Blending alcohols vith gasoline raises the volatility of the gasoline
{Oxygenated Fuels Task Force, 1986). Colorado law requires that all finished
gasoline or gasoline blends (except ethanol) meet ASTM volatility standards.
State law requires that ethanol be blended with a gasoline that meets ASTM
standards.

An issue throughout the development of Regulation 13 was whether the exemption
of ethanol from ASTM standards would increase the likelihood of vapor lock and
create driveability problems for Colorado motorists. The basis for the
concern was the possibility that gasoline blended with ethanol that exceeds
ASTM standards may gain significant market penetration during the non-vwinter
varm weather months and increase the possibility of vapor lock. However, in
approving the Regulation 13, the Commission concluded that increased vapor
lock vould not likely be a problem because other states have substantial
ethanol penetration year round, and the use of oxygenated fuels was mandated
only for the cold veather months of November through February.

In addition to mitigating driveability problems, RVP controls can reduce
evaporative emissions (Oxygenated Fuels Task Force, 1986). Gasoline with a
high RVP produces more evaporative emissions, which contribute to the
formation of ozone, than a low RVP gasoline. The addition of ethanol to a
gasoline with a high RVP (permitted by ASTM and Colorado Law) can increase the
tendency of the gasoline to form evaporative emissions (NAP, 1987). Hovever,
ozone formation in the Denver metropolitan area is a summertime phenomena,
and, in approving Regulation 13, the Commission concluded that even if ethanol
achieved substantial year-round market penetration, the increased evaporative
emissions attributable to ethanol vould not significantly exacerbate Denver’s

ozone problem.

Materials Compatibility and Solvent Nature of Alcohols

Alcohol fuels have characteristics that require they be transported, stored
and blended differently than gasoline. These distinctive handling require-
ments create expenses not normally incurred by gasoline marketers.
Additionally, some fuel systems in early model motor vehicles (1980 models and

ROG/Hagler, Bailly Inc. 2-6


annualized central case estimate of per gallon engineering costs attributable
to the 1988-1989 program vould be $.0017 (assuming statewide monthly
consumption of 115,500,000 gallons per month).

Cleaning Of Tanks Related To Ethanol

The standard procedure for the handling and distribution of ethanol is to
ensure that storage tanks are clean and contain no water to minimize the
possibility of phase separation and the release of deposits (because of the
solvent nature of alcohols). The cost estimates conducted prior to the
rulemaking established a range of service station maintenance costs of $25 to
$4000.

The actual costs of preparing a service station to handle ethanol tended
towards the lover end cost estimates (summarized in Table 4-2). Stations
incurred costs of $20 to $49 per pump hose for changing filters and pump
castings. There were approximately 60 service stations on the Front Range
that distributed ethanol blended gasoline during the program. Less than 20 of
the stations started blending ethanol during the program. The stations that
were blending vith ethanol prior to the program therefore did not incur added
preparation expenses due to the rulemaking.

The stations that incurred the greatest expense are those that required that
water/gasoline mixture be removed from their tanks. Water from a tank must be
treated as a hazardous waste, and disposal of the liquid is the greatest cost
in the cleaning process. The expense of drying a storage tank ranged from $90
to $250 per tank. Approximately 50 to 70 storage tanks were dried and cleaned
with a total cost range from $4,500 (50 x $90) to $17,500 (70 X $250)
(Conversations with ethanol blenders and tank cleaning firms).

ROG/Hagler, Bailly Inc. 4-4


and Kansas by truck. Some of the clear gasoline was used to blend vith
ethanol, and the rest was marketed as oxygenate free gasoline.

ROG/Hagler, Bailly, Inc. 3-15


tone 10CR7, 7-87 page 5

The Commission encourages and directs the Division to work with
non-retat] motor fuel suppliers to keep adequate records and inform purchasers
of non-retail fuel regarding the amount and type of oxygenate in the fuel
suppl{ed to and in the AIR Program area.

The oxygenated fuels program provided in Regulation No. 13 wilt be fn
effect for the period of January 1 to March 1 of 1988 and for each period of
November 1 to March 1, thereafter. This time period fs being used for the
following reasons:

- High levels of carbon monoxide are experienced fn Denver and
Colorado's Front Range during- the winter months. For the most
part exceedances of the CO standard occur between November 1 and
March 2 of each winter.

- There are several environmental, climatic and geographic reasons
for these high winter-time concentrations. These include a large
motor vehicle fleet, traffic congestion, high altitude, cold
weather and atmospheric temperature fnversions.

- High CO concentrations in Colorado are brought about in part by
Colorado‘s altitude and cold weather. At higher altitudes and
colder temperatures, motor vehicles tend to have less efficient
fuel combustion, resulting in increased levels of CO.

- Another cause of high carbon monoxide concentrations {s the
incidence of winter-time temperature inversions which can develop
during the evening, An inversion will trap pollutants such as
carbon monoxide near the surface. In these conditions of stagnate
a extremely high concentrations of carbon monoxide duild and
collect.

If the marketplace for Class A motor fuel operates in an open and
competitive manner, a number of oxygenates should be available for use .in the
AIR Program area which, when blended with a base fuel, will produce oxygenated
fuels that meet this regulation. Any attempt to limit the choice of
oxygenates available in the AIR Program area between December 1 to March 1 of
1988 and for each pertod of November 1 to March 1, thereafter, while this
regulation is in effect, through a combination, conspiracy, trust, pool,
agreement or contract intended to restrain or prevent competition in the
supply or price of base fuels suitable for blending with an oxygenate to
produce. oxygenated fuets which comply with this regulation and applicable EPA
requirements, may constitute an illegal restraint of trade fn violation of
Section 6-4-101, et. seq., Colorado Revised Statutes.

Authority for Regulation No. 13 can be found in the Colorado Air
Quality Control Act, Section 25-7-101 et seq., C.R.S. 1982 (1986 Supp.).
Specifically, Section 25-7-106(1)(e) authorizes the Colorado Air Quality
Control Commission to develop "a control or prohibition respecting the use of
a fuel or fuel additives in a motor vehicle to the extent authorized by
Section 211(c) of the federal act". Specific authority can also be found in
Section 25-7-109(3}(d).

)

THE CODE OF COLORADO REGULATIONS 5 CCR 1001-16


lew cost octane enhancer, but only limited amounts can be added to most
gasolines because of their high RVP (55). Because MTBE lowers the vapor
pressure of gasoline (RVP of MTBR = 8, RVP of gasoline = 14) vhen blended,
additional low cost butane can also be blended to increase octane instead of
using more expensive octane components. ! The value of the substitution is
termed the butane credit. BBC (1987) estimated the butane credit at 0.2 cents
per gallon for 11 percent MTBE gasoline. The amount of credit depends on the
price and availability of butane and the composition of the base gasoline.
Because of the complexity and variability of refinery operations, butane
octane credit was not included in the estimate of MTBE octane value. The
inclusion of butane credit would increase the substitution value and lover the
total cost of blending MTBB.

Based on the amount of MTBB blended gasoline produced during the two-month
program without acknowledging the value of octane, the oxygenate purchase cost
of the program ranged between $4,198,100 and $5,037,720 or $0.020 to $0.024
per gallon of blended gasoline. This serves as an upper bound estimate on the
blending cost components. When adjusted for the value of octane, the cost of
blending MTBE ranged from 839,620 to $1,679,240 or from $0.008 to a central
estimate of $0.004 per gallon of gasoline.

4.2.2 Ethanol Costs

Although ethanol vas marketed economically before the program, some consumers
incurred program induced costs as a result of the ethanol pricing strategy and
base gasoline substitutions. Because of the fixed margin pricing strategy of
ethanol blends, the price of ethanol follows the price of the dominant
gasoline. If the price of other gasoline increases because of the cost of
blending MTBB, the price of ethanol blend would also increase. Gasohol
consumers would pay more even if the cost of producing ethanol blend had

decreased.

Iphe vinter RVP of gasoline in Denver averages 14 and must be below 15 to
meet ASTM requirements (Staff Statement to the AQCC Concerning Proposed
Regulation 13, June, 1987).

ROG/Hagler, Bailly Inc. 5-9


they added an assumed fu. economy decre.ses of three percent per vehicle to
yield an estimated total cost of $14 million in the first year of the program.

Because the Colorado program is the only mandated oxygenated fuels program in
the nation, the Environmental Protection Agency, Office of Policy and Planning
Evaluation, contracted for this analysis of the economic impact of the
Colorado program. This analysis was conducted prior to and during the actual
implementation of the program (January and February, 1988) to obtain the most
accurate and timely information on actual program costs. This analysis
considers:

o Engineering and production costs considering actual facility and
cleaning costs as vell as component substitution in the production of

oxygenated gasoline,
o Changes, and valuation, of octane in gasoline,
o Market penetration of the oxygenates in the Front Range and Statevide,

o The ability to reveal market price impacts using comparisons of rack and
retail prices, and

o The cost of fuel economy losses based upon the Colorado Department of
Health assumptions.

This analysis also briefly touches upon the issues and evidence concerning the
other social costs of the program.

The remainder of the report is divided into four sections:

o Chapter 2 introduces the Colorado program: what oxygenates are and
selected issues of concern in implementing an oxygenated fuels progran.

o Chapter 3 reviews the Colorado petroleum industry, and market shares and
prices for ethanol, MTBE prior to and during the program.

o Chapter 4 estimates the economic costs of the program:through review of
engineering costs, market prices and other social impacts including
reduced fuel economy.

o Chapter 5 summarizes the results and relates them to estimated tons of
carbon monoxide reduction.

RCG/Hagler, Bailly Inc. 1-3


geographic location and market size (see Section 4.3 for more detail on
comparison city selection).

There are very few sources of timely retail price information available.
Retail information collected by the U.S. Department of Energy and published in
the Monthly Refinery Report is not available until three to five months after
the survey period. Retail unleaded gasoline prices for the four comparison
cities for January 1986 through February 1988 were available from the 011 and
Gas Journal. This data provides a good indication of price trends, but it is
not as reliable in providing precise prices because the data is adjusted using
changes from base retail price levels.

More than two years of data were used to evaluate historical retail price
relationships between cities. Figure 4-10 shows the monthly unleaded retail-
prices for Denver and the three comparison cities.

Retail prices over the past two years have followed the same general trends in
all four regions reflecting major fluctuations in the price of crude oil.
Kansas City has usually had the lowest retail prices, followed by Tulsa,
Denver and Salt Lake City. Prices in Denver and Salt Lake City increased
relative to Kansas City and Tulsa during the summers of 1986 and 1987. After
the 1986 increase, Denver prices tracked at a level more closely with Salt
Lake City than vith Kansas or Tulsa. This can be attributed in part to a July
1, 1986 six cent per gallon tax increase in Colorado that brought Denver
retail prices nearer to the level of Salt Lake City. After tracking more
closely with Salt Lake City prices in August of 1987, Denver prices started
falling more rapidly, diverging from Salt Lake City prices. Salt Lake City
prices were still falling during the program but, remained above Denver
prices. Kansas City and Tulsa price levels compared to Denver also fluctuate
over time. The fluctuations in intercity retail prices make it impossible to
quantify impacts that may be attributable to the oxygenated fuels program.

Retail price changes do not consistently follow the wholesale cost of gasoline
on a month-to-month basis. Comparisons of retail and rack prices in each
region yielded widely fluctuating price margins that did not follow a

RCG/Bagler, Bailly Inc. 4-37


sou ATi Fea_ ‘7erBeg/50a

Price (cents/gallon)

61-¥

Figure 4-3

Regional Unleaded Gasoline Rack Prices
(Cents per Gallon)

85 2 ie a Deine ee te ee see cee cee
a0 -k
75 i
zo # \

4 as
65 4 \ Td a

i BR te
so \ ye n . -,

i's \ A A KF sO *
ant Ne cee

Vt i j wR e ee te NV

ol 4 “ p? ay
45 4 VY \ I mye

\ - if
40 4
35 de ee Ptr eee tot

1/86 3/86 5/86 7/86 9/86 11/86 1/87 3/87 5/87 7/87 9/87 11/87 1/88

Month/Year
Oo DEN + KC ° SLC 4 TUL

Sourcs :  PelLcoscan


movements in crude oil prices and widespread market impacts. Figures 4-2, 4-3
and 4-4 show the monthly average rack prices for regular, unleaded and premium
gasoline in Denver and the three comparison regions from January 1986 through
February 1988. Rack prices of the different grades of gasoline change in a
closely related manner. Because of this, and in order to simplify the
discussion, only regular unleaded gasoline, which comprises the largest share
of the market (53 percent; BBC 1987) is addressed in the subsequent

discussion.

Two exceptions to the general trend of parallel movements in regional prices
were when prices diverged in the summer of 1986 and diverged even more
dramatically in the fall of 1987. Regional prices converged in the winter of
1986-1987 and appear to be converging again in the winter of 1987-1988. In
discussions with the oil industry, no specific reasons could be given for the
changes in these spreads or relative prices.

Seasonal changes in prices and gasoline demand were examined to see if they
could explain variations in relative city prices. The volume of gasoline
demanded in Denver increases with tourism in the summer and decreases in the
winter. Prices would normally be expected to track with demand, however, rack
prices have not consistently followed this seasonal pattern in previous
program periods. Prices fell rapidly during the winter of 1986 and generally
rose over the winter of 1987. In the fall of 1987, prices fell sharply, but,
during the program, prices in Denver were steady and prices in tvo of the
three comparison regions (Kansas City and Tulsa) were rising. Only in Salt
Lake City, where prices had peaked one to three months after the other
regions, were prices still falling. Seasonal price trends were not consistent
in explaining relative rack price variation.

Considerable change has occurred in the relative rack prices among cities in
the region. For example, during 1986 and the first half of 1987, Denver's
rack price generally ranked in the middle of the comparison cities, but also
ranged from the lovest prices (twice) to the highest prices (twice). In
August of 1988, five months before the program, Denver rack prices were higher

ROG/Bagler, Bailly Inc. 4-17


Table 4-6
Range in Regional Unleaded Rack Prices Compared to Denver
(Price Difference in Cents per Gallon)

Range in Prices Kansas City Salt Lake City Tulsa

Jan 1986 - Feb 1988

Above Denver 7.0 11.5 4.4
Below Denver 8.5 3.0 9.4
Range 15.5 14.5 13.8

Program Period
Rack Price Relative

To Denver
Jan 1986 2.8 9.2 4.3
Jan 1987 2.4 22.7 0.5

The range in prices represents Petroscan monthly price difference between
Denver and each city.

ROG/Hagler, Bailly Inc.


prices in the three comparison regions declined approximately 1 to 3 cents

more per gallon than the change in Denver prices. A comparison of regional
price changes between August 1987, vhen market prices peaked, and February

1988 shows that Denver prices fell by 2.5 to 4.0 cents per gallon more than
the prices in the other comparison cities.

4.4 DENVER RETAIL PRICES

Changes in costs that are common to producers, distributors or retailers are
likely in large part to be passed on to the consumer in competitive markets
through changes in retail prices. Although some companies may incur
Substantial individual costs that cannot be passed through to consumers,
retail prices often reflect changes in costs to the industry as a whole.
Changes in Denver retail prices are of interest in evaluating industry costs
and consumer price impacts of program. Retail prices may also indicate if
there were different impacts by type of blend.

Unfortunately, it is difficult to obtain timely, reliable retail price

information and impossible to find retail price information by blend. One of
the few available sources of Denver retail prices is the Rocky Mountain News,
which conducts a weekly price survey of ten Denver stations. However, blends
are not identified in the survey and the sample size is too small to provide
reliable price comparisons. For these reasons, Hagler, Bailly initiated its
own retail price survey to track gasoline prices by blend during the progran.

The Denver Retail Price Survey

RCG/Hagler, Bailly Inc. conducted a bi-monthly survey in the Denver-metro area
to track changes in retail gasoline prices, by grade and by blend, prior to
and during the oxygenated fuels program. The Denver-metro area is the single
largest retail market affected by the program with approximately 60 percent of
the affected population (Denver Regional Council of Governments). A
stratified sample of 106 retail stations was selected to be surveyed based
upon the Colorado 011 and Gas Inspectors list of 760 retail stations in the

ROG/Hagler, Bailly inc. 4-27


(including crude oil and inventory changes) Denver rack prices should not be
analyzed in isolation. Relative price analysis is necessary to determine if
Denver prices significantly increased or decreased relative to other non-

oxygenated fuel regions. Other city rack prices are compared with Denver for
changes in relative prices, historical relationships, previous program period
trends and actual program period price relationships. To have meaningful and
accurate comparisons, other cities should track closely to Denver prices.

Rack price changes in Denver vere compared with rack price changes in Kansas
City, KS; Salt Lake City, UT; and Tulsa, OK to determine if program price
changes can be separately identified and if so, how much prices before and
during the oxygenated fuels program increased or decreased relative to other
markets. These cities vere selected for comparison based on gasoline supply
and market similarities with Denver and based upon industry recommendations.

A partial list of the attributes sought for comparison regions includes: a
combination of refinery and pipeline supply; delivery from the same pipelines
or refineries; similar market size; geographic locations in or influencing the
rocky mountain region; and regions with little or no current oxygenate use.
Representatives from the oxygenated fuels and oil industries indicated that no
other city is directly comparable with Denver because of its unique market
structure. However, at the Colorado Department of Health, February 4, 1988
Oxygenated Fuels Program meeting, industry representatives did agree that
Denver prices should not be vieved in isolation and recommended that Kansas
City, Salt Lake City and a mid-west petroleum producing city,such as
Tulsa,would be the most suitable comparison cities.

Kansas City, Salt Lake City and Tulsa are connected by pipelines and/or the
same refineries that supply Denver. Kansas City, Salt Lake City and Tulsa are
roughly comparable in market size. The refinery at Eldorado supplies Kansas
City by pipeline, ties into other mid-west pipelines and supplies Denver
through the Chase pipeline. Tulsa, which is in Petroleum Administration for
Defense District 3 and is part of "the Group" of interlinked oil producing
cities, is considered representative of industry conditions because of its
central location, supply of crude oil and extensive pipeline distribution
system which interconnects Tulsa with other refineries and markets. Salt Lake

ROG/Hagler, Bailly Inc. 4-15


sour_*ATryeq_‘221eH/908

Colorado Monthly ‘Gasoline Consumption

170 —: crete eee —
160 4
150 +
K ‘ ae
fn 140 7 / / \
ca
e: )
38 1304 { ZZ
£3 ‘W
Ze
ob
© 120 4
\ h
110 4 \
100 4
90 ome es Oe es MO A OO Oe a Oe ae le eee fee OO |
7/85 10/85 1/86 4/86 7/86 10/86 1/87 4/87 7/87 10/87 1/88

Month/Year
Source: Colorado Department of Revenue, 1988


Table 4-2
First Year Costs Related To Ethanol

Total Estimates

Lover Upper
Iten $ Per Unit # of Stations Bound Bound
Filters $20-49 average 20 (4-12 $1,600 - 11,760
(per pump hose) pump hoses/Station)
Tank Cleaning $90-250 Tank 50-70 $4,500 - 17,500
TOTAL: -- -- $6,100 -$29,260

Sources: Bthanol Management Company, Kubat Equipment and Service Company,
Spruce 011, Western Refining.

Assuming that twenty service stations incurred the range of cleaning costs and
sold equivalent amount of blended gasoline as all stations selling ethanol
blends, the per gallon cost of cleaning the stations vould have been an upper
case cost of $.01 and the central case of $.002. Hovever, assuming that the
Same stations continue to sell ethanol year round, the costs of preparing a
station are spread out over the entire year, and the per gallon cost is
reduced to $.0017 and $.0003 respectively. Of the two prior studies, one
estimated that the weighted average cost of preparing a service station would
be $735.00. The other study estimated that service station preparation would
cost retailers $.01 per gallon.

4.2 OXYGENATE COSTS AND VALUES

This section examines the production costs and octane values of blending MTBR
and ethanol into base gasolines to meet the 1.5 percent oxygen requirement of
the Colorado program. The gross costs of MTBE and ethanol are higher than the
cost of the base gasolines they replace. This by itself would indicate higher
production costs for gasoline blended with these oxygenates. However, because
they boost the octane rating, a higher octane gas, with a higher market value,

ROG/Hagler, Bailly Inc. 4-5


all grades. Premium gasoline had the largest price spread between blends
ranging from 1.8 to 3.6 cents per gallon. The price spread between MTBE and
ethanol blends vas about the same for regular and unleaded gasoline. The
spread between unleaded gas blends increased in mid-January to about 2.4 cents
per gallon along with the increase in prices, decreased to about 0.1 cents per
gallon in mid-February as retail prices fell and then increased to about 1.0
cents per gallon by the end of February.

While a difference in blend prices was to be expected because of the vay
ethanol blends are priced, reasons for the changes in the price spreads are
uncertain. Rthanol blends are generally priced approximately 2.0 cents per
gallon less than other gasoline at the wholesale level. Retailers have the
option of passing on this savings, minus additional ethanol related costs such
as tank preparation, or increasing their retailer profit margin. One
consequence of this pricing policy is that the rack price of ethanol blends
will follow the rack price of other gasoline. If MIBE gasoline prices
increase so will rack prices of ethanol blends. Increased competition in the
retail market may pressure prices closer together, reducing profit margins and
narrowing the spread. B&thanol blend retailers have indicated that they price
in competition with the stations in their local area, maintaining their profit
margin if possible but, if competition demands it, they will lower prices
passing some of the savings on to the consumer. The competitive local pricing
observed in the Denver retail survey provides evidence of this type of
behavior.

4.5 REGIONAL COMPARISON OF RETAIL PRICES

Retail prices in Denver were compared with retail prices in Kansas City, Salt
Lake City and Tulsa to determine if prices before and during the oxygenated
fuels program increased or decreased relative to other cities. These cities
vere selected for comparison based on industry recommendations of
comparability and similarities in market structure, a combination of refinery

and pipeline supply, service by the same pipelines supplying Denver,

RCG/Hagler, Bailly Inc. 4-36


Figure E-1
Map of Colorado Regulation 13 Progran Area

A

Cotorado 8 N

Air Program area within heavy box.

ROG/Hagler, Bailly Inc.
E-2


consistent pattern over time. The fluctuations in retail-rack price margins
and changes in the relative city retail prices make it virtually impossible to
identify program related retail costs with this data.

4.6 FUEL ECONOMY PENALTY

Throughout the Regulation 13 rulemaking there has been concern that the

program could increase gasoline consumption and create additional expenses for

consumers. As recently as March 29, 1988 Denver newspapers reported a Gtlans

petroleum industry analysis which estimated a mileage penalty of 55.6 million. 3») 25
gallons

An analysis of the literature on oxygenated fuels and gasoline consumption by

the Colorado Department of Health concluded that the type of pollution

controls on an automobile determines the effect oxygenated fuels has on

gasoline consumption (Colorado Department of Health, 1987). Using the Health

Department figures, fuel economy losses are calculated in relation to fleet

composition, the mileage penalty associated vith a particular control-

technology and market share of oxygenates during the progran.

As Table 4-10 illustrates, the fleet mix and Colorado Department of Health
assumptions on fuel economy changes shows an average fuel economy change of
less than one percent. Using the January and February statewide gasoline
consumption figures of 329.4 million gallons, an average price of about $0.87
per gallon and the worst case fuel penalty scenario of 0.22%, the cost to
consumers was $420,000. Equivalently, one could consider each gallon of gas
as, on average, having 0.22% or a $0.002 reduction in value during the first
year of the program.

ROG/Hagler, Bailly Inc. 4-39


sour Ati yea ‘seT8en/s08

St-¥

Gas Price (cents/gallon)

115

110

105

100

95

90

85

80

75

70

65

60

Source:

Figure 4-10
Regional Unleaded Retail Gas Prices

SO
jP~ b
a ne A a ees Oe Nas ee ees a
1/86 3/86 5/86 7/86 9/86 11/86 1/87 3/87 5/87 7/87 9/87 11/87 1/88 3/88
Date
Oo ODEN + SLC © TUL 4 KC

011 and Gas Journal Energy Data Base


Governaental Costs

The Colorado Department of Health and the 011 and Gas Section of the
Department of Labor incurred costs enforcing Regulation 13. The Health
department purchased new equipment to test for oxygen content and hired staff
take fuel samples and to respond to inquiries on their telephone Hotline.

Costs Outside The Program Area

Almost all of the gasoline sold in Colorado contained oxygenates. Any costs
associated with the program vere borne by all Coloradans. Hovever, some
motorists {n non-program areas used clear gasoline, which had been trucked in
from out-of-state (see Section 3.3) adding transportation costs over the
normal delivery procedures. Clear gasoline generally sold at a price equal or
exceeding MTBE blended gasoline (Conversations with industry representatives),
rather than below MTBB blended gasoline, as might have occurred without the
program. Assuming 8.6 million gallons sold during the program at a price
penalty of up to $0.013 (maximum MTBE price increase) results in an added cost
during the first program year of $112,000. If there is a strong demand for
clear gasoline in future years, petroleum marketers should be able to provide
the product.

Maintenance Costs

Testimony given prior to and during the rulemaking established the possibility
that use of oxygenated fuels would result in some driveability problems and
maintenance expenses (clogged fuel filters, deterioration of rubber parts).
The Department of Health Hotline, and an informal tracking of fuel related
repairs by the Automobile Association of America did not reveal any
quantifiable increase in maintenance costs caused by the use of oxygenated
fuels.

ROG/Hagler, Bailly Inc. 4-41


Ethanol

Using Department of Revenue estimates, ethanol blended gasoline sales (in the
Regulation 13 program area) of approximately 3,318,000 gallons in December and
4,530,500 gallons in January represent 4.1 and 5.8 percent, respectively, of
the oxygenate market. This would represent an ethanol sales increased 36%
from December to January. However, ethanol marketing industry sources,
contrary to Colorado Department of Revenue determinations, have estimated that
ethanol sales for the program period actually decreased slightly based upon
their sales records. No explanation for these different estimates has -been
determined by either source.

An issue of interest to air quality officials is why there was not greater
market penetration of ethanol during the mandatory program, and whether
ethanol penetration will increase next year. There are a number of apparent
explanations for the weak sales of ethanol during the program. Ethanol vas
carried only by independent stations because the major gasoline marketers vere
not prepared to make the adjustments necessary to accommodate ethanol.
Ethanol, unlike gasoline or MTBE, is not fungible (it cannot be shipped via
pipeline, and requires special handling) and the short period between adoption
of Regulation 13 and implementation of the program would have required changes
in operating procedures.

Some marketers also argue that consumers do not accept ethanol as a product
and are unvilling to risk consumer rejection of the oxygenate they market.
However, it is interesting to note that some of the major petroleum marketers
in Colorado (Amoco, Conoco, Sinclair and Texaco) currently sell ethanol in
other states.

Another proposed explanation for ethanol’s small market penetration is the
lack of an assured supply of gasoline suitable for blending with ethanol,
which may have constrained sales. Ethanol marketers were restricted in the
amount and quality of gasoline that was available for blending during the
months of December, January and February. S&thanol is traditionally blended
with gasoline to produce a product which has a higher octane number (two to

RCG/Hagler, Bailly, Inc. 3-13


earlier) had elastomers (rubber parts) that were not fully compatible with
alcohols. Introduction of alcohols into a fuel system of an early model motor
vehicle could cause the elastomer to swell and force the premature replacement
of the elastomer.

Alcohols also have the ability to remove deposits that have built up in the
inside of vehicle gasoline tanks, storage tanks or pipelines. When alcohol
blends are introduced into a storage tank, the deposits can be released. The
release of deposits can result in clogging of a vehicles fuel filter or result
in having impurities in a fuel. Alcohols are not shipped through pipelines
because of the their ability to release impurities.

The Commission heard testimony that older cars (frequently owned by less
affluent motorists) were susceptible to experiencing the potential problems
that alcohol fuels are alleged to create. At issue was whether mandating
oxygenated fuels vould result in widespread use of ethanol and the resulting
possibility that owners of older cars may be required to incur expenses not
associated with the use of unblended gasoline. The Commission concluded that
the risk posed by ethanol was acceptable, and consumers would have the
opportunity to use MTBE if they chose.

Phase tion

Alcohols, unlike gasoline and ethers, are soluble with water. If there is
water in a gasoline storage tank, and alcohol is introduced into that tank,
the water and alcohol can mix and form a distinct water and alcohol layer.

This is referred to as phase separation.

If phase separation does occur in a gas tank, the engine will not be able to
burn the water-alcohol layer, and the vehicle will have driveability problems.
There are a number of maintenance steps taken by blenders and retailers of
ethanol to avoid phase separation and the release of impurities created by the
solvent nature of alcohols. The maintenance practices (and costs) range from
simply changing filters on pumps, to pumping storage tanks dry prior to

ROG/Hagler, Bailly Inc. 2-7


MIBE Production, Pricing and Distribution

MTBE is a petroleum based chemical produced from two refinery products,
isobutylene and methanol. The price of MTBR is directly related to the price
of crude oil, the price and availability of feedstocks, and the price of
substitute octane blend stocks such as toluene. While MTBE prices generally
track with the price of crude petroleum, supply-demand imbalances of MTBB and
required feedstocks result in price fluctuations. The overall demand for
octane blend stocks has increased with the phasedown of lead in gasoline.

Toluene, a petroleum based product that is not an oxygenate, is another
commonly used octane enhancer and a substitute for MTBE. Because of its
substitutability, the price of toluene constrains the price of MTBE. In the
last few years the demand for toluene as a chemical feedstock has increased
its relative price giving MTBE an economic edge in enhancing gasoline octane
(BBC 1987).

MTBE is used as an octane enhancer in other areas of the country because of
its high octane value (blending octane of 108-112) and low volatility (RVP 8).
In Colorado, small amounts of HTBEB in low concentrations (2-4 percent) vere
blended prior to the program to boost gasoline octane. To meet the Colorado
Regulation 13 oxygen requirement, MTBE was blended with gasoline in an 8

percent mixture.

U.S. production capacity for MTBE in 1987 was approximately 81.7 thousand
barrels per day nationally. Approximately 91 percent of the production
capacity is in Texas, vith two companies, ARCO Chemical and Texas
Petrochemical, possessing 68 percent of domestic MTBE production capacity
(Colorado Department of Health, 1987). MTIBB production, was projected to
increase to 100,000 BPD by the beginning of 1988 (BBC, 1987). MTBE is also
imported into the U.S. MTBE can be transported into Colorado either by rail
or, when it is blended in gasoline, through a pipeline.

Based on January, 1988 sales, a 100% penetration of 8 percent MIBE during the
mandatory program would have required approximately 5,100 barrels per day for

ROG/Hagler, Bailly, Inc. 3-5


3.0 THE COLORADO PETROLEUM INDUSTRY

This section provides an introduction to the production and distribution of
gasoline and oxygenates in Colorado, which serves to highlight those companies
affected by the program. Additional background on the Colorado petroleum and
oxygenate industries can be found in BBC (1987) and BAI (1986, 1987). The
chapter also addresses market penetration and prices of ethanol and MTBE prior
to and during the progran.

3.1 GASOLINE PRODUCTION AND DISTRIBUTION

Bight petroleum companies are the primary suppliers of an average of 101,340
barrels (42 gallons per barrel) per day of gasoline into Colorado in 1986
(1987). Figure 3-1 shows the actual monthly sales of gasoline from 1986
through January 1988. In January 1988, the first month of the progran,
2,750,000 barrels of gasoline were sold in Colorado. The Regulation 13
program area consumes approximately 72 percent of the gasoline sold in
Colorado (BBC, 1987).

Gasoline sold in Colorado is supplied either by two local refineries or is
shipped through one of the four pipelines that have access to Colorado’s Front
Range (see Figure 3-2). The two local refineries are Conoco and Total, each
of which is located in Commerce City. These two refineries produce 33,300
barrels per day (BPD) of the gasoline sold in the State. Both refineries have
approximately 15 percent of the gasoline market in Colorado.

Bach of the four pipelines serves different refineries and move varying
amounts of gasoline into Colorado (1986 estimates from EAI, 1987):

o The Wyco pipeline serves the Amoco and Frontier Refineries and moves
approximately 24,600 BPD into Colorado.

o The Phillips pipeline serves Phillips Petroleum and Diamond Shamrock and
moves 15,300 BPD.

o The Chase pipeline serves Texaco and others and moves 14,400 BPD.

ROG/Hagler, Bailly, Inc. 3-1


three octane points) than gasoline. Selling a high octane product is a
marketing tactic of retailers of ethanol blends.

The unavailability of clear gasoline during the program forced ethanol
marketers to either use sub-octane gasoline or ship gasoline in from Wyoming
or Kansas if they wanted to use clear gasoline to produce a final high octane
product. At least one ethanol retailer discontinued selling ethanol blended
product because of the unavailability of clear gasoline.

Additionally, the sub-octane gasoline was reportedly not always available in
sufficient quantities for blending with ethanol. Any of, or a combination of
all of the above reasons may explain why ethanol did not gain a larger share
of the oxygenate market.

MTBB fulfilled most of the oxygenate demand for the months of December,
January and February. During the program, an estimated 210 million gallons of
MTBE blended gasoline was sold in Colorado. Of the MIBE sales, approximately
3.7 million gallons contained 11% MTBB, the remainder was blended at the 8%
level (Colorado Department of Health, May, 1988).

Clear Gasoline

Although most of the gasoline sold in the State is transported into the Front
Range, some non-oxygenated "clear gasoline" (not sub-octane) was transported
into the Western Slope and the eastern plains (geographic areas outside the
mandatory program area) via truck during the program months. Product was
moved into the Western Slope from Utah and New Mexico. Approximately
3,000,000 gallons of clear gasoline was sold on the Western Slope in January
1988.

On the Front Range and eastern plains approximately 1,470,000 gallons of clear
gasoline, 1.7 percent of statewide gasoline sales was brought in from Wyoming

ROG/Hagler, Bailly, Inc. 3-14


reduction strategy. The State of Colorado began investigating the possibility
of utilizing oxygenated fuels as a carbon monoxide reduction strategy in 1978,
and conducted a series of studies that demonstrated use of oxygenated fuels
appears to significantly reduce carbon monoxide emissions (Colorado Department
ef Health, 1987).

The Clean Air Act (42 USC 7401 et sec.) established limitations on products
that can be blended with unleaded gasoline. The restrictions established in
Section 211 of the Act reduces the pool of available oxygenates to those that
have obtained EPA approval. Currently, there are 8 oxygenates that possess
BPA approval: ethanol, MTBE, the DuPont Waiver, Oxinol, Octamix, TAME, DIPE
and TBA.

The composition of the available oxygenates all differ significantly.
However, the oxygenates can be divided into two general categories:

° Alcohols: (ethanol and methanol) These include ethanol, TBA and the
methanol based oxygenates (trade names; the DuPont waiver, Oxinol and
Octamix)

° Ethers: These include MTBE, TAME and DIPE (Renewable Fuels
Foundation, Technician’s Manual, 1987).

Ethers are derived from blending various petroleum feedstocks. Currently, the
BPA waiver permits the blending of a maximum of 11% MTBB by volume with
gasoline. 11% MTBB is the equivalent of 2% oxygen content by weight. TAMB
and DIPE are permitted up to a 2% oxygen content (Renewable Fuels Foundation,

1987).

Ethanol is produced through the fermentation of agricultural products (corn,
wheat, milo etc.) to produce a fuel grade alcohol. The EPA.waiver allows the
blending of up to 10% ethanol (90% gasoline, 10% ethanol), which produces an
oxygen content of 3.5%. Ethanol is almost always sold at 10% by volume to
take advantage of Federal tax cre“its (Renewable Fuels Association, 1987).

Methanol can be produced from almost any carbon source, such as crude oil,
coal, biomass, etc. Currently, the least expensive method of producing

ROG/Hagler, Bailly Inc. 2-4


Soars isee 1OCRI, 7-87 Pace 3

2. At its May meeting of each year, the Commission shall
consider, in light of the report and other avaflable
information, whether the oxygenated fuels program should be
modified, expanded, or terminated by rule, and the
Commission shall transmit to the General assembly the report
of the Division and the results of the Commission's
consideration,

C.  Enforcement/Penalties for Non-Compl fance

Compliance with the requirements of this regulatfon shall be
monitored and enforced by the Division. Tolerance for
measurements of fuels defined in Section II.A.1. and 2. shall be
determined by the Division and shall be consistent with reasonable
practices. Pursuant to Section 25-7-l11(f), the Division may
designate any appropriate agency of the State to ass{st in the
monitoring and enforcement of this regulation. The Division shat
make every effort to coordinate monitoring and enforcement of this
regulation with the current duties of the State Inspector of OfIs,
conducted pursuant to C.R.S. 8-20-101 et seq.

D. Severability
The provisions of this regulation are sevérable, and if any
provisions, or the application of the provisions to any
circumstances, is held invalid, the application of such provision
to other circumstances and the remainder of this regulation shall
not be affected.

TI]. REFERENCED MATERIAL

Pursuant to C.R.S. 24-4-103 (12.5), the following materfals
referenced in this regulation are available for public inspection
during normal working hours, or copies are available upon request at
-cost, from the Technical Secretary of the Air Quality Control
Commission, Ptarmigan Place, 3773 Cherry Creek Orive North, 3rd floor,
(303) 331-8597: CRIS. 42-4-307, (11), C.R.S. 8-20-202, C.R.S.
B-20-204, C.R.S. 8-20-229, C.R.S. 24-4-103(12.5), C.R.S. 6-4-101 et
seq, C.R.S. 25-7-111(f), C.R.S. 8-20-10] et seq.

Iv, STATEMENT OF BASIS, SPECIFIC STATUTORY AUTHORITY AND PURPOSE

The primary purpose of Regulation No. 13 fs to reduce ambient levels of
carbon monoxide along the Front Range of Colorado. To achieve this reduction,
Regulation 13 will institute an oxygenated fuels program throughout the AIR
Program area during the period of January 1 to March 1 of 1988, and for each
perfod of November 1 to March 1, thereafter. The Commission has determined
that a voluntary program from November 1, 1987 through December 31, 1987 would
be of great benefit to the public and will result in air quality benefits by
reducing carbon monoxide, and directs the Division to proceed with
Coordinating and implementing such a voluntary program.

An oxygenated fuels program is a necessary step for Colorado to attain
the National Ambient Air Quality Standard (NAAQS) for carbon monoxide. Of
primary concern is the efght hour, long term carbon monoxide standard, which
provides for an eight hour carbon monoxide limit of 9 PPM. Having more than

THE CODE OF COLORADO REGULATIONS 5 CCR 1001-16



Table 4-10
Fuel Economy Changes

Zz in Fuel
Control Technology Z of Fleet MTBE Ethanol
Non-Catalyst 34% 0.0% -0.32%
Catalyst 41% +1.3% +0.32%
Closed Loop 25% -1%-3% 20.3%
Weighted Average: 100% -.22% to +.28% -.05%

Source: Estimates of percent change in fuel economy from the Colorado
Department of Health, 1987.

4.7 OTHER SOCIAL IMPACTS AND COSTS

Industry Administrative Costs

In January, 1988 approximately 8.4 million gallons of MIBE was transported
into Colorado either by rail or, when blended with gasoline, via pipeline.
Gasoline containing MTBE was transported through the Chase and Phillips
pipelines (30 percent of the Colorado market). The remaining 5.88 million
gallons (70 percent of total MTBE sales) was transported to Colorado or
Wyoming for blending in approximately 200 rail cars (30,000 gallons per car).
The incremental rail costs are incorporated into the MTBE production cost
estimates in Section 4.1. However, gasoline marketers who obtained MTBE by
rail were inconvenienced by the logistical difficulties of obtaining shipment
of MTBE. The gasoline distributors were confronted with the unavailability of
MTBE shipments and were occasionally forced to borrow MIBE from other

distributors until a shipment arrived.

RCG/Hagler, Bailly Inc. 4-40


Statistical Comparison of Rack Price Fluctuations
(January 1986 - February 1988)

Table 4-7

Kansas City Salt Lake City Tulsa

One-Month Average Change 4.7 4.4 4.4

Standard Deviation 4.0 4.1 3.9
One-Month Relative

Average Price Change 2.7 3.1 2.5

Standard Deviation 2.7 3.0 2.4
Two-Month Relative

Average Change 3.7 4.6 3.4

Standard Deviation 3.1 3.9 2.7
Three-Month Relative

Average Change 3.6 4.7 3.3

Standard Deviation 2.6 3.9 2.5

NOTES: One-Month figure = changes in price spread betveen comparison city and
Two and three month

Denver cver a one-month period in absolute value.
price changes are calculated the same way.

RCG/Bagler, Bailly Inc.

4-25


Total Cost Of The Program

The range of costs identified are summarized in Table B-1. Total costs
statewide ranged from $1,013,481 (central bound estimate) to no more than
$3,559,604 (upper bound estimate). The lower bound estimates are zero. The
costs were largely incurred by Colorado residents in the AIR area (72%),
although residents in non-program areas may have incurred costs due to the
Colorado petroleum distribution structure resulting in most of the state
converting to oxygenated fuel. These costs are included in both the central
and upper bound estimates. The central average price increase per gallon
attributable to the program is $0.0045.

Cost Per Ton of Pollutant Removal

The Colorado Department of Health has estimated that a 94% market share of 8%
MTBE and 6% market share ethanol (10%) reduced ambient Carbon monoxide levels
in the Denver Metropolitan area from 8% to 11%, or from 160 to 220 tons per
day. Using state-wide central and upper case cost estimates, and applying the
carbon monoxide reductions to five days a week, the dollar per ton cost of the
program would be $154.49/ton (Central estimate) to $542.62/ton (upper-bound
estimate) for an 8% reduction and $112.36/ton to $394.63/ton for an 11%

reduction.

ROG/Hagler, Bailly Inc. E-7


3.3 | MARKET SHARE AND PRICES OF ETHANOL, MTBE AND CLEAR GASOLINE DURING THE
MANDATORY PROGRAM

The volume of a particular oxygenate used during the mandatory program is
dependent on the percentage of the market the oxygenate possesses and the
oxygen content requirement of Regulation 13. In the first year of the
program, 8 percent MTBE was used to meet the 1.5 percent oxygen standard. Ten
percent ethanol (3.5% oxygen) was blended with gasoline to take advantage of
federal tax credits. The sales of gasoline during the program months of
January and February 1988 are summarized in Table 3-2.

In preparation for and during the mandatory program, the four pipelines
shipped gasoline blended with MTBE into Colorado for most of December and all
of January and February.2 The practical result of MTBE being blended with all
gasoline transported into, and refined in, the State was the virtual
elimination of any gasoline suitable for blending with ethanol, as is normally
done. To ensure the availability of a blending stock for ethanol, the
Governor met with representatives of the refineries that service Colorado and
arranged for the production of gasoline suitable for blending with ethanol.
Consequently, a special non-oxygenated "sub-octane" gasoline (82.5 octane
unleaded regular, 84 octane regular) was produced to allow the blending of
ethanol. Three refineries, Conoco, Total and Sinclair, were the only
suppliers of sub-octane gasoline. The sub-octane gasoline sold for one cent
less per gallon than unleaded gas. The rack prices of MTBE and ethanol just
prior to and during the program are summarized in Figure 3-4 and Table 3-1.

2several refiners and blenders began to produce and distribute oxygenated
fuels by mid-December. The earlier start was necessary to ensure that retail
stations would have oxygenated fuels by January 1, 1988. Regulation 13
required that the type of oxygenate blend be posted on pumps in the program
area from January 1 through February 29. Gasoline with ethanol was already
required to be posted. Prior to the program some stations may have carried
MTBE blended gasoline without knowing it. Less than three percent of the
Stations reported selling MTBB blended gasoline in the December 13, 1987
RCG/Hagler, Bailly Inc. retail price survey.

RCG/Hagler, Bailly, Inc. 3-11


sour Atryea_ ‘3913eH/D08

ce-¥

Gas Price (cents/gallon)

Figure 4-7

Denver Regular Retail Gasoline Prices

By Blend

86

85

D~
a4 4 / —
vA : /~ SS
i“ / ~

2/28/88

~~
83 4 N
7 se *
y, N
/ ~~
82 4 / ~—
/ m~
/ — ~
x
817
80 TTM T - or — 1
1/3/88 1/16/88 1/30/88 2/14/88
Survey Date
a MTBE + Ethanol

Source: RCG/Hagler,

Bailly, Inc., Denver Retail Price Survey


101

soa Aired ‘x21 8en/g08

Figure 4-9

Denver Premium Retail Gasoline Prices
By Blend

100 4 aa

oo ;

99 - a oN
~ or” .
s 98 4 NN
0 +.
S ee “SS
£ 97 4 A
& — a]
© 96 + TM,
u
tc
o s
® 95 4 ~
8 _

N\
94 4 “
93 4 NX
x iF
s
92 T T —— ct eieienates ~
1/3/88 1/16/88 1/30/88 2/14/88 2/28/88
Survey Date
o MTBE + Ethanol

Sourc:::

RCG/Nagler, Baslly, Denver Retail Survey


Table 4-9
Summary of the Denver Retail Price Survey
Prices in Cents Per Gallon

Pre-Progran Program
Average Price By Survey Date Price Price

Grade Change Change
and Blend Dec. 13 Jan. 3 Jan. 16 Jan. 30 Feb. 14 Feb. 28 Dec.13-Jan.3 Jan.3-Feb.28

REGULAR 84.28 82.66 85.28 83.93 82.14 80.74 -1.62 -1.92
MITBE * 82.90 85.46 84.07 82.10 80.84 * -2.06
Ethanol 83.90 81.21 84.21 83.10 81.97 80.17 -2.69 71.04

Observations 85 86 88 102 103 103

UNLEADED 87.71 86.13 89.56 87.40 985.29 983.55 -1.58 -2.58
MIBE * 86.22 89.90 87.546 85.30 83.67 * -2.55
Bthanol 87.26 85.59 87.52 86.43 85.17 82.83 -1.67 -2.76

Observations 89 89 91 106 106 106

PREMIUM 101.07 98.34 100.26 §=- 99.10 «97.21 +=: 96.05 -2.73 -2.29
MIBE * 98.41 100.46 99.26 97.34 96.31 * -2.10
Bthanol 98.50 97.40 97.57 97.04 95.50 92.70 -1.10 -4.70

Observations 38 37 59 69 69 69

Source:  ROG/Hagler, Bailly Inc. Denver Retail Price Source, The gasoline grade average is for
all blends in the sample
* Less than 2% of the stations reported having MTBE in the December 13 price survey.

ROG/Hagler, Bailly Inc. 4-35


of the costs of selling ethanol, such as tank cleaning, to increase the
retailers’ margin or passed along to the consumer. In the Denver area retail
ethanol blended gasoline prices average about a cent less than other gasoline,
but varies by retailer.

Ethanol prices are site specific depending on the supplier, market, method of
transport (rail or truck) and incentive programs. The delivered price of
ethanol does not include the federal tax incentive.

There is virtually no history of MTBB sales in Colorado prior to the mandatory
program. Small concentrations of MTBE (blended at 3-4%) were sold in the
premium gasoline of some major retailers in the State prior to the mandate.
Independent marketers blended MTBE in gasoline prior to the mandate. For
proprietary reasons, concentrations and volumes of MTBE sold in the State are

not available.

MTBB is sold at the Gulf Coast price plus transportation. Figure 3-4 and
Table 3-1 show the Gulf Coast spot market price of MTBE. Transportation costs
vary by company, shipment size and other factors. On average, approximately 8
to 10 cents per gallon must be added to the Gulf Coast price for rail
transportation costs to Denver (Colorado Department of Health, 1987).

Prior to the program, concern was expressed about increases in oxygenate
prices resulting from the Colorado program demand (BAI, 1987). Colorado
demand for MTBB and ethanol was small relative to production capacity and,
according to industry sources (ARCO Chemical, the primary supplier of MTBB),
did not have an impact on oxygenate prices. Statewide Colorado use of MTBE in
January was 8.0 percent of daily U.S. production.

RCG/Hagler, Bailly, Inc. 3-8


Cost Per Ton of Pollutant Res. val

The Colorado Department of Health has estimated that a 94% market share of 8%
MTIBB and 6% market share ethanol (10%) reduced ambient Carbon monoxide levels
in the Denver Metropolitan area from 8% to 11%, or from 160 to 220 tons per
day. Using state-wide central and upper case cost estimates, and applying the
carbon monoxide reductions to five days a week, the dollar per ton cost of the
program would be $154.49/ton (Central estimate) to $542.62/ton (upper-bound
estimate) for an 8% reduction and $112.36/ton to $394.63/ton for an 11%

reduction.

ROG/Hagler, Bailly Inc. 5-3


II. BESULTS OF THE ANALYSIS
Market Penetration

The major suppliers of gasoline into Colorado met the program oxygen
requirement by blending 8 percent MTBE in approximately 95% of the gasoline
sold in the program area. A special sub-octane grade of gasoline vas produced
to permit the blending of ethanol during the program.

In October of 1987, the ethanol blended gasoline market had decreased to 2.1
percent, down from 20 percent in 1986, due to the elimination of a state tax
credit for ethanol and other factors. During the program, ethanol had a
market share of 5.3 percent. During the Regulation 13 rulemaking, members of
the Air Quality Control Commission assumed that ethanol might capture an equal
share of the market under a standard requiring 1.5% oxygen.

The most probable reasons for the limited market share actually experienced
for ethanol includes the short term of the program in the first year; the
concerns of major marketers, retailers and consumers about the suitability of
ethanol; and the constrained quantity and quality of gasoline to blend with
ethanol.

Production And Distribution Cost Estimates

One approach used to evaluate the incremental economic impacts of the program
was to compute the incremental blending and distribution costs associated with

the program.

MIBE. Strictly blending higher priced MTBE into base gasoline vould increase
the price of gasoline in Denver between about 2.0 and 2.4 cents per gallon.
Hovever, blending MTBE into gasoline increases the octane, and by adjusting
other components that offset much of the price impacts a standard 85 octane
regular gasoline can be produced. The net effect is estimated to increase
production costs by between 0.4 and 0.8 cents per gallon. Adding MTBE reduces
RVP, which can also further offset blending costs by the use of cheaper

RCG/Hagler, Bailly Inc. E-4


gasoline fuel economy; the cost effectiveness of the program as a strategy to
reduce carbon monoxide exceedances and others.

The Colorado Department of Health and the trade association of the petroleum
industry had economic analyses conducted prior to the program. These studies
provided a large range of cost per gallon estimates of $.005 to $.08. The
range in cost estimates are based on assumptions of the market penetration of
a particular oxygenate, and whether other states in the region would adopt
similar programs and constrain the availability of oxygenates. In addition to
being computed in advance of the program, these estimates are based upon
projected engineering costs that do not reflect market behavior.

This analysis vas undertaken to track the program before and during
implementation with the focus upon the costs of meeting the requirements.
Specifically this work:

o Tracked rack and retail prices,

o Tracked and compared average retail and rack prices in Denver and other
cities,

o Reexamined actual incremental engineering costs for production and
distribution,

o Bxamines octane benefit derived from blending with oxygenated fuels,
o Tracked and addressed market penetration by type,
o Examines the cost per gallon and cost per ton of the program, and

0 Provides related information on other selected aspects of the program.

The first four elements provide alternative methods to examine the cost per
gallon incurred by citizens and the cost to industry of the program.

RCG/Hagler, Bailly Inc. 8-3


methanol is utilizing natural gas as a feedstock. Methanol is always blended
with other alcohols (cosolvents). The Oxinol waiver permits the blending of
9.6% oxinol with gasoline and produces an oxygen content of 3.5%. The Dupont
Waiver permits a maximum 3.7% oxygen from blending up to 5% methanol plus a
minimum 2.5% cosolvent alcohol.

2.3 SELECTED ISSUES IN IMPLEMENTING AN OXYGENATED FUELS PROGRAM

Throughout the development of Regulation 13 certain key concerns vere raised
as possible impediments to the implementation of the oxygenated fuels program.
This section briefly describes concerns and costs of the oxygenated fuels
program in Colorado. These include issues that affect both oxygenates and
gasoline such as volatility control, and concerns that are more pronounced
with oxygenated fuels than gasoline, such as the solvent nature of alcchols,
phase separation and materials compatibility.

Volatility

Gasoline is blended to achieve certain quality control specifications. One
important fuel quality specification is the ability of a fuel to vaporize
(change from a liquid to a vapor). The rate of vaporization (referred to as
volatility) will determine how well a fuel will perform under varying
conditions. Volatility guidelines are established by the American Society of
Testing and Materials (ASTM) and are generally followed by gasoline refiners
and blenders. These volatility guidelines include standards for Reid Vapor
Pressure (RVP), distillation profile and vapor/liquid ratio (ASTM, 1986).

Meeting ASTM volatility standards is critical to ensuring proper motor vehicle
performance. The ASTM standards reflect temperature during seasons, climate
and altitude. Gasoline is olended to meet conditions governed by the
applicable standard in a geographic area. A fuel with a low volatility in
cold veather may have trouble starting. A fuel with high volatility in hot
weather may vapor lock and stall.

RCG/Hagler, Bailly Inc. 2-5


that Denver's prices declined relative to select cities or that conversly,
there vas a cost impact. However, the intrinsic, relative short-term
fluctuations in rack prices across regional cities undermines the statistical
validity of this approach for detecting small short-term price impacts from
any one cause, and it cannot be defensably used to independently calculate
program costs at the rack level.

A retail price survey was also conducted in Denver and historic Denver retail
prices were compared to other cities, As with rack prices, no definite
conclusions about the program price impacts can be drawn from this analysis.

Fuel Econoay Impacts

Reductions or increases in gasoline consumption occur with oxygenated fuels, >
depending on the type of pollution controls on a motor vehicle. Using
Colorado Department of Health assumptions on fuel economy penalties by
oxygenate, pollution control type and existing vehicle fleet mix resulted in
calculated average fuel mileage penalties of up to 0.22 percent, or a $0.002
per gallon reduction in value.

Clear Gas

Some motorists in non-program areas used clear gasoline that had been trucked
in from out-of-state. Clear gasoline was generally sold at a price equal to
or exceeding MTBE blended gasoline. Assuming 4.4 million gallons of clear gas
sold per month at a price penalty of up to $0.013 per gallon (maximum MTBE
price increment) this cost increment during the program vould have been
$112,463.

Other Impacts

Administrative and planning costs by industry and government did occur, but
were not quantified. Similarly, the ethanol industry is reported to have
experienced loss of market share attributable to a shortage of sub-octane
gasoline, but the costs are not identifiable with any certainty.

RCG/Hagler, Bailly Inc. B-6


Page4

one exceedance of this standard per year constitutes a violation of the carbon
monoxide NAAQS. Areas along Colorado's Front Range, especially {n Denver,
have cons{stently failed to meet this standard.

Use of oxygenated fuels reduces carbon monoxide emissions from gasoline
powere’ motor vehicles. The technical basis for this determination {is as
follows:

- Most cardon monoxide emissions along Colorado's Front Range are
from motor vehicles. It {s estimated that in 1987, 77% of the
areas CO emfssions are from motor vehicles.

- Oxygenated fuels, containing oxygen vfa an alcohol or ether
blended with gasolfone, have been shown, through testing by CDH
and others, to be effective at lowering carbon monoxide emissions
from motor vehicles. Reductions are directly attributable to the
oxygen contafned in these fuels, by leaning the air/fuel ratio.

- Most gasoline powered motor vehicles are set up to run slightly
rich at Sea level. Unless these vehicles are altitude
compensating, they will be further enriched as the altitude
increases, since there fs less oxygen present.

- The amount of leaning is directly proportional to the level of
oxygen contained in the fuel. The higher the percent of oxygen in
the fuel, the leaner the effective air to fuel ratio will be. As
the air to fuel ratio becomes leaner, CO emissions are reduced.

Thus, at Colorado's altitudes, most vehicles run richer than at sea
level. This excess fuel results in less complete combustion and thus
increased carbon monoxfde emissions. Oxygentated fuels counter-act these
factors.

Since vehicles are running rich at high altitudes, the enleaning effect
of oxygenated fuels is not anticipated to result in vehicle driveability
degradatfon.

Current State Jaw prohibits the Commissfon from requiring ASTM Reed
Vapor Pressure (RVP) standards for ethanol blends. There is no undue concern
with the lack of RVP standards on ethanol blends for the following reasons.
First, Regulation No. 13 is being proposed as a wintertime only program.
Volatility fmduced vapor Jock {s primarily a summertime problem. Marketing
ethanol blended gasoline during the other efght months of the year would be
the decision of individual fuel marketers. Second, data provided by the State
Inspector of Oils indicates that the vast majority of gasoline sold in
Colorado during 1986 was significantly below the applicable maximum RYP
standard. In terms of ethanol blending, this implies the majority of gasoline
could have been blended with ethanol and remain within RVP limits. State law
C.R.S. 8-20-204, as revised July 1, 1986 is largely responsible for this lower
RYP gasoline, The Commission would prefer to have appropriate ASTM RVP
standards apply to all final oxygenated fuels but recognizes that the Colorado
General Assembly has this prerogative

5 CCR 1001-16 THE CODE OF COLORADO REGULATIONS

A

Wwe


National Advisory Panel on Cost Ef zectiveness of Fuel Bthanol Production
(NAP). 1987. Fuel Bthanol Cost Bffectiveness Study, Final Report.
October, Washington, DC.

RCG/Hagler, Bailly, Inc. -2-




Figure 3-2

FRONT RANGE COLORADO
PHYSICAL SUPPLY OF REFINED PRODUCTS

0 1986
O UNITS: ANNUAL AVERAGE BPD

O PRIMARY SUPPLIERS SHOWN

wYCO PL
MOGAS 24600 MISC TRUCKS
JET 2250 MOGAS 200
SINCLAIR PL DIST 6100 JET o
MOGAS 13500 AMOCO, DIST 400
JET 600 LARCO, FRONTIER FRONTIER, CRA,
ost 2700 SINCLAIR
SINCLAIR |
‘DENVER REFINERIES |
SENVER CHASE PL
MOGAS 33300 __
JET 6500 MOGAS 14400
DIST 10200 JET 14400
DIST 2500
TEXACG
AND OTHERS
TEXAS PANHANDLE
PHILLIPS PL TRUCKS
MOGAS 15300 a0
JET S700 to)
DIST 3500: 40

TOTAL SUPPLY

MOGAS 101340
JET 29450

DIST 25440

Source: Energy Analysts International Inc., 1987
3-3

ROG/Hagler, Bailly Inc.



COLORADO'S OXYGENATED FUELS PROGRAM:
ECONOMIC EVALUATION OF THE FIRST YEAR

Prepared for:

Michzel Shelby
U.S. Environmental Protection Agency
OPPE

Washington, DC

Prepared by:

Joshua B. Epel
Ari M. Michelsen
Robert D. Rowe

RCG/Hagler, Bailly Inc.
F.0. Draver 0
Boulder, CO 80306

Work performed under contract #68-01-7489 and vork assignment #88-27.

Mention of trade names does not constitute an endorsement of any product or
fire.


© 1987 THE PUBLIC RECORD CORPORATION

ALL RIGHTS RESERVED

10CR7 7-87 Pace t

I.

Statement of Intent, Area of Application, and Definitions

AS

“The Reduction of Carbon Monoxide Emissions from Gasoline
Powered Motor Vehicles through the use of Oxygenated Fuels®

Statement of Purpose

and particulate emissions from gasoline powered motor vehicles in
the AIR Program area through the winter time use of oxygenated
gasolines. The attached Statement of Basis, Statutory Authority
and Purpose, and Fiscal Statement are incorporated herein, for the
purpose of reference only, as Sections IV. and V., respectively.

Area of Application

defined in C.R.S. 42-4-307 (11).
Definitions

used in this regulation:

iF

2.

REGULATION NO. 13

OXYGENATED FUELS PROGRAM

The purpose of this regulation is to reduce carbon monoxide

This regulation shall apply to the AIR Program area as

The following terms shall have the following meaning when

"AIR Program" means those parts or all of Colorado's Front
Range counties as defined in C.R.$ 42-4-307 (11).

"Commission® means the Colorado Air Quality Control
Commission.

“Division® means the Air Pollution Control Division of the
Colorado Department of Health (CDH).

“Motor Vehicle" means any self-propelled vehicle which is
designed primarily for travel on the public highways and
which is generally and commonly used to transport persons
and property over the public highways. For the purpose of
this regulation, motor vehicles shall refer to spark
ignition motor vehicles which use on a part or full time
basis, gasoline or gasoline-type products.

“MTBE* means methy)-tert-butyl-ether.
“Oxygenated Fuels" means gasolines blended with a component

or components containing oxygen, generally an alcohol or
ether.

©)

THE CODE OF COLORADO REGULATIONS 5 CCR 1001-16


Table 4-4
Ethanol Program Impac.s,
Costs to New and Previous Consumers

Fuel Costs $ per Galloa Octane
Before Program
1. Gasoline 0.85 85
2. Bthanol Blend 0.83 87.5
During Program
3. MTBE Gasoline 0.85-0.86 85
4. Bthanol Blend 0.83-0.84 85
Program Induced Change in Costs
5. Bthanol Blend to Ethanol -2.5
Blend (line 4 - line 2)
- Price Impact 0.0 to +0.01
- Octane Value Reduction 0.02 to 0.037
- Total Impacts 0.02 to 0.047

(added costs)

6. Switching from gasoline to

Ethanol Blend (line 4-line 1) 0
- Price Impact -0.01 to -0.02
- Total Impacts -0.01 to -0.02

(added savings)

Assumes, for the purpose of sample calculation, preprogram unleaded prices of
$0.85 and $0.83 with an ethanol octane boost of 2.5 and maintaining $0.02
retailer price margin. Costs of the program are from changes in base gasoline
costs, changes in MTBE gasoline prices, and loss of octane. The cost to
previous consumers is the total of the cost increase in other gasoline (0.0 to
0.01) plus the loss in octane value. The cost (benefit) to new consumers is
the cost reduction in ethanol blends.

ROG/Hagler, Bailly Inc. 4-11


1.0 INTRODUCTION AND OBJECTIVES

1.1 INTRODUCTION

The Denver metropolitan area has been listed by the EPA as having the worst
carbon monoxide pollution in the nation. In 1986, the Denver metropolitan
area exceeded the CO NAAQS thirty-six times, and the single highest exceedance
of the standard in the nation vas recorded in downtown Denver (Metropolitan
Air Quality Council, 1987).

To meet the Federal health standard, carbon monoxide emissions in the Denver
metropolitan area will have to be reduced by 50 percent. Bighty-five percent
of the carbon monoxide emissions are created by motor vehicles. Therefore,
strategies designed to reduce carbon monoxide must either reduce motor vehicle
exhaust emissions or reduce vehicle miles travelled (Metropolitan Air Quality
Council, 1987).

The Interim CO State Implementation Plan for the Denver Metropolitan Area
identified oxygenated fuels as the most effective carbon monoxide reduction
strategy available to the metropolitan area to help reduce ambient carbon
monoxide levels to meet the Federal health standards (NAAQS) and to avoid up
to $30 million annually in federal sanctions. Oxygenated fuels are gasolines
blended with a component or components containing oxygen: either alcohols or
ethers. These fuels are asserted to be effective in reducing motor vehicle
exhaust emissions by up to 34 percent (Colorado Department of Health, 1985).

The carbon monoxide emission reductions due to oxygenated fuels are dependent
on the typé and concentration of oxygenate used and the emission controls
present on a motor vehicle. The two oxygenates that vere given the most
consideration in developing the Colorado oxygenated fuels regulation were
ethanol and MTBB.

Analysis of the effectiveness of oxygenated fuels by the Colorado Department
of Health estimated that a mandated program could reduce ambient carbon
monoxide levels by 8-16 percent (Oxygenated Fuels Task Force, 1986).

RCG/Hagler, Bailly Inc. 1-1


Table B-1
Summary of Colorado’s Oxygenated Fuels Program Costs

(S$ 1988)
Dollars
Cost Central Upper
HTBE
Capital Equipment $ 110,044 $1,031,546
MTBE Purchase 4,198, 100 5,037,720
Octane Value Added -3,358,480 73,358,480
Total MTBE Cost 949, 664 2,710,786
Ethanol
Cleaning Costs 1,017 29,260
Market and Octane Costs 62,800 282,575
Total Ethanol Costs 63,317 311,835
Clear Gasoline 0 112,463
Fuel Economy Penalty Q 424,520
Total All Gasoline $1,013,481 $3,559,604
Cost Impacts By Location
Dollars
Cost Central Upper
AIR ARRBA - Total $ $763,837 $2,615,536
- $/Gallon $0.0046 $0.0159
- $/Household $0.868 $2.97
REST OF STATB - Total $ $249,644 $943,968
- $/Gallon $0.0039 $0.0148
- $/Bousehold $0.729 $2.75

* Total costs statevide. Sales volume during the tvo-month program: ethanol Blend,
9,419,000; MTBE 209, 905,000; and Clear Gasoline 8,651,000.

bi ewdy

20G/Hagler, Bailly Inc. EB


January 1986 through February 1988. During this time, monthly price
differences in the comparison cities have ranged from 9.4 cents per gallon
below Denver to 11.5 cents per gallon above Denver.

The one-month fluctuation in Denver prices during the period 1/86-2/88
averaged 4.2 cents per gallon and ranged from 0.01 to 15.69 cents per gallon.
Comparison cities one month price changes relative to Denver averaged 2.5 to
2.7 cents per gallon and ranged from 0.02 to 12.5 cents per gallon. The tvwo-
month fluctuation in relative prices averaged from 3.4 to 4.6 cents per gallon
with a range of from 0.03 to 13.9 cents per gallon (see Table 4-7).

Again, this highlights the fact that large (relative to the projected program
impacts) relative price impacts over short periods of time are common due to
natural market forces suggesting that small relative price changes are not
likely to be defensibly attributed to any one factor such as Regulation 13.

Because short-term price changes in comparison city prices do not track
exactly with Denver, evaluation of program impacts based upon relative changes
in prices are completely dependent on the time frame selected. During the
program, Denver rack prices held steady in absolute terms and actually
declined relative to two out of the three comparison cities. Kansas City and
Tulsa prices increased by approximately 1.6 cents per gallon relative to
Denver, while Salt Lake City prices declined by 3.1 cents per gallon relative
to Denver. An analysis based only on rack price changes in these four cities
during only the program months would indicate program benefits (relative
price decreases in Denver) from blending with oxygenated fuels rather than
costs, but again this is likely to be a spurious unsubstantiated result.

Comparing regional price changes over other time periods associated with the
program yields a variety of different results and program costs (see Table 4-
8). A comparison of regional price changes between December 1987, when fuel
blenders began program implementation, and February 1988, the last month of
the initial program, indicates that Denver prices declined relative to two out
the three comparison regions. Between November 1987 and February 1988 rack

ROG/Hagler, Bailly Inc. 4-24


Table 4-3
MTBE Blending Costs and Octane Value

MTBE Blending Costs
Blending Price Per Percent Of Cost Per Gallon
Component Gallon Gallon

I. MTBE Blending Costs

Base Gasoline $0.50 x 0.92 = $0.46

MTBB $0.75 - 0.80 x 0.08 = $0.060 - 0.064

Total 1.00 $0.520 - 0:524
Change in cost per gallon (Blended cost - $0.50) - $0.020 - 0.024

(added cost)

II. Octane Substitution Value

Change in Octane times Octane Value (2 x $0.008) = ~$0.016
(Saving)
IIL. Total MYBE Blending Cost and Octane Value Impact
$0.004 - 0.008
(added cost)

Note: Assumes 50 cents per gallon for base gasoline and actual MTBE program
prices of 75 and 80 cents per gallon for central and upper cost estimates. _
Octane substitution value is based on oi] industry figures of 0.8 cents per
octane gallon. This is a conservative estimate of octane value and does not
include additional octane value obtained through the increased use of butane.
Actual octane value varies by refinery feedstock, equipment, and operation.

RCG/Bagler, Bailly Inc. 4-7


APPENDIX A


Table 3-1
MTBE and Ethanol Prices
(Cents Per Gallon)

Date Ethanol! mrBE2
November 24 85.00 72.50
November 30 85.00 72.50
December 8 85.00 67.50
December 15 85.00 65.00
December 22 86.00 64.00
January 4 86.00 62.00
January 1} 87.00 58.00
January 18 87.00 63.00
January 25 86.00 70.00
February 1 87.00 70.00
February 8 87.00 70.00
February 15 87.00 69.00
February 22 87.00 68.00
February 29 90.00 69.00

1 Delivered Price to Denver excluding the federal tax incentive of 10 percent
or 60 cents per gallon.

2 Gulf Coast Spot Market Price. 8 to 10 cents per gallon must be added for
rail delivery to Denver.

ROG/Hagler, Bailly, Inc. 3-10


octane gallon (2.5 octane reduction) vas used. The producer value of 1.5
cents per octane gallon was used for the upper estimate of this impact. The
value of reduced octane ranged from $0.02 to $0.037 per gallon for ethanol
blends as compared to the previous use of ethanol. Assuming an upper bound
cost increase of MTBE OF $0.013 per gallon (calculated figure from equipment
and blending costs), the total program cost for previous ethanol blend
consumers ranged from $0.02 to $0.05 per gallon. The total program cost
(benefit) to nev ethanol blend consumers ranged from $-0.01 to $-0.02 per

gallon.

4.3 DENVER AND REGIONAL CITY RACK PRICES

Gasoline rack (wholesale) price behavior in Denver was analyzed for impacts of
the oxygenated fuels program. Rack prices reflect crude ofl purchase costs,
refining and blending costs, cost of the oxygenate, and vholesale marketing
and distribution costs and profits. During the program period, Denver rack
prices include the cost of MTBE, except for sub-octane gasoline. Based on the
actual engineering and other costs incurred we would expect only a negligible
or small change in rack prices attributable to the program (approximately zero
to 0.013 cents per gallon).

Estimates of price increases from $0.034 to $0.06 vere made prior to the
program by BBC and BAI). This section analyzes the actual price behavior of
Denver and other cities to see if these price changes can be verified.

4.3.1 Denver Back Prices

To distinguish program related price changes, adjusted for crude oil, other
market factors and seasonal trends, previous and current program period price
movements and changes in margins were examined. Figure 4-1 shows Denver
monthly average rack prices by grade. A two-year time span was selected to
examine historical trends in Denver rack prices. Prior to and during the
oxygenated fuels program Denver rack prices declined and then held steady.

ROG/Hagler, Bailly Inc. 4-12


sour ‘ATryea ‘xeT3eH/2048

6-€

Price (cents/gallon)

Figure 3-4

Ethanol, MITBE and Crude Prices

(Cents per Gallon)

90 =}

bg to Denver
80 4

TaHK, MTBE — Gulf Coast Price

4 ————_+—___+-.~.
70 7 +, 4

4
of
so NN
50 4
_&.
40 5 9
30 T T T T T T T T 7 T T T
11/24 12/8 12/21 1/7 1/21 2/8 2/22

ia]

Date 1987-1988
Ethanol + MTBE ° Crude


Sour Atryed_‘x913en/D08

Te-¥

Gas Price (cents/gallon)

94

Figure 4-6

Rocky Mountain News Gas Price Survey
Blends Not Identifled

93 4
92 4
91
90 4
B9 4
as 4
87 4
86 4
85 4
84
83 -

82 -

81

Source:

T T T T T T T T 1
12/1 12/15 12/29 1/12 1/26:

Survey Date

13) Regular + Unleaded

Denver, Rocky Mountain News


butanes to gain octane. The price impact of this butane substitution vas not
computed.

Capital costs incurred by individual producers and distributers of KTBR
blended gasoline ranged from no costs (obtaining gasoline through exchanges)
to building or purchasing rail off loading facilities, piping to storage, new
storage tanks and in line blending equipment. These equipment purchases have
productive use lives of multiple years, and, moreover, can be used for other
purposes during non-program months. To account for these factors, equipment
costs were annualized and apportioned entirely to the program for an upper
bound estimate of 0.005 cents per gallon. For a central case estimate, these
equipment costs vere allocated for year round use for an estimate of 0.0005
cents per gallon.

Bthanol. The distribution of ethanol can require the replacement of filters

and cleaning of storage tanks. Assuming a maximum of 20 stations switching

from regular gas to ethanol for the program (based on the increase in ethanol

gasoline volume), these costs vere estimated to range from 0.03 cents (as a pete
central case estimate) to 0.09 ¢ cents (as an upper bound estimate). The F\yenh
central case allocates the cost over one year, the upper case allocates the . Myqer
entire cost to the two-month program.

The estimated impact of switching to ethanol includes the change in price of
ethanol related to any changes in the dominant MTBE gasoline price (estimated
to be up to 1.3 cents per gallon). Ethanol users, who prior to the program
purchased blended gasoline with an 87.5 octane, purchased ethanol blends
during the program with 85 octane because only subgrade gasoline vas available
for blending vith ethanol. The value of the octane impact was computed to be
betveen 2 and 3.7 cents per gallon for those individuals who, used ethanol
prior to and during the program. New ethanol users vere estimated to have a l

to 2 cent cost reduction per gallon.

As an alternative method of determining whether the program significantly
impacted lower gasoline prices, relative rack prices in Denver and other
cities vere compared. The rack price data can be interpreted to show either

ROG/Hagler, Bailly Inc. E-5


introduction of blended fuels to cleaning and drying the tanks. The costs of
these procedures are discussed in Chapter 4.1.

BO0G/Hagler, Bailly Inc. 7-6


APPENDIX A
List of Persons Interviewed

RCG, Hagler, Bailly would like to express its appreciation to the following
people who generously provided us with invaluable information.

Individual Company

Mike Barvig Spruce 0i1

Barbar Bauerle Automobile Association of America
Ken Buckler Total Petroleum Inc.

Pete Coggeshall Amoco Corporation

Vern Combs Pennzoil Products Company
Dick Cowen Sinclair 011 Company

Jan Cool Exxon

Dennis Creamer Conoco Inc.

Tom Dunn Colorado Department of Revenue
Dick Ervin Texaco

Jerry Gallagher Colorado Department of Health
Ron Hagmier Ventra, Inc.

Ted Holman Colorado Department of Health
Lance Hoboy Westec Petroleum

Loren Hoboy Western Refining

Jim Kaiser Sinclair 011 Company

Jeff Kramer Frontier Oil and Refining
Tom Lareau American Petroleum Institute
Jerry Levine Amoco Corporation

Kim Levo Colorado Department of Health
Sandra Nobbe Oil and Gas Journal

Stan Lomax Texaco

Bob MeHall Diamond Shamrock

Dave Meyers Conoco Inc.

Bill Piel ARCO Chemical Company

Dick Piper Phillips 66 Company

Mike Powell Colorado Department of Labor, 011 Inspection Section
Joe Scott Chase Transportation

John Snodgrass Diamond Shamrock

Patty Stolp Ethanol Managment Company
Jim Suttle’ Chase Transportation

Rod Voight Archer Daniels Midland

Jack Wilkins Kubat Equipment

Ron Williams Gary Refining

George Wright Coors

Darcy Wold Total Petroleum Inc.

George Yogis ARCO Chemical Company


Table 4-5
Regional Price Differences Compared With Denver
(Unleaded Gasoline, Cents per Gallon)

Price Relative To Denver

Date Denver Kansas City Salt Lake City Tulsa
1/86 71.15 2.82 9.20 -4.30
2/86 55.56 -0.72 11.12 -2.68
3/86 45.06 -0.46 4.01 -2.02
4/86 46.85 2.31 0.09 0.28
5/86 51.57 6.98 - 2.37 4.39
6/86 54.64 -4.18 4.52 -5.69
7/86 41.74 -2.54 11.53 -3.72
8/86 47.69 1.72 - 0.92 -0.40
9/86 48.02 -1.59 - 1.15 -3.14
10/86 43.85 0.46 1.21 -1.51
11/86 44.70 0.97 - 0.29 -0.50
12/86 43.38 1.31 - 0.45 -0.12
1/87 49.68 2.44 - 2.73 0.49
2/87 50.58 -0.24 1.96 -1.77
3/87 51.05 2.60 1.94 0.61
4/87 53.04 1.89 - 2.12 0.33
5/87 54.66 2.63 - 2.46 1.09
6/87 57.77 1.53 - 2.04 -0.19
7/87 61.56 0.72 - 3.01 -1.16
8/87 68.11 -6.17 - 2.53 -7.29
9/87 64.45 -8.51 3.92 9.44
10/87 58.18 -0.58 6.59 72.34
11/87 55.64 0.12 5.45 -0.99
12/87 50.91 -4.25 6.81 -5.29
1/88 50.04 -3.57 2.84 -4.86
2/88 50.03 -1.95 - 0.24 -3.26

Source: Petroscan for monthly prices. Positive prices are above Denver,
negative price below.

ROG/Hagler, Bailly Inc.


BIBLIOGRAPHY

American Society of Testing and Materials (ASTM) 1986. Annual Book Of ASTM
Standards, 1986, Philadelphia.

ARCO Chemical. 1987. "Testimony of George Yogis Before the Air Quality
Control Commission, June 18 and 19." Denver, CO.

Alberta Gas Chemicals, Inc. 1987. "Bxhibit Before the Air Quality Control
Commission, June 18 and 19, 1987." Denver, CO.

Browne, Bortz and Coddington, Inc. (BBC). 1987. Bconomic Impact Analysis and
Market Assessment of A Colorado Oxygenated Fuels Program. Report to the
Colorado Department of Health. January, Denver, CO.

Colorado Code of Regulations, 1987, Denver, CO.

Colorado Air Quality Control Commission. 1987. Transcript of Hearings, In
the Matter of Proposed Regulation 13. June 18 and 19, Denver, CO.

Colorado Department of Health, 1983. Bffects of Bthanol-Blended Fuel on Motor
Vehicles at High Altitude. September, Denver, CO.

Colorado Department of Health. 1985. Bthanol Blended Fuel as a CO Reduction
Strategy at High Altitude. August, Denver, CO.

Colorado Department of Health. 1987. Staff Statement to the Air Quality
Control Commission Concerning Proposed Regulation 13. June 18 and 19,

Denver, CO.

Colorado Department of Health. 1988. Briefing to the Air Quality Control
Commission. March 17.

Energy Analysts International, Inc. (RAI). 1987. Impact of A Mandated
Blended Fuel Program on Consumer Costs, Product Supply and Economics. June
4, Denver, CO.

Metropolitan Air Quality Council. 1987. “Interim Carbon Monoxide State
Implementation Plan for the Metropolitan Denver Non-Attainment Region."
June, Denver, CO.

Renewable Fuels Association. 1987. Testimony Before the Air Quality Control
Commission. June 18 and 19, Denver, CO.

Renewable Fuels Foundation. 1987. “Changes in Gasoline and the Automobile
Service Technician." Washington, DC.

Oxygenated Fuels Task Force. 1986. "Report and Recommendations of the
Oxygenated Fuels Task Force." October 29, Denver, CO.

RCG/Hagler, Bailly, Inc. =1-


Pege2

7. “Class A Motor Fuel" means any gasotine type product as
defined in C.R.S. 8-20-202.

TI, REQUIREMENTS OF THE OXYGENATED FUELS PROGRAM
A. Class A Fuel Requirements

1. Beginning January 1, 1988, to March 1, 1988, no Class A
motor fuel shall be supplied or sold by any person intended
as a final product for fueling of motor vehicles within the
AIR Program Area, or sold at retail,.or sold to a private
fleet for consumption, or introduced {nto a motor vehicle fn
the AIR Program area by any person, unless the fuel has at
least a 1.5% oxygen content by wefght. Oxygenated fuel
containing 8% by volume MIBE shal] be considered equivalent
to 1,5% oxygen content by wefght.

2. Beginning November 1, 1988, to March 1, 1989 and for each
period of November 1 to March 1 thereafter, no Class A motor
fuel shall be supplied or sold by any person intended as a
final product for fueling of motor vehicles within the AIR
Program area or sold at retail, or sold to a private fleet
for consumption, or introduced into a motor vehicle in the
AIR Program area by any person unless the fuel has at Teast
a 2.0% oxygen content by weight. Oxygenated fuel containing
11% by volume MIBE shall be considered equivalent to 2.0%
oxygen content by weight.

3. AN)._soxygenated motor fue) sha}} be labeled at the pump
.during the periods stated in Sections [I.A.1. and 11.A.2.,
identifying the type and amount of oxygenate contained in
the motor fuel, fn accordance with labeling criteria
developed by the Division consistent with any applicable law.

B. Reporting and Review Requirements

hw The Air Pollution Control Ofvision, in consultation with the
State O12 and Gas Inspection Section, the Environmental
Protection Agency, the fuel reffners, oxygenate
manufacturers, marketers and retailers, the Colorado Auto
Dealers, Yead air quality planning agenices, motorists and
environmental organizations, shat) prepare a report, to be
filed with the Commission, on April 15 of each year
regarding the results of the Oxygenated Fuels Program, with
particular attention to a cost/benefit analysis, to include
such factors as air pollution reductions obtained from the
program, driveability problems, if any, the cost of the
program to motor vehicle owners, refiners, marketers and
retailers of the fuel, and other information which jis
relevant to whether the oxygenated fuels program should be
continued. The Division shall also work with all
appropriate entities to develop and {implement a public

education program. (C)

t § CCR 1001-16 THE CODE OF COLORADO REGULATIONS


sour ATIFea ‘3e1Pep/s0R

62-9

Gas Price (cents/gallon)

102
101 ~
100 - —,.

Source:

Figure 4-5

Denver Retail Gasoline Price Survey

MTBE and Ethanol! Averaged Prices

g9 + Toe
98 7
37 4
96 4
95 +
94 74
93 4
92 4
91 4

90

82 a

ie ~

85
a4 ~ ae

B3 —~

82
81

/

ae
_ —

80 + T T T
12/13/87 1/3/88 1/16/88 1/30/88

Survey Date
a Regular + Unleaded

RCG/Hagier, Bailly, Denver Retail Price Survey

°

T 1
2/14/88 2/28/88

Premium


Costs To Refiners, Distributors and Retailers Related To MTBE

Rail Off Loading and Blending Equipment. The costs incurred by individual

suppliers for the purchasing and building of rail off loading and in-line
blending equipment varied from no cost (suppliers who obtained blended
gasoline through exchanges) to $750,000 (for an unloading facility, piping to
a storage tank and in-line blending equipment}. The aggregated cost for all
identified rail off-loading and blending facilities totaled $2,925,000
(Conversations with gasoline and oxygenate distributors).

Storage Tanks. The refineries and terminals that supply product into Colorado
possessed different storage capacity. Some suppliers utilized available tanks,
others vere required to rededicate existing storage tanks, and some suppliers
were required to construct new tanks (the upper bound expense for constructing
a new tank was $750,000). The aggregate cost for providing tanks to store MTBB
and sub-octane gasoline totalled $2,100,000 (Conversations with gasoline and
oxygenate distributors).

Annualized Cost of Equipment. The above equipment installed to meet the
requirements of Regulation 13 generally has a life expectancy of 10 to 30
years. Therefore, the cost of the equipment should be annualized, and not
charged exclusively to the first year of the program. Purther, such
equipment can be used by a refinery or terminal year round for purposes other
than blending oxygenates during the four months of the program. For the
purpose of this analysis, we have calculated the annual cost of complying with
Regulation 13 in two vays (Summarized in Table 4-1):

1. As an upper bound on costs, amortizing equipment at 10 percent with a
tax life seven years (Tax Reform Act of 1986) and assuming the equipment
is useful only during the program; and

2. As a central estimate, amortizing the equipment at 10 percent over 15
years and assuming the equipment can be utilized the entire year and
therefore, allocating the cost of the equipment to the program in
proportion to the months used for the program.

RCG/Hagler, Bailly Inc. 4-2


Potential Increases In Ozone

Testimony was presented prior to and during the rulemaking that a large year-
round penetration of ethanol could increase hydrocarbon emissions, and
exacerbate the existing summer time ozone problem. Analysis by the Colorado
Department of Health has concluded that even vith a 100 percent penetration of
ethanol (exempted from ASTM) during the non-winter months, the overall
increase of evaporative emissions vould increase ozone from the current
highest recorded levels of 0.13-0.15 parts per million to 0.15-0.17 PPM
(Colorado Department of Health, 1985).

ROG/Hagler, Bailly Inc- 4-42


Table 4-1
Annualized Cost of HTBE Related Bquipment Expenditures

Cost Of Equipment Upper Central
Rail, Piping Blending $2,925,000 -- --
Storage $2,100,000 -- --
TOTAL: $5,025,000 $1,031,546/year $110,044/year

Sources: Amoco 0il, Conoco, Diamond Shamrock, Exxon, Frontier 011, Phillips
Petroleum, Sinclair 011, Spruce 0il, Texaco 011, Total Petroleum, Vestern

Refining.

Utilizing the upper bounds of the engineering costs attributable to the first
year, and attributing the entire annual cost to only the program zonths
(January and February) gasoline sales, the engineering cost per gallon of MTB8
mixed gasoline is $0.0049. This upper bound cost would be half this amount in
a four-month program. Using the central case estimates, the per gallon
engineering cost for two months would be $0.0005. Gf the tvo prior studies,
EBC, (1987} projected a capital cost related to using MTBE of $0.006 per
gallon and BAI (1987} estinated HTBE capital costs (in total dollars on a
seasonal basis) of $4.4 million.

Meeting the 2.0 percent oxygen standard in the second year of the program
could require some refineries and terminals to incur additional engineering
costs. To avoid the logistical problems created by the program (see Section
4.7) the refineries and terminals that will be blending MTBE shipped by
vailear will have to dedicate an additional 50,000 barrel tank for storage of
MTBE. In addition to providing the additional storage capacity, the blender
will have to take shipment of the MTBE in August of 1988, and not receive the
benefit before November 1, 1988.

Refinery operators have estimated that the cost of providing the storage for
the next years program will exceed the amount spent in the first program year.
Assuming all eight refineries are required to build new MTBE storage
capacity, at the upper case of $750,000 each (for a total of $6 million), the

ROG/Hagler, Bailly Inc. 4-3


sour Atrred_‘3eT3en/908

Price (cents/gallon)

sI-¥

Figure 4-2
Regional Regular Gasoline Rack Prices
(Cents per Gallon)
80 — nee ee ee re ee.
\
\

we ec ae
75

SS TTT TT Toe oe ree ee oes eee
1/86 3/86 5/86 7/86 9/86 11/86 1/87 3/87 5/87 7/87 9//87 11/87 1/88

Month/Year
a DEN + KC o

Source: Petroscan

SLC a TUL


the program area, and 7,096 barrels per day Statewide. A 100% MTBE program
vould represent 6.2% and 8.7% respectively of the daily national MTBE
production capacity. A 100% MTBE program (using January, 1988 gasoline
volumes) using 11% MTBE would represent 8.6% and 11.9% of the 1987 daily MTBE
production.

Retail Retvork

There are approximately 3,210 service stations in Colorado, with 1,589 located
on the Front Range. Non-branded suppliers and bulk consumers account for- one
third of total gasoline sales in Colorado. Among branded retailers in
Colorado, Amoco had 13% of the market, Conoco 12.8%, Texaco 10.3%, Phillips
6.7% ‘and the rest is divided among numerous other branded retailers (BBC,
1987). In the program area, ethanol was sold in sixty non-branded retail

stations.

3.2 HISTORICAL MARKET SHARES AND PRICES OF ETHANOL AND MIBE BLENDS
Ethanol

Of the two oxygenates available during the mandatory program, only ethanol has
a history of substantial market penetration in Colorado. Historically, the
periods of greatest ethanol sales growth and decline correspond with the
adoption and elimination of a Colorado five cent per gallon ethanol tax
credit. The State of Colorado provided a five cent per gallon tax credit for
ethanol from July of 1978 to June of 1986. Figure 3-3 shows historical
Colorado Department of Revenue Statewide sales of ethanol prior to and during
the mandatory program and industry estimates of ethanol sales. During the
program ethanol use represented 0.6 percent of U.S. production.

Federal tax incentives lover the gross cost of ethanol so that it can be
economically blended with clear gasoline. Ethanol is generally priced so that
the net tax cost of the blended product will be two cents per gallon below the
rack price of gasoline. The two cent difference may be used to pay for some

ROG/Hagler, Bailly, Inc. 3-6


than all of the comparison cities. After this peak, Denver prices fell
rapidly and then leveled off.

Historically, the above type of relative price fluctuation is not unusual when
comparing cities. This therefore limits the ability to detect relatively
small price changes and assign the difference to any one source of impacts.

In fact, to verify or quantify specific program impacts, the regional and
temporal variability in prices must be smaller than the price impact to be
identified.

Table 4-5 shows the inter-city difference in price as compared to Denver by
month for 1986 through February 1988. Figures 4-2 to 4-4 and Table 4-5, show
there are limited consistent relative price trends. Prices in each comparison
city fluctuate from below and to above Denver prices over the course of a few
months, apparently due to variability in local market pressures. The relative
price changes can be quite large and do not follow simplistic patterns.

The rack price spread between the comparison cities is highly variable and has
ranged from a high of 13.86 cents per gallon (1/1986, Tulsa-low and SLC-high)
to a low of 2.6 cents per gallon (8/1986, SLC-low and KC-high) for unleade
gasoline. Immediately prior to the program, the price spread vas 12.1 ce:

per gallon (12/87, Tulsa and SLC). In the last month of the oxygenated fuels
program, Denver prices were just a quarter of a cent higher than SLC and the
spread between the four cities had narrowed to only 3.26 cents per gallon, a
change in the spread of almost 9 cents per gallon.

Month to month fluctuations in rack price in comparison cities as compared to
Denver, are large. Historical variations in comparison city prices are much
larger than the estimated impacts of the program. A comparison of the
relative price differences in January of the program shows that they are not
consistent with previous January price spreads but, are well within the range
of observed historical price differences. It appears impossible to identify
small (even the 3 to 6 cent pre-program estimates) short-term program related
changes in rack price when there are larger non-program related price changes.
Table 4-6 summarizes the variability in rack prices relative to Denver from

ROG/Hagler, Bailly Inc. 21


Denver retail prices declined prior to and overall during the oxygenated fuels
program. During the program period (January 1 through March 1), the average
price of both oxygenate blends declined by 1.92 cents per gallon for regular,
2.58 cents per gallon for unleaded and 2.29 cents per gallon for premium (see
Table 4-9). A decline of from 1.6 to 2.7 cents per gallon was also observed
immediately prior to the program. To measure consumer price impacts of the
program with retail prices, changes in retail prices should be directly linked
with changes in rack (industry) prices. Over the December through February
period, rack prices only declined by about tvo cents per gallon, less than the
4 to 5 cent drop in retail prices. However, this smaller change in rack
prices follows a sharp drop in rack prices throughout the fall. Hypotheses
about the difference between program period retail and rack price movements
include: that retail prices lag behind changes in rack prices; that
inventories built up at the retail level; and that retail competition
increased, resulting in reduced retailer profit margins. In either case,
changes (decreased) in retail prices are larger than the changes (decrease) in
rack prices and therefore cannot be used to reject above engineering costs
estimates of the relative small program costs.

Other retail market changes occurred during the program, which also made it
difficult to distinguish program related impacts. Regular gas (without
oxygenated added), which has traditionally been priced below unleaded gasoline
at the retail level, was at some retail stations priced the same as or above
unleaded gas during the program. Regular gas has been and is priced slightly
higher at the wholesale level. The pricing change brings the regular-unleaded
retail price spread in line with the rack price spread. Changes in gasoline
grades have also ocurred. Texaco has discontinued distributing regular leaded
gasoline and is selling a mid-grade (87 octane in Colorade) unleaded gasoline
in its place. The midgrade gasoline was excluded from the survey.

Differences in Blended Gasoline Prices

There were significant differences between the prices of oxygenate blends.
Figures 4-7, 4-8 and 4-9 and Table 4-9 show the average prices of MTBE and
ethanol blends by grade of gasoline. &thanol blends were lower in price for

RCG/Hagler, Bailly Inc. 4-30


Colorado's Oxygenated Fuels Program:
Economic Evaluation of the First Year

RXECUTIVE SUMMARY

I. BACKGROUND AND OBJECTIVES OF THE ANALYSIS

The Colorado oxygenated fuels program, Regulation 13, was enacted to reduce
carbon monoxide emissions from motor vehicles in the non-attainment areas of
the Front Range of Colorado (see Figure B-1). Regulation 13 requires that all
gasoline sold in carbon monoxide non-attainment areas during the high
pollution months of November through Pebruary contain a specified minimum 2
percent oxygen content by weight. The minimum oxygen requirement can be net>
by blending 10 percent ethanol (3.5% oxygen), 11% MTBE (2.0% oxygen) or other
oxygenates that have obtained an Environmental Protection Agency vaiver. In
the first year of the program, the oxygen content standard was reduced to 1.5
percent and the nandatory blending period shortened to January and February,
1988 to allow the petroleum and oxygenate marketing industries sufficient time
to meet program requirements.

The blending of oxygenated fuels in all gasoline during the high pollution
months has been projected to reduce ambient carbon monoxide levels by 8 to 14
percent. The lower oxygen content of air at high altitude (18 % lower than
sea level) causes most motor vehicles to burn fuel inefficiently and create
excessive carbon monoxide emissions. Blending oxygenates with gasoline
compensates for the lack of oxygen in the high altitude areas and reduces
motor vehicle tailpipe emission.

Throughout the analysis and Rulemaking process that led to the development of
the program, numerous concerns about the consequences of the program were
raised. These included: the costs that would be borne by consumers and
industry; potential motor vehicle driveability and maintenance problems, which
could result in a lack of public acceptance; the market shares oxygenates
would control at different oxygen requirements; potential decreases in

RCG/Hagler, Bailly Inc. E-1


Previous ethanol users vho stayed with ethanol may have incurred increased
prices and reduced product value because the octane of ethanol blend during
the program vas reduced as compared to before the program. Ethanol blend
prior to the program had an octane rating two to three points higher than the
same grade of non-ethanol gasoline. This was considered a consumer selling
point of ethanol blends. During the program, ethanol was blended with lower
octane “subgrade” gasoline. The finished blend using subgrade was the same
octane as other gasoline. The program induced cost was the 2 to 3 point
reduction in octane. The subgrade was provided at a slightly lower cost, from
one half to one cent per gallon less than MTBE blended gasoline, and was the
only gasoline available for blending with ethanol. The ethanol blend gasoline
to unblended gasoline price margin before the program was approximately 1.5 to
2.0 cents per gallon. The reduction in cost of the subgrade (relative to
gasoline) allowed blenders of ethanol to maintain the price margin betveen
gasoline and ethanol blend, thus, offsetting program costs and/or increasing
their profit margin. Maintaining the ethanol blend to gasoline price margin
results in a cost to the consumer by the save $/gallon amount of the MTBB
gasoline price increase. (The price increase is in relative terms. For
example, the retail price of gasoline declined during the program, but ethanol
blend may not have declined as much as it would have without the program.)

The consumer cost incurred depends on the type of gasoline that was purchased
before and during the program (see Table 4-4). For example, assuming up to a
$0.01 per gallon increase in the cost of gasoline because of blending MTBE,
the retail prices of both MTBE and ethanol blends of gasoline vould increase
by up to $0.01 per gallon. Consumers that purchased ethanol blends before the
program and during the program paid up to $0.01 due to the MIBE effect (line 4
- line 2 in Table 4-4). Consumers that switched from gasoline to gasohol
during the program paid $0.01 less per gallon (line 4 - line,1) due to the
ethanol retail pricing strategy. If the change in price of blending MTBE was
zero, then the consumer change in price would be zero.

Previous ethanol consumers also experienced a reduction in octane. For the
central estimate of this impact, a production cost of 0.8 cents per octane
gallon (2.5 octane reduction) was used. The producer value of 1.5 cents per

RCG/Hagler, Bailly Inc. 4-10


method that can be used to estimate producer octane value is to compare the
difference between unleaded regular and premium gasoline. Their rack prices
differ by approxisately 6 cents while their octane differs by 4 points (89 vs
85). Using this method, the octane value is approximately 1.5 cents per
octane number per gallon. Although this estimate is probably on the high
side, because it includes wholesale profits as well as production costs, it
demonstrates that octane has value.

As illustrated, increased octane gasoline available from strictly blending
MTBE could have been sold at a higher price or, as actually occurred,
producers could maintain the octane at normal preprogram levels (85 unleaded,
86.5 regular and 89 premium). By substituting MTBE octane for other octane
components, the cost of producing gasoline is decreased by the amount of
octane components substituted. This savings is the production value of
octane. Octane costs vary by refinery feedstock and equipment. Refineries
with higher octane costs will receive larger benefits of octane enhancers than
refineries with lower octane costs. The production cost to increase octane by
one number has been estimated at 0.8 cents per gallon (BBC 1987) and 1.0 cent
per gallon (George Yogis, ARCO Chemical, AQCC testimony June 4, 1987).

MTBE increases the octane of blended gasoline by approximately two numbers.
Using a value of 0.8 cents per octane number, the octane value of MTBE through
Substitution of other inputs is 1.6 cents per gallon of gasoline. The 1.6
cents per gallon offsets the purchase cost of MTBE (see Table 4-3).

Therefore, the net change in production cost of blending KTBE including octane
value ranges from 0.4 to 0.8 cents per gallon. Confidential industry sources
have confirmed these are reasonable estimates of the production costs of
blending MTBE. Octane substitution benefits estimated here may be
conservative as evidenced by the economic use of NTBE in other areas of the
country and by the possible continued use of MTBE after the program by three
companies in the Denver market.

Another form of MTBE octane substitution is also possible that would increase
the blending valve. Additional octane value, other than the direct boost of
MTBE, can be derived through butane substitution. Butanes are an abundant,

ROG/Hagler, Bailly Inc. 4-8


sour Atrred_‘ze12en/o0g

cy

Gas Price (cents/gallon)

Denver Unleaded Retail Gasoline Prices

Figure 4-8

By Blend
° JTM
\
89 4 / NN,
88 + J NX
a
vA ae
87 7 / a TM~_ SA,
s “ ~~ N
a TM \
r 7 oR IN
86 4 a ~
4 SS
85 7 ~
N
84 -
83 7
82 T T ——y
1/3/88 1/16/88 1/30/88 2/14/88
Survey Date
o MTBE + Etnanol
Source: RCG/Hagler, Bailly, Denver Retail Price Survey

2/28/88


2.0 BACKGROUND ON THE COLORADO PROGRAM AND OXYGENATED FUELS

2.1 THE COLORADO PROGRAM

Colerado’s oxygenated fuels program (Regulation 13, Appendix B) was
established in June, 1987 (Code of Colorado Regulations, 5 CCR 1001-16, 1987).
In the first year of the program the implementation period was January 1
through March 1,1988. The first year of the program established a shorter
program duration (tvo months) and lower oxygen standard (1.5 percent) than the
requirements of the second and subsequent years to allow the petroleum
industry time to adjust to the production and distribution of oxygenated
fuels. In the subsequent years of the program, Regulation 13 requires all
gasoline to contain a minimum of two percent oxygen content (by veight) as the
optimal oxygen level that will achieve maximum CO reduction and encourage
healthy competition betveen ethanol and NTBE. Program implementation in
subsequent years will be November 1 through March 1, vhich is during the high
pollution season.

Pursuant to Regulation 13, the Air Follution Control Division established a
mechanism for spot testing the oxygen content of gasoline at retail stations.
The Division employed five personnel to obtain fuel samples, and one staff
member to maintain records. The Division conducted 556 inspections and issued
45 Notice Of Violations to retail service stations found to have failed to
meet minimum oxygen content requirements (Colorado Department of Health,
1988).

Oxygenated fuels are mandated only in the areas of Colorado where the CO NAAQS
are violated in the Front Range of Colorado (Figure 2-1). However, because of
the gasoline distribution system in Colorado, substantial portions of the
State appear to also have been impacted by Regulation 13 during the first year

of the program.

ROG/Hagler, Bailly Inc. 2-1


*2Ul_ATryea ‘3eT3eH/D08

Price (cents/gallon)

0z-¥

Figure 4-4

Regional Premium Gasoline Rack Prices
(Cents per Gallon)

90 _-
85 4
80 4
75 -|
70
65
60
55
50

45

G0 i ae Sn SO A De Oe Se ee ee
1/86 3/86 5/86 7/86 9/86 11/86 1/87 3/87 5/87 7/87 9/87 11/87 1/88

Month/Year
°°

o DEN + KC Sic A TUL

Source: Petroscan


Regional Comparison of Changes in Rack Prices Over Time

Table 4-8

Change In Price
Comparison Kansas Salt Lake Comparison
Period Denver city City Tulsa City Average
Jan-Feb 88
Regular 0.06 1.83 -3.13 1.71 + 14
Unleaded -0.01 1.61 -3.09 1.59 + .04
Prenium -0.02 1.64 “3.14 1.65 + .0S
Dec 87-Feb 88
Regular -0.82 1.76 -7.96 1.34 -1.62
Unleaded -0.90 1.42 -7.93 1.15 -1.79
Premium -0.88 1.45 -7.98 1.15 -1.79
Nov 87-Feb 88
Regular -5.52 -7.34 -11.33 -7.70 8.79
Unleaded -5.61 -7.69 -11.30 -7.88 -8.96
Premium -5.59 -7.76 -11.48 -7.88 -9.04
August 87-Feb 88
Regular -17.99 -13.51 -15.82 -13.85 -16.43
Unleaded -18,08 -13.86 -15.79 714.05 -14.57
Premium -18.15 -13.87 -16.05 -14,05 -14.66
Source: Petroscan, 1988.
ROG/Hagler, Bailly Inc. 4-26


In addition to regulating the distribution and oxygen content of gasoline, the
oxygenated fuels program was designed with the intent of minimizing potential
driveability problems that could be caused by the use of oxygenates (see
Section 2.3). Regulation 13 was predicated on state law that requires all
gasoline meet fuel volatility standards (ASTM D-439) to minimize driveability
problems. State law exempts gasoline blended with ethanol from meeting ASTM
D-439; however the base gasoline must meet ASTM specifications (see Section
2.3).

In accordance with State lav, the 011 and Gas Inspector of the Division of
Labor is required to test and ensure that all gasoline sold in Colorado meets
appropriate ASTM and octane requirements. The Oil and Gas Inspector checks
fuel sold at refineries and terminals and conducts spot checks of retail
service stations. If gasoline does not meet the appropriate ASTK or octane
requirements, the Inspector can require that the fuel be removed from the
market.

2.2 WHAT ARE OXYGENATED FUELS?!

Oxygenated fuels were first used in response to the oil embargoes of the
1970s. In an effort to reduce demand for imported oil, ethanol usage was
encouraged through federal tax incentives to substitute ethanol for gasoline.

Oxygenated fuels also came into demand as octane enhancers in the early 1980s.
The demand for all oxygenates as octane enhancers accelerated when the
Environmental Protection Agency required that the levels of lead in gasoline
be reduced. Prior to the BPA’s lead phasedown policy, lead was utilized
extensively as an octane booster in gasoline (1988).

Studies conducted by the EPA and papers presented by the Society of Automotive
Engineers initiated the examination of using oxygenated fuels as a pollution

\References to exhibits refer to documents produced for the Colorado Air
Quality Control Commission Rulemaking hearings, June 18 and 19, 1987.

RCG/Hagler, Bailly Inc. 2-3


LIST OF TABLES AND FIGURES

Executive Summary
Pigure B-1 Map of Colorado Regulation 13 Program Area
Table 8-1 Summary of Colorado's Oxygenated Fuels Program Costs
Chapter 2.0
Figure 2-1 Kap of Colorado Regulation 13 Program Area
Chapter 3.0
Figure 3-1 Colorado Monthly Gasoline Consumption
Figure 3-2 Front Range Colorado Physical Supply of Refined Products
Figure 3-3 Monthly Blended Ethanol Gas Consumption
Figure 3-4 Ethanol, MTBE and Crude Prices
Table 3-1 MTBB and Ethanol Prices (Cents Per Gallon)
Table 3-2 Gasoline Sales Summary
Chapter 4.0
Table 4-1 Annualized Cost of MTBE Related Equipment Expenditures
Tabie 4-2 First Year Costs Related To Ethanol
Table 4-3 HMTBE Blending Costs and Octane Value
Table 4-4 Bthanol Program Impacts, Costs to New and Previous Consumers
Figure 4-1 Rack Gasoline and WII Crude 011 Prices
Pigure 4-2 Regional Regular Gasoline Rack Prices
Figure 4-3 Regional Unleaded Gasoline Rack Prices
Figure 4-4 Regional Premium Gasoline Rack Prices
Table 4-5 Regional Price Differences Compared With Denver
Table 4-6 Range in Regional Unleaded Rack Prices Compared to Denver
Table 4-7 Statistical Comparison of Rack Price Fluctuations
Table 4-8 Regional Comparison of Changes in Rack Prices Over Time
Figure 4-5 Denver Retail Gasoline Price Survey
Figure 4-6 Rocky Mountain News Gas Price Survey
Table 4-9 Summary of the Denver Retail Price Survey Prices in Cents
Per Gallon
Figure 4-7 Denver Regular Retail Gasoline Prices
Figure 4-8 Denver Unleaded Retail Gasoline Prices
Figure 4-9 Denver Premium Retail Gasoline Prices
Figure 4-10 Regional Unleaded Retail Gas Prices
Chapter 5.0

Table 5-1 Summary of Colorado's Oxygenated Fuels Program Costs


4.0 ECONOHIC IMPACTS OF THE OXYGENATED FUELS PROGRAM

Widely varying economic impacts of Colorade Regulation vere made prior to
program implementation. This study uses several methods and alternative data
sources to quantify the actual industry and consumers economic impacts of the
program. This section presents the analyses of:

© Capital equipment costs incurred by refineries and distributors,
© Oxygenate costs and values,

o Denver and regional city rack prices,

o Denver and regional city retail prices, and

o Changes in fuel economy.

4.1 ENGINEERING COSTS INCURRED BY REFINERS AND DISTRIBUTORS

The estimated costs of implementing Regulation 13 were based, in part, on the
infrastructure costs incurred by the producers and distributors of gasoline
and oxygenates. These costs included:

o Building or refurbishing storage facilities,
o Constructing rail unloading facilities,
o Piping from unloading facilities to storage tanks and

o Purchasing in-line blending equipment to enable refineries and terminals
to blend and distribute oxygenated fuels.

The suppliers of gasoline and blenders of oxygenates were contacted to
determine the actual costs of implementing the program. The information
provided for this study will be presented in aggregated form to ensure the
confidentiality of the proprietary information. All major participants in the
Colorado petroleum industry were contacted and were generally very cooperative
in providing information on a confidential basis (See Appendix 1 for a list of

contacts).

RCG/Hagler, Bailly Inc. 4-1


5.0 Summary of Economic Impacts

Table 5-1 summarizes the range of costs estimates of Colorado’s first year
Regulation 13 program. Total costs statewide ranged from $1,013,481 (central
bound estimate) to no more than $3,559,604 (upper bound estimate). The lower
bound estimates are zero. Program costs varied by oxygenate blend. MTBE
blends comprised about 95% of the gasoline sold in the program area.

The costs vere largely incurred by Colorado residents in the AIR area (72%),
although residents in non-program areas may have incurred costs due to the
Colorado petroleum distribution structure resulting in most of the state
converting to oxygenated fuel. ‘These costs are included in both the central
and upper bound estimates. The central average price increase per gallon
attributable ta the program is $0.0046, the cost per program area household is

$0.87.

The economic impacts estimated in this costing analysis, which are based upon
incremental capital equipment and blending costs are not rejected by careful
examination of rack prices in Denver and other cities. No substantive
increase in Denver rack prices relative to comparison cities can be defended.
In fact, if price trends are analyzed in the cities recommended by the
petroleum and oxygenate industries (Section 4.3.2), Denver’s prices during the
program months appear to decline relative to those cities. However, it is
important to note that the intrinsic, relative short-term fluctuation in rack
prices across regional cities due to local market forces is of such magnitude
that small short-term impacts due to a program like Regulation 13 are unlikely
to be defensibly quantified using this approach. Therefore, the recent
estimates by BAI (1988) are likely to have little or no statistical validity.
In fact, alternative analysis of their data indicates numerous alternative
conclusions, all with little or no statistical power.

80G/Hagler, Bailly Inc. 5-1


o The Sinclair pipeline is a proprietary pipeline and moves 13,500 BPD.
o Trucks move only 600 BPD into the Front Range.

Ethanol Production and Distribution

The Coors Brewery in Golden, Colorado is the only existing source of ethanol
production in Colorado. Coors can produce up to 120,000 gallons of ethanol a
month from its beer waste stream and yeast production process. To ensure
product quality which meets industry standards, Coors adds a detergent and
corrosion inhibitor package to their ethanol. The volume of ethanol
production is seasonal, vith the least production occurring in December,
January and February, the time frame of the mandatory program. Assuming its
maximum production capacity, Coors was capable of producing 25.7 percent of
the ethanol used during the program, or 1.4 percent of the total oxygenate
needed to meet the requirements of a 100 percent ethanol program.

Of the approximately 65.4 thousand barrel per day ethanol production in the
United States in 1986, 63 percent of the production capacity is located in the
Midwest (BAI, 1987), with Archer Daniels Midland of Illinois having 50 percent
of the nations’ production capacity (Oxygenated Fuels Task Force, 1986}.

The three primary ethanol marketers in the program area (Bthanol Managment
Company, Spruce 011 and Western Refining) obtain their ethanol either from
Coors Brevery in Golden, Colorado, or by rail from Archer Daniels Midland. A
100% ethanol penetration during the mandatory program would have required
approximately 6,387.0 barrels per day for the program area and 8,870 barrels
per day Statewide or 9.8% and 13.6% respectively of the national daily ethanol
production capacity.!

lanalysis of the volume of oxygenate necessary to meet the requiremen
of the program must be based on the gasoline sold in the Front Range ar:
Hovever, blended fuel was sold throughout the entire State.

ROG/Hagler, Bailly, Inc. 3-4


Table of Contents

EXECUTIVE SUMMARY. ..ccscsscccnsccccccsetsecscssecs
I. Background and Objectives of the “pnalysis ’
Ii. Results of the Analysis............ bene eect eee ennn ese teeteeneee

1.1 Introduction...
1.2 Objectives of t

2.0 BACKGROUND ON THE COLORADO PROGRAM AND OXYGENATED FUELS...........
2.1 The Colorado Program.........-.+- errerirrrriry oeeee
2.2 What Are Oxygenated Puels?...-.cccsrectscccccccccscsscctecane
2.3 Selected Issues in Implementing An Oxygenated Fuels Progran..

3.0 THE COLORADO PETROLEUM INDUSTRY.....+.sesseccesscce
3.1 Gasoline Production and Distribution....
Bistorical Market Shares and Prices of Bthanol. and MTBE

3.2
Blends. ..cccscccevsccsecccvcctececessccanesceserees sevseeceee
3.3. Market Share and Prices of Bthanol, MTBE and Clear Gasoline
During the Mandatory Program.....sssescesecscees sec secsccsces

4.0 ECONOMIC IMPACTS OF THE OXIGENATED FUBLS PROGRAM..-....-seereseees

4.1 Engineering Costs Incurred By Refiners and Distributors.

4.2 Oxygenate Costs and Values........... .

4.3

4.4

4.5 Regional Comparison of Retail Prices.....

4.6 Fuel Bconomy Penalty...... weet eceneeceeeses .

4.7 Other Social Impacts and CostS.....sscecscccccesecccccaseses
5.0 SUMMARY OP RCONOMIC IMPACTS.......sc:sececcsescoenecseseocseceens .
BIBLIOGRAPEY
APPENDIX A

APPENDIX B

B

-—— ww
‘ aed md
Nee Bee

yo pee
Uwe



Crude oil is & substantial component of the cost of gasoline. West Texas
Intermediate (WII) crude oil spot prices from January 1986 through February
1988 are also shown in Figure 4-1. WII was recommended by the oil industry as
being representative of U.S. crude ofl price movements. Gasoline prices
basically follow crude oil costs. Market imbalances rather than changes in
component costs are attributed to the difference in rack and crude oil price

trends.

Based on seasonal gasoline demand patterns, adjusted for crude ofl price
changes, one might expect Denver prices to rise in the summer vith the hig
tourist demand in the rocky mountains and decline in the winter. Denver
seasonal rack prices do not consistently follow this trend. Prices during the
winter of 1986 were falling sharply; prices during the winter of 1987 were
rising; and prices during the program winter of 1988 were steady. The
previous seasonal price trends do not explain program price trends.

Despite large overall price fluctuations, the margins betveen grades in Denver
have remained fairly stable. Regular leaded and unleaded prices remain very
close with leaded gasoline slightly higher since January of 1987. Premium has
been and continues to be priced 5 to 6 cents above regular and unleaded
gasoline. Sub-octane gasoline used for blending with ethanol only became
available in December 1987, in preparation of the program. The sub-octane was
1.5 to 2.5 points lower than standard octane or MTBB blended gasoline during
the program and sold for half a cent to a cent less (the octane varied by
source and time; the price by brand name). Based on octane value, the sub-
octane would have been expected to cost even less than it did. Increased
production, storage and distribution costs of separate clear grades of
gasoline in addition to the full line of MTBB blends were cited for the small
difference in sub-octane gasoline prices.

4.3.2 Comparison Cities

Based on the changes in Denver rack prices there was little or no cost
increase of the program. However, because of other concurrent market changes

RCG/Hagler, Bailly Inc. 4-13


Table 3-2

Gasoline Sales Summary
1988 January/February

Program Area Statewide Area

Gallons z Gallons z=
Ethanol 9,419,000 5.8 9,419,000 4.1
Clear Gasoline one -- 8,651,000 3.8
MTBE (11%) 3,672,000 2.3 3,672,000 136
MTBE (8%) 148, 488,000 91.9 206,233,000 90.5
Total Sales 161,579,000 100 227,975,000 100
Sources: Colorado Department of Revenue, Colorado Department of Health

3-12

RCG/Hagler, Bailly, Inc.


may be sold or other lower price octane components may be substituted to
offset some or all of their cost.

4.2.1 MTBE Blending Costs

MTBE delivered to Colorado during the program averaged between 70 and 80 cents
per gallon. In relative terms, this was 20 to 30 cents per gallon above
gasoline during the program, or 140 to 160 percent of the cost of base
gasoline. Relative prices are important in analyzing costs because gasoline
and MTBE prices change over time. The program price differential between MTBE
and gasoline fs in the same range as historical relative prices shown by BBC
(1987). A study by Energy and Environmental Analysis, Inc. (1987), using new
plant economics at current petroleum prices, projects MTBE prices to remain
about 25 cents more per gallon than base gasoline, thus maintaining the same
price differential.

The change in cost from adding MTBE can be calculated from the prices and
amounts of base gasoline and MTBE added per gallon of blended gasoline.
Multiplying the price per gallon times the percent of that component in the
finished product and then summing the costs will yield the cost of the
product. The cost of blended gasoline can then be compared to the cost of
unblended gasoline. For example, in a gallon of blended gasoline, 92 percent.
is base gasoline and 8 percent is MTBB. Assuming a price of 50 cents per
gallon for base gasoline the component cost is $0.46 ($0.50 X .92) per gallon.
Assuming the higher program price of 80 cents per gallon of MTBE, the cost is
$0.064 ($0.80 X .08) per gallon. The blended gasoline cost per gallon vould
therefore be $0.524 or 2.4 cents more per gallon than base gasoline if no
other considerations are made. Assuming the program average price of $0.75
per gallon of MTBB, the blended gasoline cost would be $0.520 or 2.0 cents per
gallon more than base gasoline (see Table 4-3). These estimates of 2.0 to 2.4
cents/gallon serve as the central and upper bound estimates of program changes
in production costs.

The addition of MTBE increases the octane of the base gasoline by
approximately two numbers, vhich has a value to producers and consumers. One

ROG/Hagler, Bailly Inc. 4-6


Page 6

v. FISCAL IMPACT STATEMENT

Proposed Regulation No. 13 would require the use of oxygenated fuels in
the AIR Program area starting January 1 1988 to March 1 of 1988, and for each
period of November 1 to March 1, thereafter. This regulation would require
the use of an oxygenate such as an alcohol or an ether to be blended into

gasoline.

The increase in the retail price of gasoline due to this regulation is
being estimated at .05¢ to 3.5¢ per gallon. The affected AIR Program (Front
Range) area consumes an estimated 1.2 billion gallons of gasoline a year, For
the four month winter period oxygenates would be required each year, this
would affect. an estimated 380 million gallons of gasoline annually. Using the
estimated high range of 3.5¢ per gallon increase, this would result in an
annual cost of $13.3 million.

Based on Division testing, a 2% fuel economy penalty was seen for
closed loop vehicles operating on oxygenated fuels. This is estimated to be
250,000 vehicles in the affected area. Assuming each vehicle is driven 4,000
miles from November 1 to March 1, each vehicle averages 25 mpg, 160 total
gallons of gasoline would be consumed per vehicle. A 2% increased fuel
consumption would increase consumption an additional 3.2 gallons. This
results fn a total increase of 800,000 gallons. At one dollar per gallon,
this {s an additional $800,000. This brings the total program cost to $14.1
million annually.

With both ethanol and MTBE in use in the marketplace, this regulation
is estimated to result in a 300 ton per day, or 14% reduction in ambient
carbon monoxide levels. This results in a cost of $128 per ton of carbon
monoxide reduced.

These figures estimate increases in the retail price of gasoline, and
encompass all associated costs to provide oxygenated fuels. Gasoline
refiners, blenders, distributors and marketers will all have costs as a result
of this regulation. Refiners may have a reduction in crude of? through-put
from their refinery operations, as oxygenates will be displacing gasoline.
Refiners or fuel blenders will need to purchase and blend an oxygenate into
gasoline. This may require additional tankage and blending facilities in some
cases. Retail fuel marketers, and private fleets with fueling facilities will
need to ensure underground tanks are clean and water free before handling any
alcohol blended gasoline. Final filters at the fuel pump nozzles may need to
be added when dispensing alcohol blends. These costs are included in the
estimates made above regarding cost per gallon increase.

It should be noted that these estimates are using the high end of
retail gasoline cost estimates, and are the costs applicable to the fully
implemented program, and would be less during the phase-in years. There was
conflicting testimony at the public hearing regarding costs. Representatives
of the petroleum industry estimated that costs of implementing the program
could range up to 8.3 cents per gallon and total $49 million. These cost
estimates vary so widely because an oxygenated fuel program in the AIR Program
area may encourage the use of such fuels in other areas and states with carbon

5 CCR 1001-16 THE CODE OF COLORADO REGULATIONS

monoxide problems. Some owners of motor vehicles may also incur repair “©


sour ‘ATi yea ‘7eTSeR/0a

L-£

Gallons/Month
(Thousands)

a ee
woorNnuUutnanoaud
L i 1 J 4

eno P IO HN DW

Monthly Blended Ethanol Gas Consumption

Figure 3-3

Colorado

data not avallable

7/85

TUT TTT Tt tT TT tt
10/85 1/86 4/86 7/86 10/86

Month/Year
O colorado Department of Revenue

ToT TT tT rr tT tT tT tT TF

1/87 4/87 7/87 ~—-10/87

+ Ethanol Marketing Sources

1/88



BPA and local air quality officials throughout the country are also examining
the use of oxygenated fuels to reduce carbon monoxide in other non-attainment
areas. In Arizona, oxygenated fuels may soon be mandated either by BPA in
response to a court order or through bills pending in the Arizona Legislature.
In Washington, D.C., several proposed revisions to the Clean Air Act require
the use of oxygenated fuels in carbon monoxide non-attainment areas. Other
proposed Federal legislation would require the blending of ethanol (an
oxygenate) in a large portion of gasoline sold in the United States for both
energy and air quality reasons.

1.2 OBJECTIVES OF THIS REPORT

The objectives of this analysis are to provide improved estimates of the costs
of the Colorado oxygenated fuels program based upon the actual experience.
Prior to the oxygenated fuels rulemaking, economic analyses of the proposed
Colorado program were conducted for the Colorado Department of Health (BBC,
1987) and for the trade association of the petroleum industry (BAI, 1987).
Both analyses took similar approaches: they projected expected engineering
costs of complying with different oxygen content requirements and estimated
per gallon cost increases attributable to different market share scenarios.

Interestingly, the results of those two studies differed dramatically. The
State estimates varied from $.005 to $.035 per gallon while the industry
estimates ranged from $.042 to $.08 per gallon.

The results of both prior studies are subject to question as substantial
acknowledged uncertainty existed in many of the estimates. R&ngineering cost
estimates also often ignore mitigating behavior on the part of producers and
consumers, which may result in overstated cost estimates. Subsequent to the
completion of the program, EAI (1988) and Amoco Oil have produced revised
estimates of the program costs (Denver Post, March 29, 1988) based upon
comparisons of changes in the wholesale price of gasoline in Denver and other
cities, from which a $.022 to $.047 per gallon price impact is estimated, plus

ROG/Hagler, Bailly Inc. 1-2


Metro-Denver area. The survey includes retailers in Denver, Aurora, Commerce
City, Littleton, Englewood, Lakewood, Wheat Ridge, Arvada, Federal Heights,
Thornton, Westminster, Northglenn and Boulder.

Retail prices by gasoline grade (regular, unleaded and premium) and by
identified oxygenate blend (MTBE or ethanol) were collected every two weeks
from December 13, 1987 through February 28, 1988. Only self service prices
were collected to eliminate the wide variations in full service profit
margins. The final survey captured approximately 14 percent of the Denver-
metro market.

Results of the Denver Price Survey

Denver retail prices for both blends and all grades of gasoline declined
during the oxygenated fuels program. Figure 4-5 shows the average price of
MTBE and ethanol blends for regular, unleaded and premium gasoline by survey
period. Prices fell as oxygenated blends were phased in during December,
jumped by approximately of 3 cents per gallon in mid-January and then fell to
below preprogram price levels. A comparison with movements in rack prices
does not explain the sudden increase then decrease of Denver retail prices in
January. Similar retail price movements are also observed in the Rocky
Mountain News survey, as summarized in Figure 4-6, although the Rocky Mountain
News Survey did not examine price movements by blend and only sampled ten
stations in the Metro-area. The Rocky Mountain News retail survey prices
differed from the Denver retail price survey by from +2.5 to -1.5 cents per
gallon.

The Denver retail survey revealed a high correlation between station location
and price. Stations located in close proximity almost always had comparable
prices, regardless of the price level or oxygenate used, while prices between
locations varied widely. The existence of many local competitive markets
underlines the importance of having a large sample size and a widely
distributed survey.

ROG/Hagler, Bailly Inc. 4-28


Table 5-1
Summary of Colorado’s Oxygenated Fuels Program Costs

($ 1988)
Dollars Dollars/Gallon
Cost Category* Central Cost Upper Bound Central Upper

Estimate Estimates Estimates Estimates

MTBB

Capital Equipment $ 110,044 $1,031,546 0.0005 0.0049
MIBE Purchase 4,198,100 5,037,720 0.020 0.024
Octane Value Added -3, 358,480 73,358,480 70.016 29.016
Total MTBE Cost 949,664 2,710, 786 0.0045 0.0129
Ethanol
Cleaning Costs 1,017 29,260 0.0003 0.009
Market and Octane Costs 62,800 282,575 0.0066 0.03
Total Ethanol Costs 63,817 311,835 0.0069 0.039
Clear Gasoline 0 112,463 0 0.013
Fuel Economy Penalty Q 424,520 0 9.002
Total All Gasoline* $ 1,013,481 $3,559,604 0.0045 0.016
Cost Impacts By Location
Dollars
Area and Impact Central Case Upper Bound
Estimates Estimates
ATR AREA - Total $ $763,837 $2,615,536
- $/Gallon $0.0046 $0.0159
- $/Household $0.868 $2.97
REST OF STATE - Total $ $249,644 $943,968
- $/Gallon $0.0039 $.0148
- $/Bousehold $0.729 $2.75

* Total costs statewide. Sales volume during the two-month program: ethanol
9,419,000; MTBE 209,905,000; and Clear Gasoline 8,651,000.

ROG/Hagler, Bailiy Inc. 5-2


sour Att yeg ‘3° T8en/90a

vice

Price (cents/gallon)

Figure 4-1

Rack Gasoline and WTI Crude Oil Prices

Denver

ZO
1/86 3/86 5/86 7/86 9/86 11/86 1/87 3/87 5/87 7/87 9/87 11/87 1/88
Month/Year

o PRE + UNL ° REG A SUB x wml

Source: Rock prices from Petroscan. Crude oil west Texas intermediate prices from the Oil and
Gas Journal Energy Data Base.


City is in the rocky mountain region and is served by the same refinery (Amoco
in Casper, Wyoming) that supplies a substantial share of the Denver market via
the WYCO pipeline. All of the comparison regions have little or no current
oxygenate use. Other cities, such as Casper, Vyoming, are also connected to
the Denver market, but were not used for comparison because they differ
significantly in market supply, size and/or structure.

Bach of the cities selected for comparison satisfies many of the criteria
attributes. However, no city is exactly comparable with the Denver market.
Gasoline markets are unique, and prices can and do change independently of
other markets. Reasons for differential price changes, other than costs of
the oxygenated fuel program, include: differences in refining and distribution
costs, changes in inventories, changing price margins (profits), market
competition and supply and demand imbalances. One attribute that
distinguishes Denver from most other markets of the same size is its
limitation in responding to supply-demand imbalances. Kansas City, Salt Lake
City and Tulsa have the ability to import and export gasoline, while Denver
does not. Denver is at the end of the pipelines and only imports gasoline.

Octane numbers in Denver and the rocky mountain region are two numbers lover
for the same grades of gas than for the rest of the country. Octane numbers
in the rocky mountains are 85 for unleaded, 87 for regular and 89 for premium.
This precludes effectively comparing rack prices in Denver to those in other
cities outside of the region.

4.3.3 Back Price Changes in Comparison Cities

The reason for examining rack prices in comparison cities is to separate price
changes due to natural market forces from program related price changes.
Seasonal movements, relative city price relationships and monthly price
variations are analyzed. Identifying these relationships and changes in the
price are necessary to be able to verify estimates of program price impacts.

Over the past two years, with notable exceptions, overall rack prices in the
comparison regions have tended to move together, obviously following major

ROG/Hagler, Bailly Inc. 4-16


Figure 2-1
Map of Colorado Regulation 13 Program Area

A
N

Colorado

Air Program area within heavy box.

RCG/Hagler, Bailly Inc. 2-2