASHINGTON, DC.

Mr. PERCIASEPE. Thank you, Mr. Chairman. My name is Bob

Perciasepe, Assistant Administrator at the Environmental Protection Agency. I guess one credential I will mention that I very rarely

mention when I am in front of an agriculture committee is I am

the first and probably the only Assistant Administrator for Air at

EPA that will ever have graduated from an agricultural college.

The CHAIRMAN. That is very commendable.

Mr. PERCIASEPE. I would like to take this opportunity and appreciate the invitation to talk a little bit about the administration’s recent announcements and recommendations on reducing or eliminating the use of MTBE and boosting the use of alternatives like ethanol that pose less threat to groundwater.

The objectives we have are to protect drinking water, to preserve

the clean benefits, and to promote greater production of renewable

fuels. And, again, I am, I think, repeating what has been said already several times this morning. Last month, when Administrator

Browner and Secretary Glickman announced these principles, they

laid out that kind of a strategic approach that we felt was appropriate, and I will just mention briefly what those three principles

were.

First, Congress should amend the Clean Air Act to provide the

authority to reduce or eliminate MTBE. I think it has been mentioned before, but I will clarify from our perspective that the Clean

Air Act is not elegantly designed to be able to deal with this situation the way it is currently written, and so we think legislative action is needed to do that, and it is needed for all the reasons we

have already mentioned.

Second, as MTBE is reduced or eliminated, we must ensure that

the clean air gains that we have made are preserved, and this

means the toxic emissions, the ozone precursors like volatile organic compounds and nitrogen oxides and carbon monoxide, again,

which all have already been mentioned.

And, third, we feel that the oxygenate requirement in the current

law will be a constraining factor in developing these other alternatives, and that we ought to replace it with a renewable fuel

standard. And the objective there is again similar to what has already been mentioned many times, to increase farm income, create

jobs in rural America, improve our energy security—and I don’t

think we have had a more direct summation of that issue than we

did from the previous witness—and to protect the environment.

We do need to start with a little bit of history on the Reformulated Gasoline Program, and I would just like to reiterate its current successes. It has been successful in improving air quality in

many cities across the country. It has been successful in achieving

the goals that Congress set out for it, including air quality, en-
19

hanced energy security, and the use of oxygenates and renewable

fuels.

It has reduced ozone levels in cities that it is used, but we still

have ozone problems in the United States. So we can’t turn ourselves away from the air quality needs that we have as we look at

the solution to these problems. We still have 30-areas in the United

States that don’t meet the one-hour standard, and you know there

is a continuing debate on whether or not even that ozone level is

the proper one. The health effects we are talking about are respiratory infections, lung inflammation, respiratory diseases such as

asthma, and decreased lung function.

The oxygenate program and the RFG program, where it has been

used in the United States, has reduced in the first phase which

started in 1995, volatile organic compounds and toxics by 17-percent and nitrogen oxides by 1 1⁄2 percent. The second phase that

has been mentioned which starts this summer will reduce VOCs,

or volatile organic compounds, by 27-percent and toxics by 22-percent and nitrogen oxides 7-percent.

I will add as a little editorial comment to those requirements

that in most cities those levels are being bettered by the use of reformulated gasoline. And as the governor mentioned, that is the

equivalent to about 16 million cars of the road. Seventeen States

and the District of Columbia utilize this strategy to help them in

their clean air plans.

As has also been mentioned, about 87-percent, 85- to 87-percent

of this reformulated gasoline in the United States uses MTBE, or

methyl tertiary butyl ether, as the oxygenate of choice. And that

brings us to the concern that I think Senator Harkin’s bottle

brought home, and that is that despite these air quality improvements which are not insignificant, there is widespread concern

about the contamination to groundwater. Evidence shows from the

U.S. Geological Survey, 21-percent of the samples taken in areas

that use RFG. We find MTBE in only 2-percent in the non-RFG

areas. So, clearly, it is linked.

As mentioned, the Blue Ribbon Panel that EPA set up in which

USDA and the Department of Energy cooperated and worked with

us—that Panel recommended many of the same things that are

being discussed here this morning: flexibility on RFG with the

oxygenated standard, reducing the use of MTBE, and improving

our remediation of leaking tanks.

We are doing other things that the Blue Ribbon Panel recommended in the area of reformulated gasoline and leaking tanks.

One is we are developing new drinking water standards. We are

developing water quality standards. We are improving the compliance with our underground storage tank program. We are working

with the University of California to evaluate leak detection technologies, and we are doing demonstration projects on new remediation techniques.

I will just close by saying that these legislative principles I mentioned earlier, which we will talk about in a little more detail here

with some more information, are designed to achieve these objectives in the least-cost way. You have to look at them together as

a package in order to achieve all the goals that we set out to

achieve in 1990, but to achieve them in a more flexible way for gas-
20

oline prices and in a more effective way for promoting renewable

fuels and energy security. So looking at them together as a package

is what we present and want to work with Congress on.

So thank you for that opening comment and I will yield to my

colleagues.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Perciasepe can be found in the

appendix on page 82.]

Mr. Collins.

STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S.

DEPARTMENT OF AGRICULTURE, WASHINGTON, DC.

Mr. COLLINS. Mr. Chairman, Senator Harkin and Daschle, thank

you for the opportunity to participate today in this hearing on

MTBE, renewable fuels, and related issues.

Following on Mr. Perciasepe’s overview of why MTBE should be

phased down and how, I want to use my couple of minutes to describe the important role of biofuels, principally ethanol, for U.S.

agriculture, and why today’s farmers, the administration, and

many others want to see an expanded role for biofuels and bioenergy in the future.

We have witnessed recently that a very tight energy market can

impose a substantial financial burden on U.S. farmers as they face

increased production expenses. But it also underscores a growing

opportunity that farmers have as producers of renewable fuels. Production of ethanol, and ethanol being the primary renewable fuel

today, rose from a few million gallons in the late 1970s to 1.5 billion gallons produced in 1999. With low corn prices and high oil

prices, ethanol production has been setting new record highs this

winter. The most recent data for February shows ethanol production at a record high 108,000 barrels per day.

Ethanol has grown for several reasons. One reason is that its

production costs have declined over time, and they have declined

quite substantially, and that has generated commercial investment.

It is also, as mentioned, an important source of oxygen for the winter time oxy-fuels program and Reformulated Gasoline Program.

And ethanol is in demand as well as an octane enhancer.

Today, corn accounts for about 90-percent of ethanol production,

but there are other feedstocks used as well—wheat, sorghum, for

example, and starch-and sugar-containing wastes as well. This

year, we expect that corn used in ethanol production will total

about 550-million bushels. And if you look back over the 1990s,

what we have seen is that corn used in ethanol production grew

at an annual average rate of about 5-percent, and that is substantially faster than the rate of growth of corn exports or corn used

in domestic feed use for livestock over the 1990s.

We have estimated how ethanol production affects U.S. farmers,

and we have done that simply assuming no corn use in ethanol and

putting that into our economic models for several years to see what

happens to prices, farm income, and variables like that.

Without corn ethanol production, corn cash receipts would be

about $2.5 billion lower. U.S. net farm income would be about $1.3

billion lower over a 7-year analysis period that we looked at. We

would also have lower farm exports, and we would also have higher
21

imported oil costs and that would contribute about $1 billion to the

trade deficit.

Now, these effects, I think, indicate the important role that ethanol plays today in supporting the farm economy, and it is one of

the reasons why on February 2nd Secretary Glickman announced

a biofuels program that we will put in place this year to help support increased ethanol production capacity expansion in the United

States using Commodity Credit Corporation financing.

Because of such benefits, there is great interest within agriculture in the role of ethanol as a replacement for MTBE, and we

at USDA have looked at the question, assuming that MTBE is

phased out by the year 2004 and that ethanol would replace the

oxygen now supplied by MTBE in reformulated and oxygenated

gasoline.

The impacts for agriculture of that kind of an event are very

similar to the ones that I just described for having no ethanol at

all because we estimated that by 2004, ethanol production would

have to about double to replace the oxygen in MTBE. Therefore,

you get very similar effects as the absence of ethanol, farm income

rising $1 billion a year, on average, over time, and that is primarily

due to an annual average increase in corn prices that we would

project over the first decade of this century of about 15-cents per

bushel. There would also be positive trade balance and rural employment effects.

We have also completed some limited analysis of the effects of

waiving the 2-percent oxygenate requirement in reformulated gasoline and replacing it with a national average renewable fuel standard. The results of that analysis indicate that an appropriately

specified renewable fuels standard could provide the same or greater economic benefits to agriculture in rural areas as a phase-out of

MTBE with no waiver of the oxygenate requirement.

I want to conclude by saying that the administration has a great

interest in maintaining and increasing the role of renewable fuels

and bioenergy for reasons for economics, energy security, and key

environmental effects. Your bill, Mr. Chairman, S. 935, the National Sustainable Fuels and Chemicals Act of 1999, and the President’s Executive Order 13134 on developing bio-based products and

bioenergy, provide the goals and the guidance to Federal agencies

to improve research, cooperation and coordination.

And I think today on the research side, particularly under the

combined leadership of the Department of Energy and USDA, Federal agencies are working better than ever to help achieve a bright

future for cleaner air, cleaner water, and an efficient and sustainable supply of energy.

Thank you.

The CHAIRMAN. Thank you very much, Mr. Collins.

[The prepared statement of Mr. Collins can be found in the appendix on page 89.]

Dr. Mazur.

STATEMENT OF MARK J. MAZUR, DIRECTOR, OFFICE OF

POLICY, U.S. DEPARTMENT OF ENERGY, WASHINGTON, DC.

Mr. MAZUR. Mr. Chairman, members of the Committee, I am

pleased to be here today to discuss the role oxygenates like methyl
22

tertiate butyl ether and ethanol play in the production and supply

of gasoline, and how possible reductions in the use of MTBE and

other changes in the Federal Reformulated Gasoline Program

might affect the use of ethanol.

I want to start off by highlighting the Department of Energy’s

analytical focus on topics related to motor fuels. The Department

has done a series of detailed analyses of the costs and refinery

operational impacts of various product quality regulations, as well

as looked at broader fuel supply and pricing issues. The Policy Office, where I work within the Department, has maintained a focus

on how the various proposals will affect the American consumer,

sometimes an overlooked stakeholder in the policy development

process.

Our work indicates that the Federal Reformulated Gasoline Program has been an air quality success, with very few negative impacts on gasoline markets or consumers. There have been adequate

supplies for RFG and its price has been generally only slightly

higher than that for conventional gasoline.

Moreover, oxygenates also provide important energy security

benefits by increasing the gasoline supply and bringing non-petroleum and renewable feedstocks into the overall mix of refinery inputs. To the extent these oxygenates come from non-petroleum and

domestic sources—and a large majority of oxygenates that we do

use now come from domestic sources—they have the added benefit

of displacing imported petroleum and refined product.

We share the concerns of many over the water quality impacts

of MTBE, and the administration has put forward a set of legislative principles that my colleague, Bob Perciasepe, went over. The

key recommendations are to gradually phase down or eliminate

MTBE use in gasoline, ensure that air quality gains are not diminished, and replace the reformulated gasoline oxygenate requirement with a renewable fuel standard for all gasoline.

As we work together to develop the details of our program to reduce MTBE use and increase the use of renewables, it will be of

utmost importance that we move deliberately and carefully so that

we do not create gasoline supplier price problems or other unintended consequences. As you know, we are operating in a tight gasoline market this summer, and projections indicate it is likely that

motor fuel supply and demand balance in the foreseeable future

will also be somewhat tight.

It is in this context that we must find a way to reduce or eliminate over 280,000 barrels a day of MTBE use. That is equivalent

to about 400,000 barrels a day of gasoline, due to the variable characteristics of MTBE. It is a large volume, basically the output of

four or five large refineries. To accommodate these changes will require substantial additional investment in refineries and ethanol

production capacity.

We want to work with Congress to develop legislation consistent

with the administration’s legislative principles. A well-measured

approach will give us the best chance of preserving a reliable gasoline supply, avoiding price volatility, and maximize the opportunity

for biomass-based ethanol to participate in market growth. Given

enough time, the fuels market can respond to the loss of MTBE,

and clearly increased use of ethanol will play a key role.
23

As you know, the major renewable fuel used in this country

today is ethanol from the starchy parts of corn kernels. Corn ethanol production is approximately 1.5 billion gallons a year, representing about 1-percent of the energy of our annual gasoline consumption. To complement this production, the Department of Energy is engaged in a long-range research program to develop ethanol derived from cellulosic matter, including agricultural and forest

residues, the organic components of municipal solid waste, and future energy crops such as fast-growing grasses and trees.

The cost of producing cellulosic ethanol is getting close to the

cost of producing corn ethanol, and Ambassador Woolsey went

through that in some detail. The Department of Energy’s biofuels

program focuses its research and development at lowering further

the production costs of cellulosic ethanol so that a major transportation biofuel industry can be established.

The Department’s transportation biofuels budget request for fiscal year 2001 is $54 million. That is a substantial increase over the

fiscal year 2000 appropriation. This request includes stepped-up

R&D to develop cost-effective technology for breaking down cellulose into simple sugars which could be used to manufacture ethanol and other higher-value chemicals. We appreciate your support

for this program.

From this developing cellulosic ethanol technology, we could see

a significant growth in production of ethanol from this source on

the order of 1 billion gallons a year by 2010 if there is a reliable

market for ethanol. We believe it is fairly clear that overall ethanol

use could increase several-fold by 2010, depending on the circumstances. Surely, there is room for expansion of ethanol production, and the Department’s efforts are intended to ensure that cellulosic ethanol is part of the mix.

Let me summarize by noting that MTBE getting into water supplies represents a serious problem that we propose addressing

through the administration’s legislative principles. We want to

work with Congress to develop legislation that fully addresses

these water quality problems, while protecting American motorists

from unnecessary price increases for gasoline, unnecessary price

volatility, and also providing the best opportunity for growth in biomass-based ethanol production.

Thank you for the opportunity to present this testimony today.

The CHAIRMAN. Thank you very much, Dr. Mazur.

[The prepared statement of Mr. Mazur can be found in the appendix on page 101.]

Senator Daschle, do you have questions for the witnesses?

Senator DASCHLE. Well, thank you, Mr. Chairman. Let me just

commend all of our witnesses for excellent statements.

Governor quittVilsack, welcome. You had indicated in your testimony that the Governors’ Ethanol Coalition had endorsed the elements of the bill that we have now drafted, and that included, of

course, the renewable fuels standard. That letter was written about

a year ago, is that correct?

Governor VILSACK. That is correct.

Senator DASCHLE. Is that still the position of the Governors’ Ethanol Coalition today?
24

Governor VILSACK. We are anxious to support anything that will

enhance opportunities for ethanol production in this country. The

renewable fuels standard is a way of doing that.

I would say that we would hope that the standard would be one

that could expand over time. If you have a specific percentage

where you define just a certain percentage without any expansion,

then basically you define the market. We believe this market has

extraordinary potential from an economic standpoint as well as environmental standpoint. So we would hope that as Congress considers this and as the administration looks at it that the standard is

one where there is the goal to increase over time as opposed to a

fixed percentage.

Senator DASCHLE. Thank you.

Mr. Perciasepe, I would like to just ask, if I could, the schedule

is, of course, unclear with regard to your consideration of the California waiver application. But assuming that you make some decision, and it could even be this summer, is it your expectation that

there are other parts of the country that could follow in the footsteps of California and apply for a waiver as well?

I have heard that, for example, the Northeast may be looking at

it, and I have heard that Missouri specifically has asked to be completely relieved from its responsibilities of the RFG oxygen requirement. What is your observation with regard to the precedent-setting nature of the California waiver application?

Mr. PERCIASEPE. Well, California is in somewhat of a unique position, in that it is a very contained petroleum, or at least refined

petroleum product market. They have some leeway under the

Clean Air Act on their own fuel, since they in many ways were

ahead of the Federal Government.

But the issues revolving around the oxygenate waiver, as it is

laid out in the Clean Air Act, specifically say that a governor can

ask for a waiver from the oxygenate requirement if it can be demonstrated that it is interfering with their attainment of a national

ambient air quality standard. And you have to understand this is

a pretty side angle in to trying to solve an MTBE groundwater

problem, but nonetheless the States find themselves in this very

difficult dilemma, including the Northeast.

We have had specific requests from States like New Hampshire,

Governor Shaheen asking for some relief from the RFG program.

Missouri recently in their St. Louis plan—and I would say that

that is also East St. Louis, in Illinois, as well, although I don’t

think they have made any specific request, but that whole area has

got a unified air quality plan.

So we would expect, depending on how the analysis goes on

whether or not oxygenates in the California situation interfere with

ambient air quality standards, that other States will look at it. It

will be different in the other States, and so it is hard to predict

specifically, but we have standing requests. We would expect more,

and I think it does point out, if I can use this word, the volatility

of the situation with the oxygenate requirement and how it is being

perceived out in the world where governors have to meet air quality goals that they have set for their cities.

Senator DASCHLE. And what will happen in California, barring

any kind of action by the Congress, if a waiver is granted? What
25

would be your expectation about the fuel supply and how it might

be characterized following the granting of that waiver application?

Mr. PERCIASEPE. In California?

Senator DASCHLE. Yes.

Mr. PERCIASEPE. Well, the Governor of California, I think the

Committee probably knows, has issued an executive order to eliminate MTBE from gasoline in California by January 1, 2003, depending on what side of the new year you are going to be on there.

In order to do that, the governor’s request says that the oxygenate requirement is constraining right. Now and he can’t get the

MTBE out in that time frame with the oxygenate requirement for

parts of California, which would be San Diego, the Los Angeles

area and the Sacramento area. So he would like to move more

quickly. The refiners have indicated their desire to move more

quickly as well.

Senator DASCHLE. But, in short, from your technical experience,

I think one could say, could they not, that there is no obvious reason why the refiners in California, if the oxygenate requirement is

eliminated, would be required to use ethanol for any reason because there isn’t any oxygenate requirement involving MTBE or

any alternative? Is that not correct?

Mr. PERCIASEPE. If the oxygenate requirement is eliminated or

modified in any way due to this request, obviously that would be

the case. You know, I think most observers feel some ethanol would

be used, for some of the reasons that have been laid out, including

octane and volume. But there would be no requirement.

Senator DASCHLE. Mr. Collins, I will just finish with this question. I appreciate the statement made by the governor about the

certainty of ethanol supply. To what extent do disruptions in production of corn and biofuels today cause a concern about that supply for the Department of Agriculture? To what extent do we have

to be concerned about drought and about loss of production, for

whatever reason, as we continue to try to meet the demands of the

ethanol market?

Mr. COLLINS. Well, Mr. Daschle, I think it is a concern because

you could look back at 1996 when we saw corn prices go to over

$5 a bushel and we saw many ethanol plants shut down over the

summertime. And if, in fact, ethanol were to be required because

of a 2-percent requirement or a renewable fuels standard, certainly

that could mean some very high corn prices and ethanol prices for

refiners.

On the other hand, I would point out that we have looked, for

example, at the variability of corn prices versus crude oil prices,

and the coefficients of variation, a measure of variability, are about

the same. So there is nothing necessarily inherently more unstable

about corn as a source of supply for energy than there is for crude

oil.

So, on one hand I am concerned about it because of the experience of 1996. On the other hand, I don’t know that it imparts any

increased volatility to the Nation’s energy supply should we would

move in a greater direction toward renewable fuels.

Senator DASCHLE. Thank you, witnesses. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Daschle.
26

Senator Harkin.

Senator HARKIN. Thank you, Mr. Chairman, and I again appreciate all the testimony.

I especially appreciate the leadership that you have shown, Governor Vilsack, in this whole area of ethanol and clean air and renewable fuels. The only point that I would like to cover with you

before I get into this California waiver bit is the practicality of

building more ethanol production plants and how those are going

to be accomplished.

We see more and more efforts, like the one in Benton County, of

farmer cooperatives, building these plants, which is going to return

actually more money to the farmers in that locality. And if you

could just maybe for the benefit of the record and the audience just

talk about what you see as a vision for our State and other States

where we can both provide for energy security in this country, but

also provide for economic benefits.

I guess why I am asking is because we hear a lot of talk that,

oh, well, this ethanol thing is just to benefit one company, the biggest ethanol producer in America. Yet, as you pointed out, onethird of ethanol production is now, I think, in smaller cooperative

plants. What is the future for that, as you see it, for our State and

other States?

Governor VILSACK. Well, Senator, thank you for the question,

and I appreciate the kind comments about my leadership. I am

simply following your lead.

First of all, in terms of supply it is fairly clear that the current

ethanol production facilities are not producing as much ethanol as

they are capable of producing. They can be run more efficiently,

which would result in immediate additional supplies.

second, existing plants can be extended and expanded quite

quickly, within 12- to 18-months, because of the modular nature of

the construction of these facilities. And there are currently plans

underway that would expand significantly above and beyond that

in a relatively short period of time. So we are in a position to be

able to double capacity within 3- to 4-years to meet the demand if

MTBE is phased out.

How that is done—I think you will begin to see a greater opportunity made for ordinary family farmers to band together in cooperatives, and they in turn will own these processing facilities.

You mentioned a third of the processing capacity today is farmerowned. I think you will see a continuing enhancement of that.

In our State, for example, we are making opportunities available

through an ag-financed corporation, an entity available to provide

loans and credit to farmers to become equity owners in these processing facilities. I think it is fairly clear that our agricultural policy

has to recognize the importance of giving farmers that kind of opportunity to profit not just from production but also processing.

I would also suggest to you that there are great opportunities

with biomass, in addition to corn. Even in our own State, as you

know, and under your leadership, there is a particular emphasis on

this in the south central part of Iowa. I am excited about the fact

that ethanol can be made from virtually anything, and I think we

don’t want to lose sight of that as we deal with the issues that Senator Daschle raised about supply. The reality is it isn’t necessarily
27

exclusively produced from corn. It can be produced from rice, it can

be produced from waste paper products, it can be produced from

municipal waste. The opportunities are enormous.

Senator HARKIN. Thank you very much, Governor, and I would

just go from that again to Mr. Collins. I did this work day at the

Benton County facility, Sunrise Cooperative, where they have just

come on line with their ethanol production last fall. They seem to

be doing quite well. They are feeding the wet milling to cattle and

they are contract-feeding cattle from all over the Midwest now.

I mentioned to them that the administration had proposed, out CCC authority, that this year there be at least $100 million in

grants to ethanol plants that would increase their production over

some baseline. Next year, that is supposed to be $150 million, and

then $150 million the year after that.

You mentioned in your testimony about promulgating this rule.

We are anxious. When do you think you will have that rule out?

Furthermore, will that money be focused on the kinds of plants

that Governor Vilsack was just talking about, the kinds of cooperatively-owned plants that can ramp up their production with this

kind of assistance? Is that how you are focusing the money?

Mr. COLLINS. Mr. Harkin, let me say a couple of things about

this. The Secretary proposed this and the administration has provided for this funding as part of the administration’s farm safety

net package to support agriculture at a time of low prices.

We are in the process of drafting that proposed rule right now.

It is our desire to use that to expand economically achievable, economically feasible production. That means that there is going to be

somewhat of a more narrow range, perhaps, on the kinds of agricultural commodities that could be used to produce ethanol, but it

would certainly include corn and, in the case of diesel, soybeans.

We are doing this under Commodity Credit Corporation authority. There are some limitations on that with respect to targeting

the eligible plants. The authority that we are using to do this is

to purchase agricultural commodities to support farm income. So

we are working on that right now. We are looking at different

ways, and it is one of the things that has taken a little bit of time

in developing this rule.

We are looking at some different ways of targeting this so that

smaller operators or cooperative producers will get a higher proportion of the benefit than the very largest ethanol plants. We haven’t

quite figured out how to do that yet, but that is what our goal is.

Senator HARKIN. Well, I sure hope you will be talking to us about

that.

Mr. COLLINS. We certainly will.

Senator HARKIN. If we need legislation and if you can’t do it in

a rulemaking, we had better get hot on some legislation.

Mr. COLLINS. We think there are some ways that we could do

that.

Senator HARKIN. It seems to me this is the best way to ramp up

production rapidly, and also provide for broader-based ethanol production and to provide for a broader-based income safety net, as

you are talking about, the economic benefits of this accruing in

more places than just one in the United States. I mentioned this

at the plant and they were very interested in this, of course, be-
28

cause they can ramp up production. And with this kind of help,

they could move, and a lot of these cooperatives could.

So you have no timetable on this rule? I mean, you know, this

is April.

Mr. COLLINS. Yes, it is. We are working as fast as possible. I

can’t give you a date that we would propose that rule, but I hope

it will be soon.

Senator HARKIN. Well, end of the month?

Mr. COLLINS. I can’t give you that date. I am sorry.

Senator HARKIN. End of May?

Mr. COLLINS. Soon, Mr. Harkin.

Senator HARKIN. Well, I hope it is by the end of this month. Like

I say, if you have any problems in the targeting, I think you should

let us know and see if we need any legislative help on that.

Mr. COLLINS. Thank you for your help on that.

Senator HARKIN. Lastly, on the waiver, the California waiver, let

me just say at the outset that I don’t see any need for that waiver

right now. I assume that comes as a surprise to a lot of people in

this room.

[Laughter.]

Senator HARKIN. It is obvious that the report we got back from

the GAO shows that we can ramp up production. As California

phases out MTBE over the next couple of years, we can meet the

demand. There is no problem with that.

Now, they were somewhat concerned about the price effect, and

so we were looking at the price effect on that. Right now, according

to Keith Collins at USDA, the wholesale price of ethanol now, after

deducting the excise tax exemption which we will keep, thank you,

is about $.70 a gallon, while the wholesale price of gasoline is $.90

to $1.00 a gallon and MTBE is $1.10 a gallon. Those are your estimates.

So, again, these prices undercut arguments about the excessive cost of replacing MTBE with ethanol. If ethanol is about $.70 a gallon and MTBE is now $1.10 a gallon—I am not talking about the

contamination problems; I am just talking about economics and the

cost—motorists in California and elsewhere could save money at

current prices by switching to more ethanol, which is just the opposite of what we are hearing from California. They are saying, oh,

my gosh, this is going to cost us all this more money.

Well, if these figures are right, then it seems to me it is not going

to cost the motorists in California or anywhere else any more at

all, even if you are including some transportation costs. Now, obviously, there are some transportation costs involved.

But at $.70 a gallon, compared to $1.10 a gallon for MTBE, do

you see, Mr. Collins, any problem with prices in California?

Mr. COLLINS. Mr. Harkin, I do. What you have quoted are a

snapshot of market prices at a point in time, and those certainly

change from to time to time and they are certainly reflective of the

tight energy markets we have today.

But I would point out that there have been a number of studies

that have been done that have looked at the cost of producing fuel

with and without an oxygenate requirement, with no MTBE, both

in California and around the Nation. Most of those studies would

show a higher cost for no MTBE with the oxygenate requirement
29

in place, compared with no oxygenate requirement. Now, the cost

difference is fairly small in some studies and larger in others.

Senator HARKIN. Now, Keith explain that to me.

Mr. COLLINS. Well, I can.

Senator HARKIN. You say the studies show that the cost would

be higher if we have an oxygenate rule without MTBE. I just

quoted you your own figures on the cost of production.

Mr. COLLINS. You quoted market prices, but I have not done a

study of refinery costs and what it takes to refine gasoline in California. I know that one study has been sponsored by the Department of Energy, done by MathPro, and perhaps Mr. Mazur would

bail me out here and want to comment on that.

Mr. MAZUR. Just in general, I think Keith is right that when you

quote these prices, they were taken at a snapshot in time and your

price for gasoline was over $1.00 a gallon. It is somewhat less than

that now at a wholesale level, and these prices move up and down.

Senator HARKIN. It is not less than $.90 a gallon.

Mr. MAZUR. In New York Harbor, it is much less than $.90 a gallon.

Senator HARKIN. Where?

Mr. MAZUR. New York Harbor.

Senator HARKIN. New York Harbor. I am talking about California.

Mr. MAZUR. I didn’t look this morning at the price in California.

I don’t know what that is.

Senator HARKIN. OK.

Mr. MAZUR. Anyway, the study that we worked on, we had a

number of people look at the operations of a typical refinery under

a situation where you have MTBE allowed to be used in gasoline

and where you don’t, and it is a couple of cents a gallon more to

replace MTBE. Generally, MTBE is a good, low-sulfur, high-octane,

high-quality blendstock, and it gets replaced by ethanol, plus a

somewhat differently refined product, and it tends to cost a little

bit more to make that blend.

Now, Keith’s point is correct that it is a couple of cents per gallon

in a market where we see fluctuations like that happen pretty regularly. So it is not something that people will view as a price spike.

Senator HARKIN. That is right.

Mr. MAZUR. But the point is that there will be upward pressure,

and the California market is quite tight under any circumstances

and so importing additional supplies of blendstocks or ethanol will

likely put upward pressure on prices.

Senator HARKIN. Well, you are the Department of Energy, Mr.

Mazur, and the Department of Energy indicates that if the RFG oxygenate requirement is maintained and MTBE is replaced by ethanol, the increased cost to consumers of gasoline would be less than

1-cent a gallon.

Mr. MAZUR. Depending on how you phase that in, yes. It could

be 1, 2, 3, a couple of cents a gallon, something like that.

Senator HARKIN. What if we phase it in over a 3-year period of

time?

Mr. MAZUR. Phasing it in over a longer period of time is certainly

better than not phasing it in.
30

Senator HARKIN. Well, in California that is what you have got.

Well, you have got 3-years, that is right; you have got 3-years’

phase-out in California. That is exactly what we are talking about,

and we are talking about ramping up production, as our own studies show that we can do. We can ramp up that production to meet

that need in 3-years, no problem.

Mr. MAZUR. Well, not quite no problem because there is a couple

billion dollars of investment that will be needed to ramp up that

production.

Senator HARKIN. That investment will be there, with some help

from CCC and the need to maintain—obviously, if they need to

maintain an oxygenate requirement, you see.

Mr. MAZUR. Yes, and if you look at the administration’s principles, one of the things that we focused on was a requirement for

a renewable fuel standard and provide some certainty to the market over time so people making these long-term investments will

know that——

Senator HARKIN. Well, don’t get me wrong. I am supportive of

what Senator Daschle and others are doing for a renewable fuels

percentage nationwide. But I am not certain I want to see that

happen now without some thought on the oxygenate requirement.

I would hate to do away with that right now because I don’t know

what that percentage is going to be. Right now, we are at 1.2-percent.

Mr. MAZUR. Approximately, right.

Senator HARKIN. Approximately. If we replace all MTBE, that

gets it up to about 2.5-percent, roughly.

Mr. MAZUR. Maybe a little more.

Senator HARKIN. Well, my figures are 2.5, less than 3.

Mr. MAZUR. My figures are around 3, but that is close enough.

Senator HARKIN. To replace all MTBE. So we can do that within

about a 3-year period of time, if I am not mistaken, according to

the studies we have had.

Mr. MAZUR. According to the USDA study, yes, at a cost of a few

billion dollars.

Senator HARKIN. And so, again, to get up to 5-percent in a few

years does not seem to be out of the ball park either.

Mr. MAZUR. I think you are getting close then.

Senator HARKIN. What?

Mr. MAZUR. I think you are getting close to out of the ball park

there.

Senator HARKIN. Well, 5-percent by what year? Give me a year.

End of the decade? Sure.

Mr. MAZUR. As Ambassador Woolsey pointed out, if you get some

breakthroughs on cellulosic ethanol technology, you can make some

substantial contributions there. If those breakthroughs don’t come

through, it is very difficult to hit those targets.

Senator HARKIN. I am not certain about that. I mean, I am not

only thinking about corn, but I am thinking about sugars and everything else that we produce in this country from which you can

derive ethanol, non-cellulosic-type ethanol, starch-based.

Mr. MAZUR. At a price, you could. I think the key is getting the

price of the ethanol down to competitive levels.
31

Senator HARKIN. I understand that, but again don’t get me started on this price thing because I will get into my argument with

Phil Gramm again, and that is what is the cost of gasoline? What

is the cost of oil, how much a barrel does it cost?

When you figure all the subsidies we have given over the last 70-

years to the oil companies—someone was talking about how much

we have provided to ethanol since the early 1980s, since we had

the excise tax provision. The amount of tax subsidies to ethanol is

even less than what it is to the oil companies during that same period of time, not talking about going back over the last 70-years.

What did the Gulf War cost us? What does it cost us to keep our

military in position to keep our oil lanes open to the Mideast? What

does all that cost? We haven’t factored that in. That is just sort of

a freebie. Well, you start factoring that in and I am telling you, the

cost of domestically-based ethanol looks very competitive.

So, again, we can all get into a discussion of market prices, but

U.S. taxpayers are paying the additional cost for what it costs us

to import oil from other countries. And I think if we are going to

start talking about price—and I am not arguing with you, I am just

making a statement—we ought to be factoring that in, too.

So I think, overall, just to sum it up, I am just saying I think

we need to keep that oxygenate requirement. I see no need for a

waiver because we can meet the requirements in California. It is

not going to cost any more. We are going to ramp up production,

and then I think we have to come underneath with a national reformulated standard for the future.

I agree with Governor Vilsack. We shouldn’t set some kind of a

percentage, or if you do, it ought to be minimum. If you want to

set a minimum of 5-percent by the end of the decade, it may be

a minimum, but it certainly shouldn’t be any kind of a maximum

goal that we are looking for. So I am concerned about that percentage goal.

Thank you very much. Thank you for your indulgence, Mr.

Chairman.

The CHAIRMAN. Thank you, Senator Harkin.

Mr. Collins, there is one small part of this picture, but still an

important one. My understanding is that the sugar processors and

growers have asked the Department of Agriculture to make open

market purchases of sugar. I have written to Secretary Glickman

to outline why I think that would not be a good idea and I have

mentioned that these open market purchases might not necessarily

prevent the loan forfeitures which are being sought as the objective. Finally, of course, dumping the sugar overseas would create

real problems with our trade partners, including possible litigation.

What I am concerned about is that one proposal has been that

the sugar might be purchased, and the current market price is

$.19—you might be able to get it for less than that, but probably

not much—and sold at least to ethanol plants for $.03 or $.04, to

be used to make ethanol at the expense of about a $.15 per pound

differential to taxpayers.

Already, consumers in America pay a lot for sugar, whether they

realize it or not, as a hidden tax. But this would be a very visible

one in which very clearly taxpayer funds would be required to do
32

this operation. For those reasons, I strongly protest doing this kind

of thing, for whatever it means.

But I ask you specifically, have proposals been made to ethanol

companies with the thought that this kind of sugar supply might

be available to them cheaply? Is this a part of the administration

solution to the problem right now?

Mr. COLLINS. Mr. Chairman, I know Mr. Woolsey used the Julie

Andrews model, and often at USDA, using another musical, we use

the line of Fagan in ‘‘Oliver,’’ who sings ‘‘we have got that under

review.’’

So I would say that it is not part of administration policy at this

point. We have had the sugar growers come to us and ask us to

purchase sugar off the open market. As you know, we have got 1.4

million-or-so tons of sugar under loan. We expect that at least

300,000 tons of that will be forfeited. We had a lock-up last night

and this morning and we revised our sugar numbers this morning,

and we have yet even more beet sugar production than we anticipated, another 50,000 tons. So we have prices well below the loan

rate in many areas of the country, and the proposal has been, rather than wait for large forfeitures in the month of August, to purchase open-market sugar.

You have come right to the heart of the issue, and that is if you

were to do this, and put aside for the moment the cost of doing it

and what the effect might be on subsequent forfeitures, the question is what do you do with the sugar. Usually, when we purchase

such commodities, as we did wheat last year, we use them in humanitarian assistance programs overseas. There is not a big demand for sugar in foreign countries, particularly developing countries, particularly with the world price of sugar in the $.05 to $.06

a pound range. It also doesn’t seem prudent to move large volumes

into the domestic feeding programs, such as the School Lunch Program or others.

So, yes, we have talked with the ethanol industry about using

this sugar for ethanol. We have talked with them strictly to see if

it was technologically feasible. They tell us that it is, that they

could feed sugar, once the corn is broken down, into a sugar

stream, they could feed this sugar in and turn it into ethanol.

They have to use refined sugar, which would probably cost us in

the neighborhood of $.23 to $.24 a pound rather than the $.19 you

mentioned, and they have indicated that it would be economically

feasible for them to do that at a price in the $.03 to $.04 a pound

range. Now, on the surface that sounds like a horrific taxpayer

loss. It only looks at all attractive if you compare it to the alternative, and that is that we make a purchase and donate it overseas, for which we get nothing back. At least under this option you

would get a few cents back.

But having gone through this long discussion about this, you can

see that we are engaged on this issue, but we have made no decisions whatsoever at this point on how we are going to proceed,

whether we are going to let forfeitures occur or whether we would

do what the sugar growers have proposed to us.

And I might say that the Secretary did mention to me this morning your letter, which I think he got yesterday. I have not seen it,
33

but it certainly has his attention and he will pay careful attention

to it, I am sure.

The CHAIRMAN. Well, I hope that he will. I appreciate the dilemma that you have suggested, but these really would be grave

situations. It is not simply a humanitarian gift of the sugar. I think

you understand better than most of us the ramifications in terms

of foreign policy and our relationships with a raft of countries

where, on the one hand, we are attempting to help, and on the

other hand we are planning to devastate.

Dropping this sugar on these people is no gift, and I would just

simply say that dropping it on the ethanol plants ought to excite

Senator Harkin. It certainly excites me.

Mr. COLLINS. The dilemma is we are probably going to get sugar

one way or another.

The CHAIRMAN. Yes, because we have a disastrous sugar policy,

and hopefully this may underline the ridiculous nature of what we

have been doing year after year. So I am hopeful that will be at

least one good thing that comes from this fiasco.

I just listened to my colleague for several minutes trying to think

through the ethanol dilemma with regard to corn and MTBE and

what have you, and on the other hand sort of offstage the proposal

is that we dump all this sugar on the ethanol plants at $.03 or

$.04. Having lost the taxpayers’ money, we have pretty well ruined

the corn farmers in the process, and I just don’t like that idea at

all. I think you understand that, so without going into histrionics

about it, I hope the Secretary does not proceed. If he does so, I

think there will be consequences, and they will come from me and

I suspect maybe from Senator Harkin and this committee. We just

will not stand by. Even though you may have an administrative

call to make, there are legislative remedies, and I think this is

very, very serious.

Mr. COLLINS. I will convey your thoughts to him.

The CHAIRMAN. Thank you.

Senator Grassley, do you have any final thoughts before——

Senator GRASSLEY. You want to adjourn, don’t you?

The CHAIRMAN. Not yet, no. We have another panel.

Senator GRASSLEY. Oh, you do?

The CHAIRMAN. Yes.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR

FROM IOWA

Senator GRASSLEY. Well, yes, I do. I want to take advantage of

the opportunity to thank Governor Vilsack for his leadership in the

area of ethanol, along with Senator Harkin also working hard at

it. I hope I contribute something to it as well.

I want to focus on the American Petroleum Institute’s opposition

to what Iowa tried to do and did do last year successfully to ban

MTBE, and that was that you got a letter from them arguing that

the Clean Air Act preempted the rights of States to regulate

MTBE. I also had a copy of that letter.

First of all, I don’t agree with their narrow analysis, but even if

there were restrictions, it would seem highly unlikely that neither

the petroleum industry nor the EPA would dare attempt to enforce

such a preemption. Because the petroleum and MTBE industries
34

are facing escalating multi-billion-dollar cleanup liability lawsuits,

it seems to me they would be digging themselves in very much

deeper if they had the chutzpa to try to block States from regulating MTBE.

Now, this is not to put you on the spot, but I just wonder do you

agree and do you have any comments that you could share about

the petroleum industry’s response to the Iowa efforts to ban MTBE.

Governor VILSACK. Well, Senator, I guess in a word I think

States need the ability and the power to protect their water supplies. When we have documented evidence that MTBE contaminates groundwater and surface water, and therefore threatens

drinking water, it would be remiss on my part if I didn’t exercise

every power that I had as a governor to ensure the safety of our

drinking water, as Governor Davis did in California.

Senator GRASSLEY. So you have to take the position that the

Clean Air Act doesn’t preempt the right of States to regulate

MTBE, even though they said otherwise?

Governor VILSACK. It would certainly be my position that we

would need as much flexibility as possible, which is why we were

also supportive of the administration’s efforts to phase out MTBE.

Senator GRASSLEY. I would like to suppose for a minute that the

Clean Air Act does preempt States from regulating fuel components

or characteristics for the purposes of controlling motor vehicle

emission. Also, let’s suppose that the EPA and/or the petroleum industry would have the audacity to attempt to enforce such a preemption. Then what I would propose is that the States be very specific in their regulation of MTBE and pass legislation regulating for

the express purpose of protecting the States’ water supplies, and

only the water supplies, and not do it through the Air Act, again

banning MTBE to protect the water, not to protect the air.

If I can recall from memories of promoting the Reformulated

Fuels Program, when we passed the Clean Air Act we did not intend to preempt the right of States to protect their water supplies.

So I can see a unique and dramatically positive role that governors

can play in addressing the MTBE problem. So I hope maybe

through your leadership on the Ethanol Coalition that you could

provide guidance to governors throughout the United States, explaining to them that they and their legislatures, from the intent

of the Reformulated Fuels Program not to preempt States from protecting their water supply, can take immediate action on their own

to protect their States’ water, and to do it that way.

That would then bring me to something that I have to tell our

colleagues, or at least my views on something that the EPA testified to, and I would quote, ‘‘Congress should amend the Clean Air

Act to provide the authority to significantly reduce or eliminate the

use of MTBE. This action is necessary to protect America’s drinking water supplies.’’

So I think that this detracts us from what we ought to be concentrating on; that the problem is not the Clean Air Act when it

comes to water; that we protect our water by acting to protect our

water and not detract the ability to do that by some preemption of

the Clean Air Act for States to do that.

As you testified today, the Clean Air Act did not contaminate

Iowa’s water supply with MTBE. The oil industry uses MTBE in
35

conventional fuel as an octane enhancer, even though we don’t

have requirements under the RFG programs for our State. And it

is use as an octane enhancer as much as an oxygenate requirement

that contaminates water in States like Iowa that don’t use reformulated gasoline. Yet, we have the petroleum and MTBE industries

telling Americans that all you have to do is amend the Clean Air

Act and water supplies will be safe. They won’t be safe as long as

MTBE is still used as an enhancer.

Second, and just as important from my Governor’s testimony, he

underscores the fact that States can ban MTBE on their own, and

consequently there is no reason to wait for the Federal Government

to take action. Yet, I think EPA tells us that that is the way it

must be done.

So, Mr. Chairman, what I see that we need to do is States need

to be told today that they may proceed to ban or phase out MTBE

immediately. And there may be some States that want to continue

to use MTBE, and then if so, Congress should not preempt the

States’ right to do that.

Second, EPA needs to admit to the public that if shortages of

oxygenates do occur, EPA has the authority to temporarily waive

the oxygenate requirements until supplies become available. Obviously, with the governor of the leading corn-growing State in the

Nation saying we have the ability to produce ethanol to replace all

MTBE within 2-years, I don’t think we should see that as a major

problem to overcome.

Unfortunately, we haven’t had from Washington a clear enough

signal to California about their baseless request for an oxygenate

waiver. And when we don’t have that clear signal, then it seems

to me that we are in a position of denying markets for $1 billion

worth of corn this year.

So, Mr. Chairman, you are outstanding member of the U.S. Senate and a lot of people listen to you, and particularly in agriculture

they are going to listen to you. And I hope that we do not allow

the distraction of amending the Clean Air Act, that that is the only

way that we can clean up our water supply, because that argument

lends itself to the argument of the big petroleum industry. And it

lends also credence to them who do not want ethanol to fill the vacuum that is created with the outlawing of MTBE.

The CHAIRMAN. Well, the Senator makes a very good point, and

you have made it eloquently. Certainly, both the Chair and I suppose our witnesses who are on the firing line really on the administration side of this have heard your call.

Are there any comments on Senator Grassley’s comments?

Mr. PERCIASEPE. Well, at great risk, I will comment. My name

is Bob Perciasepe from EPA. EPA is not going to stand in the way

of any State that wants to ban MTBE, but we will assume the legal

risks that will be involved. And we can argue forever as to whether

or not the Act allows it, or the preemption does or doesn’t allow it.

The truth of the matter is it will be litigated.

And if you provide a clear signal to the ethanol industry on production goals and the certainty of their future product, and you

want to have a clear vision of how you are going to solve the

groundwater problem that now presents itself, we still feel very
36

strongly that the legislative approach to create that certainty is the

best all-around approach to resolving the issue.

That is not to say we are not going to work with States now. It

is not to say that we may not be willing to take that risk with the

States, but we should recognize that there would be legal risk in

making that kind of decision. But, again, I would agree with the

Senator that the paramount issue of protecting groundwater and

the governors’ ability to do that is something that we will work

with them on.

Senator GRASSLEY. My response to that, Mr. Chairman, is probably more to you than to him because this is our branch of government problem and something even Governor Vilsack can’t do anything about, albeit he wants to get to the same place I want to, not

a whole lot of difference. And I am trying to convince him that

maybe our way is the best way.

But, anyway, it is not the end, it is how you get there, and that

is that within the Congress of the United States—and I know this

from the debate of the Clean Air Act of 1990, and also the ethanol

tax exemption debate, and then also on Senator Boxer’s resolution

that she had up last year—it is very difficult to overcome the arguments of the big oil companies on this issue because they do not

want to have any credibility for any product they don’t control. And

they don’t control ethanol.

The CHAIRMAN. Well, the Senator’s observation is correct. It is

difficult.

Senator GRASSLEY. And hence then to the EPA, you see why we

are reluctant to get this out on the legislative floor and then lose

everything. They get the oxygenated requirements repealed, as you

are suggesting, and we don’t get the RFG enhanced mandate. And

even if we get it, according to USDA economists, we are 9-years

getting to the $1 billion that we would have in the farmers’ pockets

right now if California had to start meeting the oxygenated requirements with ethanol today at 500, 600-million gallons. A bird

in the hand is worth two in the bush.

Mr. PERCIASEPE. And I understand that.

Senator GRASSLEY. OK, and at the time corn prices are at 23-

year lows.

The CHAIRMAN. That is the purpose of our hearing today, and

reference has been made to legislation offered by members of this

committee which offer vehicles for doing the things that Senator

Grassley and others have suggested.

Well, we really appreciate very much your coming and spending

this time with us.

The Chair would like to call now another panel which will be

made up of Mr. Trevor Guthmiller, Executive Director of the American Coalition for Ethanol, Sioux Falls, South Dakota; Mr. Nathan

Kimpel, President of New Energy Corporation, South Bend, Indiana; Rus Miller, Chief Operating Officer of Arkenol, Incorporated,

in Mission Viejo, California; Jason Grumet, Executive Director of

the Northeast States for Coordinated Air Use Management, in Boston, Massachusetts; and David Morris, Vice President of the Institute for Local Self-Reliance, in Minneapolis, Minnesota.

Thank you for coming to the hearing today. We look forward to

your testimony. We appreciate especially your patience in waiting
37

to this hour. As you can see, our committee hearings are ones in

which you bring your breakfast and your lunch and you sort of

spend the day. We are a hard-working committee.

I will call upon each of you in the order I have introduced you.

First of all, Mr. Guthmiller, would you please proceed with your

testimony?

STATEMENT OF TREVOR T. GUTHMILLER, EXECUTIVE DIRECTOR, AMERICAN COALITION FOR ETHANOL, SIOUX FALLS,

SOUTH DAKOTA

Mr. GUTHMILLER. Thank you, Mr. Chairman. My name is Trevor

Guthmiller and I am the Executive Director of the American Coalition for Ethanol and we are based out of Sioux Falls, South Dakota. ACE is a grass-roots nonprofit ethanol advocacy group, and

we were formed in 1988 with membership comprised of ethanol

producers, rural electric cooperatives, commodity organizations,

and businesses and individuals that support increased ethanol production and use.

We greatly appreciate this opportunity to comment on the relative merits of proposals to deal with the MTBE water contamination problem, the importance of the oxygenate standard in reformulated gasoline, and the need to provide sustainable growth opportunities for ethanol over the mid-to long-range term.

Mr. Chairman, the ethanol industry has been very fortunate over

the years to have had the bipartisan support of many members of

Congress, including yourself. You have been one of the ethanol industry’s most articulate spokesman and have effectively promoted

expanded ethanol production and use since the industry’s inception

in the late 1970s. Ethanol’s bipartisan supporters include all the

members of this committee as well, both Republican and Democrat.

The entire ethanol industry and America’s grain producers owe you

all a great deal.

In the interest of time, Mr. Chairman, I would ask that my full

written testimony be submitted to the record and then I would like

to briefly summarize the rest of that in the remaining few minutes.

The CHAIRMAN. Your testimony will be published in full. That

will be true for each of the witnesses, and we will ask that you

summarize in 5-minutes or a bit more. Witness the previous panel.

Mr. GUTHMILLER. Thank you.

To begin, Mr. Chairman, ACE believes that the Daschle-DoleHarkin reformulated gasoline provision in the Clean Air Act

Amendments of 1990 which established the minimum oxygen

standard in reformulated gasoline has been a great success. With

your strong support and that of many members of this committee,

the Daschle-Dole provision was adopted by the Senate by an overwhelming 69–30 vote. That was 10-years ago.

The ethanol industry has grown, but we are again at a crossroads due to the problems caused by MTBE which is putting the

future of the Reformulated Gasoline Program and the oxygen requirement in jeopardy. Knowing that we have a great product, we

must still deal with the reality that the petroleum industry, essentially both our customer and our competitor, controls the entire fuel

infrastructure our product is distributed through. And if they didn’t
38

have to meet ethanol to meet certain fuel goals in many places,

they wouldn’t use it.

Cost in large aspects is irrelevant to them, since the consumer

pays the final cost, regardless of what the product is, and they

would much rather in many cases have the customer buy petroleum versus our product, which is ethanol. It is good for our country to require the use of fuels other than petroleum if they are able

to be incorporated into our transportation infrastructure with little

or not cost to the consumer. Ethanol meets that test. The question

now becomes how do we best incorporate a growing ethanol industry in our national energy policy.

To answer that question, we need to look at what are the values

of ethanol. First off, ethanol has value as an oxygenate. Adding

ethanol to gasoline indisputably reduces automobile emissions.

This has value to areas of the country where automotive emissions

lead to poor air quality.

Ethanol also has value as a domestically produced renewable fuel

that can be used to replace imported fossil fuel. Currently, our Government and our gasoline industry place no value on substituting

a fossil fuel with a renewable fuel. With high gas prices as a result

of our increasing reliance on imported oil, the time to consider

charting a course that will result in the greater use of domestically

produced renewable fuels like ethanol and biodiesel is now.

The decisions that the EPA and Congress will make in the next

few months will potentially determine whether this industry goes

forward or falls backwards. Last week, I spoke at the groundbreaking of a new ethanol plant near the small town of Wentworth,

South Dakota. Approximately 975 farmers, with the help of the

rural electrical cooperative, the South Dakota Corn Utilization

Council, and others, invested their money in a project which will

1-day turn the corn they grow into high-value ethanol.

This investment they made was not only in that plant in Wentworth, but also in the goodwill of the United States Congress, since

it was Congress that wisely created the Reformulated Gasoline Program and the requirement that oxygenated fuel be used in that

program. There are many who do not understand the personal investment that thousands of family farmers have made in cooperative ethanol plants. They will say that the answer is just getting

rid of the Reformulated Gasoline Program’s oxygen requirements,

or to allow States to opt out of the requirement, with no consideration given to the loss of markets or the potential markets to be

gained. That is not the answer.

Two of my board members are family farmers from Minnesota

who have essentially no connection to the ethanol industry, other

than the fact that they have invested some of their family’s hardearned money in farmer-owned ethanol plants. They represent over

12,000 individual farmers in Minnesota, South Dakota, Iowa, Nebraska, and Missouri, to name only a few States that have directly

invested in ethanol plants. These are the people we must remember and think about when decisions that will affect the future of

the ethanol industry are made.

Let me say this as clearly as I can. Farmers did not create the

problems associated with the use of MTBE, and they should not be

made to pay the price for getting it out of our system. Eliminating
39

the oxygen requirement is not the answer; modifying it, maybe;

eliminating it, no. That is not the answer because it does nothing

to reduce our dependence on fossil fuels, nor does it protect the investments of farmers who have gotten together to build ethanol

plants who are banking on there being a continuing market for

their fuel, nor does it help to protect air quality.

In his recent speech to the National Conference on Ethanol Policy and Marketing in San Francisco, Senator Daschle stated the obvious: if it is possible, the ethanol industry would prefer that the

successful Reformulated Gasoline Program with the oxygen requirement be maintained as it is, and ethanol use expanded to fill

the gap left by the departure of MTBE. The outstanding success of

the Reformulated Gasoline Program with ethanol in Chicago and

Milwaukee provides the best evidence for this position.

However, we are also aware that there are many powerful interests who are strongly opposed to this approach and who are demanding elimination of the oxygen standard. Though we are highly

skeptical of the oil industry’s claims that it can produce equivalent

clean gasoline without the use of ethanol or other oxygenates, there

are many people who are so frustrated with MTBE that they do not

want to accept the status quo.

If it proves to be impossible to hold the oxygen requirement or

if it seems as though the oxygen requirement will be dismantled

by the granting of waivers by the EPA, then we agree with Senator

Daschle that the renewable fuels standard or some other mechanism like that must be established to ensure the sustainable

growth of the ethanol industry, both traditional grain-based and

emerging biomass technologies. This would protect the investments

of all the farmers who have bought shares in ethanol cooperatives,

while at the same time paving the way for the continued growth

in the ethanol industry.

Several highlights which we believe should be part of any legislation, should that be necessary at this point, I want to just highlight. The oxygen standard, we believe, should not be eliminated.

If necessary, it should be modified, but not eliminated. RFG areas

like Chicago and Milwaukee, where the use of ethanol has been a

huge success, should be allowed to continue with their program.

Any renewable fuels standard, if enacted, must have a strong enforcement and penalty provision, and the Secretary of Agriculture

must be involved in making any decisions concerning waiver of the

requirement related to concerns over potential shortages of ethanol

due to drought or other extraordinary circumstances.

If enacted, a renewable fuels standard should include strong

anti-backsliding language that will preserve the real-world gains

made from the use of oxygenated fuels in RFG areas. To prevent

refiners from increasing toxics, an aggressive cap should be imposed on the level of aromatics in gasoline.

A renewable fuels standard, if enacted, could also include credit

trading mechanisms to provide flexibility to refiners and protection

for consumers. If it is politically feasible to hold on to the oxygen

requirement in reformulated gasoline as MTBE is eliminated from

use in the country, then that is what we would prefer happen.

However, if the reality is that it is not possible, we need to have

our minds and our eyes open to other options.
40

Regardless of whether those waivers that were discussed earlier

are granted—rightly or wrongly, if those waivers happen, any

chance of growth in the ethanol market become severely limited.

And then it is those 975 farmers whom I spoke about earlier who

pooled together their own money to build an ethanol plant in Wentworth, South Dakota, who broke ground last week, who will be left

without a market for their fuel. And any other farmer group out

there that is looking at creating some extra income for their family

through processing their corn into ethanol, including the 12 groups

that met last week in Iowa, will be stopped dead in their tracks.

Their projects will not move forward.

Protecting the oxygen requirement or finding some other mechanism to promoted the increased use of ethanol is vital to the future

of this industry. Finding a solution is not a partisan issue. It is an

agricultural issue, an economic issue, and it is a personal issue to

all the farmers who have invested their money in ethanol plants.

Creating value for ethanol as a renewable fuel and as an oxygenate

are beneficial to our industry and our country.

The United States Department of Agriculture estimates that replacing MTBE with ethanol in reformulated gasoline areas would

increase the demand for corn for ethanol use by over 500 million

bushels and would increase the price of corn by $.14 per bushel,

which would overall increase total farm cash receipts by $1 billion

annually. On top of that, we would then double the amount of petroleum the ethanol industry is currently displacing in our country.

That is what we want to happen.

Any solution to this MTBE crisis that would at least ensure the

doubling of the size of the ethanol industry, protect the investments of farmers in ethanol plants, while preserving the air quality

benefits achieved with the use of clean-burning oxygenated fuels,

would be something we would be extremely supportive of.

Mr. Chairman, I found the words that you yourself spoke on February 24 to be very important. You were quoted as saying, ‘‘Nothing underscores America’s dependence on Middle Eastern oil more

than the fact that we now keep nearly 30,000 men, 13 ships, and

310 aircraft deployed in the Persian Gulf to ensure the flow of oil.

If we do anything that doesn’t take these soldiers ion the Middle

East or these farmers in the Middle West who have invested in

ethanol plants into consideration, then we are doing them all a

great disservice. We must find a way to grow the ethanol industry

to reduce our dependence on foreign oil, as well as to create new

markets for farmers.’’

Mr. Chairman, our membership commends you for convening

this important hearing and thanks you for your longtime support

for the ethanol industry. We urge you and your colleagues to continue the tradition of seeking bipartisan solutions to these very

complex problems, and we pledge our resources to assist you and

your colleagues in any way we can.

Thank you for your time.

The CHAIRMAN. Well, thank you very much, Mr. Guthmiller.

[The prepared statement of Mr. Guthmiller can be found in the

appendix on page 111.]

Mr. Kimpel, it is a pleasure to welcome you here. In 1982, I

brought Senator Howard Baker, who was then our Republican
41

Leader, to New Energy, in South Bend, for the dedication of that

plant. And you have progressed in the last 18-years in remarkable

ways, and it is good to see you here today.

STATEMENT OF NATHAN KIMPEL, PRESIDENT/CHIEF OPERATING OFFICER, NEW ENERGY CORPORATION, SOUTH BEND,

INDIANA

Mr. KIMPEL. In 1982, Senator, it was still a hole in the ground.

Our official start-up was in 1984, but we are still tremendously

happy that you had such an integral part to play in the organization of our plant.

My summary statement is still on Indiana time, so I will start

out by saying good morning, Mr. Chairman. There are very few

times when I get the opportunity to do what I like doing best, and

that is to come and talk to people about ethanol, about ethanol’s

role in reformulated gasoline, and also ethanol’s role in the oxygen

requirement in reformulated gasoline.

New Energy is located in South Bend, Indiana, and that means

that I have the distinct pleasure to be able to call the Chairman

of this committee my Senator, and I am really proud of that. We

began operations, as I said, in 1984. We started out as a 52.5-million-gallon-a-year ethanol plant. Today, our plant is operating at a

rate of approximately 85- to 88-million gallons. That is an increase

of in excess of 60-percent.

Our company employs directly 138-people, but the economists in

our area tell us that, in fact, the spillover effect or the multiplier

effect is something like four times that, with all of the outside contractors, the truck drivers, the people that work on the railroad,

and so forth and so on.

We consume approximately 31-million bushels. The majority of

that corn is grown in northern Indiana. On an annual basis, we

contribute in excess of $100 million to the northern Indiana economy. Obviously, the majority of that comes from the purchase of

corn and other raw materials, good services, transportation, wages,

and property taxes.

Since our start-up in 1984, we have produced almost 1.1-billion

gallons of fuel-grade ethanol, and in the 16-years that we have

been in operation, we have consumed 415-million bushels of corn.

That amounts to in excess of $1 billion worth of corn purchases in

that period, and that is brand new demand. Now, multiply that by

the fact that New Energy is only approximately 6-percent of the

total ethanol industry and I think that gives a good perspective of

what ethanol does as far as the farm economy is concerned.

I could just about throw out the rest of my summary statement

because, quite honestly, everything has been said before. I have an

operations manager in our company and every morning he comes

in to give me a synopsis of what has happened in the plant. And

he usually starts out by saying, do you want the good news or the

bad news first? And I always tell him, well, let’s start out with the

bad news and we will work up from there.

The obvious bad news in the Reformulated Gasoline Program is

MTBE. The good news is the tremendous benefit that we have had

over the last 10-years now of reducing carbon monoxide and

41,000-tons of toxic pollutants such as benzene. Benzene is down
42

24,000-tons annually. We believe that this is certainly partly due

to the oxygen content of reformulated gasoline.

On the other hand, ethanol has been a tremendous success in the

Chicago land area. The Chicago land also includes parts of northwest Indiana as far as Federal reformulated gasoline requirements,

and there are virtually no water problems, certainly none that are

directly concerned with RFG in the Chicago land area.

We do, however, have MTBE contamination in our area. As a

matter of fact, within 2-miles of where I personally live, we have

a leaking underground storage tank problem and one of the constituents of the pollution is MTBE. So this is certainly not an issue

that is exclusive to places like California, New Jersey, and New

York State.

What is being proposed to solve the problem? Well, we have certainly heard this morning a lot of discussion about the elimination

of MTBE, but we also have heard that refiners claim they simply

cannot eliminate the use of MTBE without the flexibility of producing non-oxygenated fuel, and have sought the elimination of the oxygen requirement in RFG. Quite honestly, we just simply don’t

think that that is a good tradeoff of clean water for clean air.

We have also heard an awful lot of conversation this morning

about whether the Federal oxygen requirement is still valid. We

have had a tremendously successful program. I simply can’t buy

the logic that we are going to have to throw out the oxygen requirement simply for the purpose of eliminating MTBE.

So what does the ethanol industry bring to the table as a solution? We don’t want to be a hinderance to legislative efforts to address a serious public health and environmental issue. We want to

be part of the solution. Toward that end, we have developed the following principles which we believe should guide congressional action on this issue.

First of all, develop a national solution. MTBE is a national problem, just like we have MTBE solution in Indiana even though we

are in our area not an RFG area. Address the cause of the problem.

That is MTBE in water, it is not oxygen in gasoline.

Protect the environment, don’t trade air quality gains for water

pollution. And we are certainly amenable to being as flexible as we

possibly can to allow refiners the time that it takes to make a rational transition to increased ethanol usage.

One of the questions that has been raised and becomes part of

the primary discussion is can we meet the demand if, in fact, ethanol is to be used to replace MTBE. Well, I can tell you that the ethanol producers say we can meet the demand. The American farmer

says we can meet the demand. The Department of Agriculture says

we can. The investment risk-takers say we can. They are already

investing in new plant and equipment. The new technology players

say we can. People like our friends at Arkenol and Masada and

BCI are already prepared to do that. The only people that I hear

saying that we can’t meet it are the people that don’t want us to

meet it.

So, in conclusion, the domestic ethanol industry understands

that Congress is faced with a daunting challenge of protecting

water supplies by reducing the use of MTBE, but we want to do

that without sacrificing air quality or increasing fuel prices. We see
43

ethanol as a solution. Increasing ethanol use in this program will

allow MTBE to be phased out in a cost-effective manner, while protecting precious water resources and air quality.

Stimulating rural economies by increasing the demand for grain

used in ethanol production will help farmers left behind in our

booming economy. Encouraging new ethanol production from biomass feedstocks will provide additional environmental benefits and

take a positive step toward the sustainable energy future that we

have all been talking about this morning. The bottom line is we

need to protect both air and water quality, and I think with ethanol we can.

Thank you, Senator.

The CHAIRMAN. Well, thank you very much, Mr. Kimpel.

[The prepared statement of Mr. Kimpel can be found in the appendix on page 117.]

Mr. Miller.

STATEMENT OF RUS MILLER, CHIEF OPERATING OFFICER,

ARKENOL, INC., MISSION VIEJO, CALIFORNIA

Mr. MILLER. Good afternoon, Mr. Chairman. I would like to convey my apologies to Senator Harkin for not smelling the contaminated water he provided, but my brother lives in Santa Monica so

I have already had the unfortunate experience of drinking that

water.

The removal of MTBE from the fuel supply of the United States

offers policymakers two choices. The first choice is to remove the

oxygenated fuels requirement. Arkenol believes that the evidence

in the EPA Clean Cities Program and Reformulated Gasoline Program of reducing air pollution after requiring oxygenated fuels over

the objections of petroleum producers speaks for itself.

Since oxygenated fuels provide cleaner air, the second choice becomes then which oxygenate should be used. There are technical

and societal factors to be evaluated in each case. Arkenol, being a

technology provider for cellulose-to-ethanol production, concurs

with the determination that ethanol is the best currently available

route. While Arkenol technology may be applied to produce numerous other oxygen-bearing fuels, those fuels have not yet been proven in the marketplace, so ethanol remains the choice.

The question before the Committee today is what would be the

demand for renewable fuels under various scenarios. The California

Energy Commission published a report, ‘‘Evaluation of Biomass-toEthanol Fuel Potential in California,’’ in December of last year.

This report includes within it several studies of this question with

ethanol as the fuel. The executive summary of that report is attached to my written remarks and a full copy of the report has

been given to your staff.

I would like to address the key scenarios briefly and then answer

your questions.

Scenario 1: The first scenario is oxygenated requirements are unchanged. To attain the required levels of oxygenation to effect air

pollution reductions currently achieved, MTBE must be used in

about 11-percent concentration in gasoline. As ethanol has a higher

oxygen concentration, a blend would only require 6-percent ethanol

to attain the same level of oxygenation. Ethanol has typically been
44

blended at higher levels of 10-percent to comply with the tax code.

The complete replacement of MTBE with ethanol would generate

a demand of over 1-billion-gallons per year solely within California.

Scenario 2: the oxygenate waiver is granted, except for EPA’s

seasonal requirements in carbon monoxide non-attainment air basins. Under this scenario, the Los Angeles and Sacramento air basins would be required to use an oxygenated fuel in the winter

when carbon monoxide levels seriously exceed EPA clean air limits.

The demand for ethanol to replace MTBE in such a scenario would

be approximately 150-million-gallons a year.

A third scenario: oxygenates are no longer required. With no oxygenate requirements in California, there would likely be no renewable fuel used in the State. Petroleum producers are very unwilling

to give up market share of their production volumes of basic gasoline. This is clearly expressed by the price of ethanol currently

being $.66 a gallon, when unleaded gasoline is only $.85 a gallon

in New York Harbor, and ethanol has a much higher octane rating

which is unrecognized.

The ethanol transportation cost to California, for your information, is somewhere between $.08 and $.10 a gallon, and California

gasoline is somewhat more expensive than New York Harbor gasoline due to a large number of refinery issues.

The fourth scenario is the renewable fuels standard is enacted.

A renewable fuels standard is a sensible approach, but its implementation must be carefully considered to truly effect an expansion

in renewable fuels use. This approach combines an awareness of

the environmental benefits of renewable fuels on immediate air pollution through oxygenation of fuel, with an awareness of the environmental benefits of reduced carbon dioxide emissions, with an

awareness of the societal benefits of reduced oil importation from

abroad.

California uses about 14-billion-gallons of gasoline per year. The

United States as a whole uses about 10-times that. The United

States imports 50-percent of the oil needed to make that gasoline,

at great cost to foreign exchange and being militarily prepared to

defend those foreign sources, as you so accurately described in your

earlier remarks.

The requirement for a renewable fuels portfolio would ensure a

clear requirement of biologically-derived fuel with arithmetical precision. A 1-percent standard would continue a nationwide demand

of 1.4-billion gallons, which is roughly the current production capacity of ethanol in the U.S. An additional 1-percent when added

to that standard would then double the volume needed and displace 2-percent of the imported oil that we currently use.

California has identified waste biomass volumes which could replace 30-percent of the total gasoline used within the State. Other

States have similar resource volumes. For example, in the L.A.

Basin alone, 40,000 tons per day are put into a landfill. Seventy

percent of that by weight could convert to ethanol, and that would

be 1-billion gallons a year just from the L.A. Basin landfill volume.

You have heard from many people today who are more qualified

than I to talk about various aspects of this decisionmaking process

in which you are engaged, and you will hear from a few more. I
45

want to leave you today with the understanding that there is a current technology which can support the use of renewable fuels.

And more importantly from my company’s perspective, there is

an industry of biomass-to-ethanol technologies ready to meet nearly

any demand for renewable fuels which can be imagined. These

technologies can use the biomass from agricultural wastes, conservation resource lands, urban green waste, and municipal solid

waste. These new technology companies need a reliable market for

our products in order to attract leading institutions to finance the

building of these plants.

We urge you not to succumb to this Nation’s petroleum addiction

or the same scare tactics used to resist the removal of lead from

gasoline and the implementation of reduced sulfur in gasoline

taken by the petroleum industry. Do not take a step backwards by

ignoring the demonstrated air benefits of renewable oxygenated

fuels. Use the opportunity created by the current MTBE and oil

prices crises to set an example for the world and put our Nation

on a path toward a sustainable future, free from the influence of

Ambassador Woolsey’s Middle East autocrats.

We look forward to your decision supporting the renewable fuels

community, and I thank you for the opportunity to appear before

you today.

The CHAIRMAN. Well, thank you very much, Mr. Miller.

[The prepared statement of Mr. Miller can be found in the appendix on page 127.]

Mr. Grumet.

STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR,

NORTHEAST STATES FOR COORDINATED AIR USE MANAGEMENT, BOSTON, MASSACHUSETTS

Mr. GRUMET. Thank you, Mr. Chairman. My name is Jason

Grumet and I am the Executive Director of the Northeast States

for Coordinated Air Use Management. For over 30-years,

NESCAUM has been providing technical and policy advice to the

air pollution programs in the 8 Northeast States, and it is in that

capacity we have authored several studies on issues of RFG and

MTBE, also in that capacity that I was both honored and challenged to serve on the Blue Ribbon Panel earlier this year.

It is sincerely a pleasure to be here with you today, Mr. Chairman. I want to thank you for your perseverance, and recognizing

that these seats are somewhat more padded than those behind us,

I would like to also acknowledge the commitment of our audience.

Mr. Chairman, there is much that is going to be in debate and

controversy before this committee, but there is one that I think is

perfectly clear, and that is if we are going to solve this problem,

we are all going to have to reach out and forge creative, and I think

sometimes courageous, even unusual coalitions.

It is in that spirit that the Northeast States earlier this year

were joined by national environmental groups, the American Petroleum Institute, and a host of refiners and gasoline marketers to

propose a set of principles that we believe this committee should

consider as it moves forward. While I will be reflecting upon that

collective wisdom, I want to stress that I am here solely today as

a representative of the 8 Northeast States.
46

Representatives of our region are notorious for speaking quickly,

Mr. Chairman, and I want to assure you that I will not try to read

the entire testimony that I have submitted. But what I would like

to really to is first of all just try to provide in the first half of my

testimony some context for this debate and then in the second half

of my testimony talk about the framework for legislative action

that we propose, and then with your leave, Mr. Chairman, in the

third half of my testimony, and I am sure in questions that follow,

speak particularly to the issues that relate to renewable fuels.

At the outset, Mr. Chairman, I think we have all acknowledged

that the RFG program has been a profound success in reducing air

pollution and in protecting public health. The challenge that is before us is clearly to maintain those substantial environmental and

public health benefits, while at the same time effectively mitigating

the environmental and economic harms caused by MTBE.

Adding to this challenge is the very real need to provide confidence in a secure and growing market for ethanol, and the opportunity to provide much needed support for a broad array of domestic and environmentally beneficial fuels.

Unfortunately, Mr. Chairman, we do not share Senator Grassley’s optimism that existing administrative authority at either the

Federal or State level provides us with the ability to address this

problem. And we are here before you today to urge, in fact, with

an unprecedented coalition, that the Clean Air Act be changed.

We believe that we, with the five principles I will discuss, can

effectively protect air quality and water quality. We can ensure

substantial growth in ethanol, and we can provide refiners with the

flexibility that we believe they need to ensure a low-cost, adequate

fuel supply.

I would like to submit attached to my testimony the announcement of these principles that the Northeast States brought forth

earlier this year, and supportive statements from the American

Lung Association, the Natural Resources Defense Council, and the

American Petroleum Institute, that forged the beginning of this coalition.

Let me now review the legislative framework that we urge you

to consider. First, we believe it is essential to repeal or waive the

oxygen standard in reformulated gasoline. Mr. Chairman, we think

that it is simply not possible to protect air quality and water quality while ensuring an adequate, low-cost supply of fuel while that

oxygen mandate is still in effect.

While the Northeast States embrace the growth in renewable

fuels and have tremendous optimism about a future biomass industry, we are convinced that there are policy approaches available to

this committee which will do much better to further those legitimate ends than requiring the sale of ethanol in the Northeast

States in the summertime.

Frankly, Mr. Chairman, as we seek to forge new coalitions, we

are disappointed by legislative efforts that seek to maintain the oxygen mandate because we are convinced that those efforts simply

do not hold promise to build the national coalition that will be necessary to resolve these issues, and we urge the Committee to look

beyond them.
47

Second, of course, it is necessary to severely curtail or eliminate

MTBE throughout the entire fuel supply. We propose a three-step

process to accomplish this. We propose that the U.S. EPA be compelled to regulate and, if necessary, eliminate MTBE to protect

public health, welfare, or the environment. At a minimum, we urge

that EPA be compelled to reduce MTBE to the levels used prior to

the 1990 Clean Air Act. And, finally, I think we agree with Senator

Grassley that the States must be clearly authorized to further regulate MTBE if necessary to protect public health, welfare, or the

environment.

Next, we believe it is incredibly important that we enhance the

environmental performance standards in the Reformulated Gasoline Program to reflect the stricter of what was actually achieved

already in the first phase of the program or what is required under

statute for VOCs, NOX and toxic emissions. And I am pleased to

be able to represent to you that the American Petroleum Institute

joins us in that regard.

We believe we need to promote consistency through timely Federal action, and finally that the transition that must be undertaken

in our Nation’s fuel supply must be enabled with enough lead time

to ensure an adequate and low-cost supply of gasoline.

Let me now turn, Mr. Chairman, to the impact on renewable

fuels, which I know is of great interest to this committee. If we are

going to create a secure future for ethanol that I think we all desire, I truly believe we must shift our collective emphasis away

from a further focus on market protection and toward rejuvenated

focus on product quality.

Mandates unquestionably provide a security never possible in a

free and open economy. At the same time, that security comes at

considerable cost to the ethanol industry because, Mr. Chairman,

it undermines public confidence in the quality of the product. It, in

essence, suggests that we need to embrace the intuitive contradiction that ethanol is so good a product that it can’t compete.

Now, we, or course, believe that that is not true, and we would

like to reflect in our testimony an analysis that we have put together using work done by the DOE and the California Energy

Commission which demonstrates, we think quite compellingly, that

if we eliminate the competition and maintain the air quality requirements, the market for ethanol in this Nation is going to boom.

We support principles that we believe are going to lead at, at a

minimum, a doubling of ethanol over the next decade. And while

we are supportive of this tremendous growth, we are mindful that

ethanol, like any product, has benefits and liabilities.

Used at the wrong time, Mr. Chairman, ethanol can, in fact, increase air pollution. It can substantially increase VOC emissions,

it can increase NOX emissions. And while reducing some toxic

emissions, it can increase others. Used in the wrong place, Mr.

Chairman, we believe that ethanol can, in fact, result in unacceptable transportation and distribution costs. And we are very concerned about forcing a disproportionate proportion of the ethanol

market into the fringes of the country. However, these concerns are

substantially mitigated, we believe, through a properly designed renewable fuels standard that enables the market to optimize when

and where ethanol is sold.
48

I would like to thank Senator Daschle for his efforts to reach out

to the Northeast States in letters last summer seeking our input

on the renewable fuels standard and initiate that dialogue. I would

like to submit the responses of myself and Governors King and

Shaheen to the record. While those responses reflect some apprehension about future sales requirements, we indicate that we believe the renewable fuels standard may respond much better to our

concerns about ethanol than congressional inaction that would result in a de facto summertime ethanol mandate.

In fact, Governor Shaheen notes that the renewable fuels standard shows great promise and, in fact, could set a wise national

precedent. I should note that Governor Shaheen was referring to

a renewable fuels standard which at the time imagined a doubling

and not a tripling of the ethanol market. But nevertheless we believe that this is, in fact, the basis for the compromise that must

be supported.

Finally, we very much support Senator Daschle’s recognition of

the differential benefit, and your support, Mr. Chairman, of the tremendous opportunities that biomass ethanol provide. In fact, we

think that a greater than 1.2-to-1 ratio is important. Moreover, we

are intrigued by recent efforts from Senators Smith and Inhofe to

broaden the renewable fuels standard concept to embrace a wider

variety of domestic energy sources that are envisioned under

EPACT.

In closing, let me just say that there is certainly much work left

to do. However, I truly am optimistic that by emphasizing market

principles in an effort to promote renewable and clean domestic

fuels, we can, in fact, fashion the necessary legislative solution in

the coming months.

Thank you.

The CHAIRMAN. Thank you very much, Mr. Grumet.

[The prepared statement of Mr. Grumet can be found in the appendix on page 130.]

Dr. Morris.

STATEMENT OF DAVID MORRIS, VICE PRESIDENT, INSTITUTE

FOR LOCAL SELF-RELIANCE, MINNEAPOLIS, MINNESOTA

Mr. MORRIS. Thank you very much, Mr. Chairman. I appreciate

your patience. My name is David Morris. I am Vice President of

the Institute for Local Self-Reliance, which is a 26-year-old nonprofit policy research organization that is based in Washington,

DC., and Minneapolis. Our mission is to strengthen local economies.

Fifteen-years ago, I coined the term ‘‘the carbohydrate economy’’

to describe an industrial economy whose materials foundation consist largely of plant matter and whose processing and manufacturing enterprises were significantly owned by the cultivators of that

plant matter. In other words, the carbohydrate economy maximizes

environmental benefits, while also maximizing economic benefits to

the communities that cultivate and process the raw materials.

We have a number of different reports, a flagship report on the

carbohydrate economy, newsletters and the like, which I can leave

for you. You have my testimony, and I thought that rather than

summarize my testimony, since I would be redundant of a lot of the
49

other people here, I just thought I would say a couple of things in

terms of history.

Six-years ago, I think, to this month, EPA had hearings in

Rosslyn on the renewable oxygenate standard, and I came and testified on the renewable oxygenate standard. And those hearings

were to allow ethanol to have a significant share of the RFG market, and so certainly the ethanol community was there. But there

were some voices even then that were very disturbed about MTBE.

We may forget, but it was 1993 when Fairbanks, Alaska, banned

MTBE and Missoula, Montana, banned MTBE. There, it was because of headaches. It was considered an air quality problem in

those areas. So in 1994 when the renewable oxygenate standard

debate occurred, there was very much a sense that something really was awry, although nobody was quite sure what it was about.

We may remember the attacks on ethanol by the methanol industry at that point attacking ethanol as, quote, ‘‘poisonous.’’ I

think it was Senator Harkin there that declared that he would

drink a pint of his product if they would drink a pint of their product. And it was interesting that 4-years later, Santa Monica should

stun the world by having to close down its water supply because

of MTBE.

So here we are again, I think that if we take an even broader

and more historical perspective, we have actually been here three

times before, over 75-years. When the car companies built more

powerful compression cars in the early 1920s, 1920, 1921, they had

a choice of ethanol, which was selling 50-million-gallons nationally

at the end of World War I, or lead. Ethanol was clearly the superior product, but it had one significant disadvantage. It took 10-

percent of the gas tank, and the oil companies were not about to

give 10-percent of their gas tank to the farmers, so they chose lead.

And we may not remember, but lead had a serious controversy

attached to it. In fact, because of the explosion of a refinery of

Standard Oil in New Jersey, the country banned leaded gasoline almost as soon as it went on the market. For 1-year, there was an

intensive analysis of the environmental and public health effects of

leaded gasoline, and to his everlasting shame the Surgeon General

gave it a clean bill of health. Within a few years, 70-percent of all

the gasoline sold in the United States was leaded gasoline.

Well, in the 1970s we woke up, perhaps for the wrong reasons,

because of what it did to the catalytic converter. But nevertheless

we also understood what it did to the brain cells of especially the

young in inner cities. So we then phased out lead, and once again

the oil industry had a choice. It could have used ethanol; it was

perfectly viable as an octane enhancer and as a perfectly good product. Instead, it chose to reformulate the gasoline to increase the aromatic content.

They increased the aromatic content to about 40-percent, on average, of benzene, toluene and xylene. And then, of course, we

found out that those things cause cancer, not brain damage, cancer.

So then in 1990, with the Clean Air Act we said try it again, and

this time put in an oxygenate. Once again, they had a choice of

using ethanol or using their own product and, of course, they used

their own product and here we are today.
50

Shame on us, shame on us, shame on us if we say try it again.

Maybe they can do something with the alkylates, maybe they can

figure out how to deal with the olefins that they have to take out.

But I assure you we will be back 5- or 10-years from now with another new-found problem.

The problem with California in their analysis when they found

out that something was going on with their groundwater—they immediately said, how come nobody told us? And the EPA—I don’t

quote, but I paraphrase—the EPA said, well, that was under the

Air Quality Act, so our water department didn’t look at it; it is our

air quality department that looked at it. And California’s response

is to say let’s get rid of the oxygenate, let’s go back to 100-percent

gasoline and take our risks with the oil companies.

It is a very one-dimensional analysis that occurred with the introduction of MTBE into the market, and I think that what we deserve now is a multi-functional, full-cost analysis, an analysis that

looks at not only air quality, but water quality, and not only water

quality, but toxicity, and not only toxicity, but the strength of the

rural community, and not only the strength of the rural community, but foreign trade impactsexchange programs.

And we also have to realize—and I will close with this—that ethanol, and people have known this for 70- or 80-years, is just the

beginning. When I talk about a carbohydrate economy, I am not

talking about an ethanol economy. Ethanol is the base for a carbohydrate economy. It is the $.07 to $.12 a pound large commodity

chemical that is the base, but already you have people that are

talking about butanol and people who are talking about polylactic

acid and people who are talking about $.30 and $.40 and $.50 and

$.60 and $1.00 a pound chemicals and chemical products that can

be made.

So what we are creating here is a biochemical industry, the first

commodity of which is ethanol, and we should not lose sight of

that. The argument between the cellulosic industry and the starch

industry about who is going to produce ethanol is really somewhat

of a nonsensical argument because starch is such a valuable commodity itself that it will clearly be made into higher-value plastic

products, and then the corn stover will take over for the lowerquality ethanol products and other kinds of biochemicals.

The President of the United States has a recycled content standard of 30-percent for paper purchased by the Federal Government.

By executive order, there is a 30-percent reduction in energy use

per square foot in Federal buildings. Although we are not going to

sign the Kyoto Protocol, I wish we were; I think the farmers should

demand it. Aside from the Farm Bureau, I think that they would.

That is a 30-percent reduction in greenhouse gas climate change.

So it seems to me that we should think once again about the 30-

percent renewable oxygenate standard, except this time make it a

30-percent renewable fuels standard; 30-percent of all the gasoline

in the country has to have at least a 10-percent ethanol blend.

That would get us up to 3, 3.5-percent, and I think that is well

within our means.

Thank you very much.

The CHAIRMAN. Well, thank you very much, Dr. Morris.
51

[The prepared statement of Mr. Morris can be found in the appendix on page 143.]

Let me just summarize for a moment. Many of you have commented, and correctly so, on the comments of my colleague, Senator

Grassley, earlier on. Senator Grassley sort of drew the point that

some of you have that air quality and water quality are both important, and I Senator Grassley, I think, shares the feeling of many

Senators, maybe many members of the public, that in the solution

of this particular problem legislatively we are unlikely to come to

the equities that are suggested.

This may show too little faith in the legislative process, but we

are going to continue with the legislative process, as I assured the

Senator. That is the reason we are having the hearing. But it does

bring to a focus your point, Dr. Morris, that Senator Grassley

would apparently share, not a conspiracy theory, but with regard

to fuels for automobiles over the course of time the oil industry at

any number of junctures might have accepted an ethanol product

as a part of the situation, but chose something else. There is a feeling that, given the opportunity, oil companies might continue to do

so.

Now, Mr. Grumet has an important thought that perhaps coalitions can be built that include the oil people, as he had them in

his coalition. We could come, I suppose, to a problem in which corn

farmers said, we are really not interested in biomass, we are interested in corn. We all have these problems in terms of constituencies and places that we take a look at things, but nevertheless

this is a serious problem.

And it is compounded starting with Mr. Woolsey’s testimony and

the views which I share that essentially our problem in terms of

national security and the security of our whole economy revolves

right now on our dependence upon petroleum-based fuels in this

country. It is something we will not be able to get around immediately, but our failure really to do very much about it over the

course of the years and to come once again to the kind of past we

have had in the last few days of not national hysteria but something approaching that with my constituents sort of illustrates how

vulnerable we are.

In my view, we will very vulnerable again and again until finally

we have an extraordinary problem that causes either a national recession or a war, as we try to fight our way through and simply

demand at gunpoint that the fuel be made available, when all of

that was really unnecessary, aside from the particular interests as

they contrived in legislation that we have.

Now, the problem as I see it—and I am intrigued by your

thought and maybe I didn’t get it correctly, Mr. Miller, but you

claim that ethanol in California costs $.66 per gallon. Was that

your testimony?

Mr. MILLER. That was the number talking to a distributor when

I spoke to him on Thursday. That is the net-out cost.

The CHAIRMAN. That is the net-out cost. What do you mean by

that?

Mr. MILLER. Well, with the $.54 removed, so his selling price

today is $1.20. So the real cost to the final user is $.66.
52

The CHAIRMAN. Well, that strikes me as very low. We hear Mr.

Woolsey saying this morning earlier on that typically the price has

been about $1.00, and therefore the subsidy sort of got you down

into something that was competitive with petroleum, with the ups

and downs.

But you are saying for the moment, petroleum is $.85. Is that

right?

Mr. MILLER. The Wall Street Journal on Wednesday, $.86, unleaded, New York Harbor.

The CHAIRMAN. Now, there is something there that strikes me as

curious, although we are talking about curious situations. If the

market for ethanol is $.66 and it is $.86 for petroleum-based, it is

a wonder why people are buying the latter.

Mr. MILLER. Defense of market share by the oil companies.

The CHAIRMAN. What do you mean by that?

Mr. MILLER. They don’t want to lose any market share. That is

a half of a percent or a percent that they don’t want to give up,

and particularly for the majors who have an oil production volume

that they also want to maintain. You get a little bit different behavior on the part of people like Tosco and Getty, who are independents.

The CHAIRMAN. Well, is this an antitrust problem in this case,

in which you have deliberate frustration of competition?

Mr. MILLER. I am not a lawyer, Sir.

The CHAIRMAN. Mr. Grumet, you have taken a look at these market-based solutions. What do you have to say?

Mr. GRUMET. Mr. Chairman, if, in 5-years, with the elimination

of MTBE and the reduction in sulfur which will further deplete the

octane pool and the maintenance of air quality benefits—if, in 5-

years, the ethanol market has not grown by leaps and bounds, then

I highly recommend that antitrust investigation.

But I would suggest to you that as much as there are interests

in notions of conspiracy theory as the unifying themes here, these

are publicly-held competitive industries and when faced with the

low cost of ethanol and the need to displace air toxics and increase

octane, I think that the ethanol industry is going to do extremely

well. And if we could work together to provide the market reflection to enable that, we would be in much better shape.

The CHAIRMAN. Well, Mr. Grumet, just practically how will this

happen? Is there some statesmanship in the oil industry somewhere that says we ought to stop fighting all this? After all, we are

an energy company. We are not an oil company, but we provide energy, btu’s.

Mr. GRUMET. Mr. Chairman, it is a unique and probably never

again opportunity for me to be here representing the oil industry.

So I, with some chagrin, will go forward. I think that the proposal

that Senator Daschle and the administration have identified is certainly worth pursuing in two important ways.

It is elegant in that it provides the market confidence that I understand the ethanol industry is demanding in this debate. Our interest in it is based on our confidence that that market is, in fact,

going to grow itself. So a market requirement that is, in essence,

redundant to what we believe the free market will actually provide

is a small price, we believe, to pay to free us from the concerns we
53

have on the other edge of the ledger, and that would be to perpetuate a scenario of ethanol mandates in the Northeast.

By allowing the free market, in fact, to figure out the best way

to optimize the sale of ethanol, what we believe will happen is that

ethanol will grow where it makes sense. If our concerns about distribution costs are exaggerated, well, then good for ethanol. It is

going to come into the Northeast. If those costs, in fact, however,

are real, well, then good for the Northeast and good for you because we will not be, in fact, imposing ethanol where it doesn’t

make economic sense to do so. The free market can answer that

discussion. None of us, Mr. Chairman, can.

The CHAIRMAN. When Dr. Woolsey and I wrote our article and

we were doing our research, our scientific backers and what have

you indicated they felt, given this change in the polymer chain that

Woolsey was describing, the cost of that product is likely to come

out more like $.50 a gallon at the end of the trail, and it wouldn’t

require any subsidy at all.

In other words, the one value of getting to that point is we end

the argument before the Congress of going for a subsidy for 5-years

or 7-years or however long we pass the situation, and we have

something out there that is being produced by DuPont or by whomever. We had a panel of these people with the President of the

United States down at the USDA this August when he proclaimed

the national situation.

We were grateful for that, but he didn’t proclaim the money for

the research. So we are still working on that and that will be forthcoming and it is not a whole lot, but the fact is that we may arrive

at solutions. If ethanol is already $.66 out in California, that is not

$1.00, or $.75 or the various other stages. In fact, producers point

out that given greater volume, greater efficiencies, and breakthroughs each year, the $.66 goes lower in the process so we finally

have a situation in which clearly there is competition, unless there

is deliberate blockage of the distribution system or other means of

subverting markets in the country, which clearly is an antitrust

problem, but one I suspect the Congress would solve long before we

would go through the litigation of that.

What I suppose I am trying to gain from expert testimony is, is

this realistic. Is it possible that in this world, given all the circumstances that we are describing, the cost of ethanol from some

biomass form or some carbohydrate form or what have you is, in

fact, going to be competitive, and, in fact, the competitor of advantage so that ultimately the fuel system of the country verges in a

market system that way?

Do you have a thought on that, Dr. Morris?

Mr. MORRIS. Yes, I do, Mr. Chairman, and thank you. I think the

answer is no. As someone who has studied this issue for quite some

time, I will be a skunk at a picnic and say that. I think that the

problem is that the price of oil is enormously subsidized, as people

here have pointed out, and that what one needs to do is to price

the price of oil itself correctly.

Certainly, if you lower the income tax, which all Americans would like, and require the Pentagon to pay the $40 or $50 billion

that it uses to protect oil at the pump, then you would begin to sort

of internalize the real costs. But the idea of ethanol getting down
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to $.50 a gallon presumes, by the way, that the feedstock would be

zero cost, and I think that for those of us who are interested in

raising the income of farmers, the idea that we are saying we are

going to make it by not paying the farmers anything—it is going

to be a waste product and we will help you because you are not

going to dispose of it—is frankly not very good public policy.

So although the price will come down, I think it will come down

because of process improvements, maybe another dime or so, but

largely because you will begin to get higher-value chemicals that

will be coming off of it. So ethanol will become sort of a by-product,

and as such ethanol can, in fact, then be sold for a lower amount

of money. And it may even be able to get down to maybe $.60, $.65,

but you are then not talking about 5 or 10 billion gallons of ethanol. You are talking about probably 1 to 2 billion gallons of ethanol.

So I think that we should be very careful about trying to run

after the price of gasoline, as artificially low as it is, by sort of forcing farmers to kind of bear the burden and having the taxpayers

come in with $.54 to kind of bail out the farmers. I think that if

we are talking about a long-term approach here, we really need to

deal with the price of oil, which in some ways—and I know this is

not by any means the forum, and maybe not the Chairman either—

brings us back to the Kyoto Protocol.

And there is, in fact, internationally a call by nations to impose

some tax, some regulation, some restriction on the emissions of carbon and the burning of carbonaceous fuels that don’t absorb carbon. And that, it seems to me, is the hook that we should at least

explore very seriously rather than reject out of hand because then

we can talk about ethanol competing not at $.50, but competing at

$.80 or $.85, which I think is more reasonable.

The CHAIRMAN. But your point is, I gather, that given the subsidies that go to oil now, if you strip all of those out, you come out

to a different figure for oil, obviously. Now, I suppose likewise I am

saying if you strip out the various subsidies involved in ethanol,

you come to a different figure. After all of this is stripped out, we

are just trying to come to some idea of where the market would be,

where the viable competition is at that point.

Yes, Sir?

Mr. MILLER. If I could offer an instructive example, in the late

1970s, early 1980s, when the Department of Energy and Agriculture took a very big interest in ethanol technology improvement,

the cost for a dry mill ethanol plant was something on the order

of $5 of capital per installed gallon of annual capacity.

Over the course of the next 10-years, the technology has improved to where now the cost is something, I don’t know, perhaps

$.125, something like that, divided by 4. Today, Arkenol and others

are nipping at our heels. We can put in an ethanol plant from cellulose for about that $5. I am not sure that we can get down to

quite that factor of 4 in the next 10-years, but we can certainly improve that enormously.

Even with that, our cost of making the ethanol is still—twothirds of that is just the capital, the debt service. So we can get

very close to the numbers that you are talking about. However,

having said that, to answer your question about what technology
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can do, I still think that Dr. Morris is right on target with kind

of the grander policy issue that needs to be addressed.

Mr. GRUMET. Mr. Chairman, if I could just add a thought or two

on the issues of subsidies and sales requirements, I think generally

we believe that subsidies and sales quotas have a place in our economy, and those are to cure market failures and to overcome market

barriers. Toward that end, the notion of an ethanol subsidy is not

a policy that we in the Northeast are here today to challenge.

What I do hope is that as the ethanol industry matures, we fill

find it rational to focus those subsidies where they are needed

most, and that would be on the smaller farmers, ont he biomass

producers, on the folks who are trying to get a foothold in this market. And, of course, we would wholeheartedly endorse a review of

the subsidy approach to mega corporations, regardless of whether

they are making oil or ethanol or Kathy Lee Gifford’s clothing in

the Third World. I mean, I think that is a noble yet complex legislative enterprise.

The CHAIRMAN. Well, it certainly is complex, and maybe noble,

also. I suppose I am just curious as to whether any of you know

of people who have done studies—maybe you have done them yourselves—about the cost factors and the subsidy factors. This committee—you have already heard by colloquy on the sugar thing—is acquainted with all sorts of subsidies that sometimes have disastrous

results and sometimes have good ones, I suppose.

And we are talking now in a broad term in terms of subsidy of

agricultural America. You have touched on this a little bit, Mr.

Grumet. The Secretary keeps talking about the very small farmers,

and I suppose the large farmers, and you get into almost a class

or a numbers distinction as to who it is you are trying to help.

I am just trying to separate for a moment what is physically possible in the chemistry and formulation of fuel, and Dr. Morris probably makes an important point that Mr. Woolsey did earlier. After

you separate out all of the biomass or corn-based ethanol, or however we get to it, the case has never been made that this substitutes for all the petroleum-based fuel in this country, but a percentage. Ten, 15, 30 has been mentioned, but that is not 100, it is

not even 50. So you still have out there a very large problem, although discoveries may occur in the next few years that supplant

many of our thoughts about fuel and energy.

The question is how do you keep the markets available, and the

incentives and the capital that could be found to do these things

when they come along without having all of the encrustation of everything else we have done legislatively that sort of squeezes them

out.

Mr. MORRIS. I would say, Mr. Chairman, that I need to leave. I

am sorry.

The CHAIRMAN. Yes.

Mr. MORRIS. You shouldn’t come to Washington, DC., to walk out

on the Chairman of the Committee.

The CHAIRMAN. No, but it is already 1:15 in the afternoon.

Mr. MORRIS. I have to be someplace at 1:30, but I thank you very

much.

The CHAIRMAN. Thank you for coming. In fact, I thank all of you

for coming. You have been extraordinarily patient and helpful.
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The hearing is adjourned.

[Whereupon, at 1:15 p.m., the Committee was adjourned.]
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