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[Senate Hearing 106-830]
[From the U.S. Government Publishing Office]

                                                        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

                     U.S. GOVERNMENT PRINTING OFFICE
68-115                     WASHINGTON : 2000

_______________________________________________________________________
            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          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAUL COVERDELL, Georgia              THOMAS A. DASCHLE, South Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
PETER G. FITZGERALD, Illinois        J. ROBERT KERREY, Nebraska
CHARLES E. GRASSLEY, Iowa            TIM JOHNSON, South Dakota
LARRY E. CRAIG, Idaho                BLANCHE L. LINCOLN, Arkansas
RICK SANTORUM, Pennsylvania

                       Keith Luse, Staff Director

                    David L. Johnson, Chief Counsel

                      Robert E. Sturm, Chief Clerk

            Mark Halverson, Staff Director for the Minority

                                  (ii)

  
                            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
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

 
           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 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 two-thirds 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' 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.
    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 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 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 starch-based 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 cars-without 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 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 cut-offs 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 cut-off 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 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' ability 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.
    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 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.
    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 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 produced 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.
    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 back-and-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 
corn-producing 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 production 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.
    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 result 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.]
    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, enhanced 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 gasoline 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 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 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.
    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?
    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 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.
    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, one-third 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 farmer-owned. 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 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, because 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 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.
    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.
    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 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, 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 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 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 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 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-Dole-
Harkin 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 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 ground-breaking 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 hard-earned 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 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.
    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 
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 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 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-to-Ethanol 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 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 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.
    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.
    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.
    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 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.
    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 lower-quality 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.
    [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.
    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 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 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--
two-thirds 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 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.
    The hearing is adjourned.
    [Whereupon, at 1:15 p.m., the Committee was adjourned.]
      
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                            A P P E N D I X

                             April 11, 2000

      
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