U.S. GOVERNMENT PRINTING OFFICE

72–583 DTP WASHINGTON : 2001

OZONE TRANSPORT AND REFORMULATED GASOLINE: HOW FEDERAL REGULATIONS ARE RAISING GAS PRICES

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH,

NATURAL RESOURCES, AND REGULATORY AFFAIRS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

JULY 6, 2000

Serial No. 106–230

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2250

Mail: Stop SSOP, Washington, DC 20402–0001

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

ROBERT A. BRIGGS, Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH, NATURAL RESOURCES, AND

REGULATORY AFFAIRS

DAVID M. MCINTOSH, Indiana, Chairman

PAUL RYAN, Wisconsin

BOB BARR, Georgia

LEE TERRY, Nebraska

GREG WALDEN, Oregon

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

DENNIS J. KUCINICH, Ohio

TOM LANTOS, California

PAUL E. KANJORSKI, Pennsylvania

BERNARD SANDERS, Vermont

HAROLD E. FORD, JR., Tennessee

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

MARLOW LEWIS, JR. Staff Director

JONATHAN TOLMAN, Professional Staff Member

GABRIEL NEIL RUBIN, Clerk

ELIZABETH MUNDINGER, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on July 6, 2000 ................................................................................. 1

Statement of:

Lyons, Francis X., Regional Administrator, Region V, U.S. Environmental

Protection Agency; Michael Koerber, technical director, Lake Michigan

Air Directors Consortium; Jerry Taylor, director, Natural Resource

Studies, CATO Institute; William L. McReynolds, sheriff, Racine County Sheriff’s Department; and Darwin Greenwald, gas station owner,

Mukwonago, WI ............................................................................................ 34

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

Greenwald, Darwin, gas station owner, Mukwonago, WI, prepared statement of ........................................................................................................... 77

Koerber, Michael, technical director, Lake Michigan Air Directors Consortium, prepared statement of ........................................................................ 50

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio, prepared statement of .................................................................... 26

Lyons, Francis X., Regional Administrator, Region V, U.S. Environmental

Protection Agency, prepared statement of .................................................. 39

McReynolds, William L., sheriff, Racine County Sheriff’s Department,

prepared statement of ................................................................................... 71

Ryan, Hon. Paul, a Representative in Congress from the State of Wisconsin, prepared statement of ........................................................................... 5

Taylor, Jerry, director, Natural Resource Studies, CATO Institute, prepared statement of ........................................................................................ 57

(1)

OZONE TRANSPORT AND REFORMULATED

GASOLINE: HOW FEDERAL REGULATIONS

ARE RAISING GAS PRICES

THURSDAY, JULY 6, 2000

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH,

NATURAL RESOURCES, AND REGULATORY AFFAIRS,

COMMITTEE ON GOVERNMENT REFORM,

Racine, WI.

The subcommittee met, pursuant to notice, at 8:30 a.m., in the

City Council Chambers, Racine, WI, Hon. Paul Ryan (vice-chairman of the subcommittee) presiding.

Present: Representatives Ryan and Kucinich.

Staff present: Jonathan Tolman, professional staff member; Gabriel Neil Rubin, clerk; and Elizabeth Mundinger, minority professional staff member.

Mr. RYAN. The hearing will come to order. This is a field hearing

in Racine, WI of the Subcommittee on National Economic Growth,

Natural Resources, and Regulatory Affairs. I am Paul Ryan. I represent the 1st Congressional District of Wisconsin, and I want to

thank the witnesses right now for coming up and coming out of

your way to be here. Many of you traveled long distances to make

it here today, and we are really appreciative of this.

This is Dennis Kucinich, the ranking member of the subcommittee, who came up from Cleveland, OH this morning. So Dennis, I

just want to thank you very, very much for coming up here today.

I will open with some brief opening statements and then we will

move on to the subcommittee testimony.

On the way to the hearing this morning—I live in Janesville— I drove over, and the gas prices are going down. We come over on

Highway A and ES and D and 20 and you watch the gas pumps

on the way over here, and clearly southeastern Wisconsin is seeing

some relief in gas prices. Out at the intersection of Highway 20 and

Interstate 94, it is $1.72 for regular unleaded, but $1.72 is still

pretty darn high gas prices, but that is down, however, from as

high as $2.30 for premium unleaded, $2.08 for regular unleaded

that we have experienced here in southeastern Wisconsin as little

as just 2 weeks ago.

Although we have seen these reductions in the last few days, it

has not lessened the impact that it has had on our families, on our

seniors and our businesses since the first of June.

Every day our office has been confronted by letters, e-mails,

faxes, and media reports from people who have been hurt by the

2

high gas prices. In fact, I think I got the biggest dose of it from

the 4th of July parades, where every other comment was directed

toward gas prices. When it takes about $40 or $50 to fill a gas

tank, most people are really pinched. These high gas prices have

taken a big bite out of the paychecks of working Americans and

small businesses in southeastern Wisconsin.

Economic studies of the effect of the high gas prices indicate that

without relief soon, they will create a drag on our local economy

and cause a ripple effect throughout the upper Midwest. I hope

that today’s hearing leads to a better understanding of the consequences of these exorbitant prices for consumers and what we

can do to get and keep gas prices down.

Although rising gas prices are affecting an increasing number of

communities across the country, price spikes have been plaguing

southeastern Wisconsin since mid-May. The cost of gas rose on the

average of $1.48 a gallon in early May to $1.69 a gallon by May

12, and as I mentioned, to over $2 by the middle of June.

The Environmental Protection Agency’s Reformulated Gasoline

Program is of particular concern to this area. Half of the 1st Congressional District lies within the EPA-designated ozone non-attainment zone. Reformulated gasoline is the most important issue

for people in southeastern Wisconsin at this time, from my opinion

and just from the constituent response that we have been receiving, and it has been an issue like this for a good month and a half.

Small business owners and families in southeastern Wisconsin

want to know why they pay more for gasoline than any other region in the country, and at the height of this crisis was the fact

that Wisconsin consumers were paying an average of 40 cents a

gallon more for the price of gasoline than the national average.

I, along with Congressman Jim Sensenbrenner, released a report

from the CRS—which is the non-partisan research branch of Congress—which has been widely cited throughout the last month and

a half. Nowhere in this report is collusion and price gouging listed

as an underlying cause for high prices. That indeed is the goal of

the ongoing Federal Trade Commission investigation.

But likewise, I have an internal report dated June 5, 2000 from

the Department of Energy, a document written from a policy director to Deputy Secretary Glauthier. This memorandum summarized,

as did the CRS report, that rapidly increasing gas prices in the

Milwaukee area are a supply problem—‘‘high consumer demand

with low inventories.’’

And the Department of Energy memo goes on to be more specific:

‘‘The Milwaukee and Chicago supply situation are further affected

by: (a) an RFG formulation specific to the area that is more difficult to produce; (b) higher regional demand; (c) high regional refinery utilization rates; (d) limited alternative supply sources; (e)

limited transportation links; and (f) lower gasoline inventories relative to the rest of the country.’’

So a lot of research has been done on this topic since these gas

prices have been high. There are several convergent factors that

have contributed to this problem, and that is what we are here to

investigate today.

As many news accounts for the high gas prices have pointed out,

Wisconsin and Illinois use ethanol instead of MTBE which makes

3

the phase II RFG blend relatively more expensive than the rest of

the country. It is very important to note that MTBE is no perfect

solution; MTBE causes ground water pollution had has clearly been

detrimental to the ground water systems around the country.

What seems odd to me is that given the unique regional constraints, the knowledge of short supply, and the knowledge that

RFG II will require more gas than before, the EPA still stands by

the estimates that gas prices were only to increase 5 to 8 cents per

gallon in Wisconsin. Clearly, there is an inconsistency between

what is reality and what the EPA has claimed.

Perhaps since 87 percent of the country’s RFG is blended with

MTBE instead of with ethanol, the EPA did not bother to calculate

the true cost of the impact on the Milwaukee/Chicago area, given

we have a different blend.

My second concern is that in southeastern Wisconsin that we

may be paying the price for other cities’ pollution. It is my understanding that because of regional wind patterns, much of the ozone

is blown into Wisconsin from places as far away as Texas. It seems

to me that in the case of ozone transport, Wisconsin receives a lot

more than we give.

The Lake Michigan Air Directors Consortium roughly estimates

that on bad days as much as two-thirds of the ozone in the GaryChicago-Milwaukee area may come from outside the region from

areas such as southern Illinois, Kentucky, Tennessee, and Missouri.

If one looks at the EPA’s own data on the sources of pollution,

it is clear where the vast majority of the problem is coming from.

These three charts that are over there—there are two over here to

my left and one over to the right—these charts are showing the

ozone emission patterns. These three charts show that the pollution program and the pollution picture is a very unique one.

If one looks at the EPA’s own data, you will see where the vast

majority of the problem is coming from. The majority of the pollution, as seen on these charts, is produced by counties in Chicago

and in Gary, IN. You can see Cook County and Lake County. If you

look at the orange portions of the charts in Indiana and Chicago,

those are the highest pollution emitting counties in our region.

Counties, however, such as Kenosha and Racine counties, although in a non-attainment zone, are relatively insignificant contributors to the overall pollution problem. Kenosha County, for example, produces 1/100th of the amount of pollution that Cook

County, IL does.

As part of the EPA’s Clean Air Program, when a county is designated non-attainment for ozone, the EPA requires that all gasoline sold should be reformulated gasoline. Consequently, even counties such as Kenosha and Racine, which do not appreciably contribute to the ozone problem, are required to have reformulated gas.

Wisconsin is making strides at alleviating air pollution, a goal all

of us should share. But at some point it cannot do anything more

to clean its air unless other regions clean their air first. Making

the residents of southeastern Wisconsin accountable for other people’s pollution in other regions is unreasonable. I recognize that the

physics of ozone transport is still very new and is very vaguely unVerDate 11-MAY-2000 12:10 Jun 11, 2001 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\72583.TXT HGOVREF1 PsN: HGOVREF1
4

derstood, but it is my hope that the EPA takes this into account

when tightening the regulations around Milwaukee.

The cause for high gas prices seems very up front to me: it is a

problem of supply and demand and environmental regulation. I do

not understand why the administration’s recent investigations do

not turn up these same results that their earlier investigations did,

even though these preliminary reports from the Department of Energy, from the Congressional Research Service, squarely outline

this fact. I believe we have had enough delay.

The goal of this hearing is not necessarily to point fingers at people; the goal of this hearing is to find out what kind of devastation

these high gas prices have reaped upon Wisconsin consumers and

small businesses and local municipalities, find the source of this

gas price spike, and try and come up with solutions.

It is my fear that as the gas prices inevitably go down—as they

are doing now that Saudi Arabia is producing more barrels now;

we will see gas prices going down—it is my precise fear that we

do not learn from this problem, that we simply push the issue aside

once gas prices go down. The goal of public policy, indeed, the goal

of sound science and reasonable regulation, is to make sure that we

clean up our air and we do it in the most scientifically based, most

reasonable and common sense way possible, because all of us support the goal of clean air. We simply want to make sure that it is

done fairly, that it is done scientifically, and that it is done reasonably.

So hopefully, what we can gain from this understanding is that

we learn from the mistakes that may have been made, that we will

find out from the Federal Trade Commission investigation whether

or not price gouging has occurred, and that we hopefully learn a

lesson from this so we can avoid this kind of crisis from occurring

again, because when it comes down to it, this does hurt our local

economy.

[The prepared statement of Hon. Paul Ryan follows:]

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

Mr. RYAN. With that, I would like to yield to the ranking Democrat on the committee, Mr. Kucinich from Ohio.

Mr. KUCINICH. Thank you very much, Congressman Ryan. It is

a pleasure to be in your district and work with you on this matter

of great concern to the people in Wisconsin and also the people of

the Cleveland area I represent.

Coming in here today, I noticed that the prices at the Speedway

on Ohio and Washington Avenues were $1.65.9 for regular, $1.75.9,

and then $1.85.9. When I left Cleveland today, they were $1.56.9,

$1.58.9 and $1.68.9. So in some cases, there is a 9 to 17 cents difference between Cleveland and Wisconsin, and I can understand

why you are concerned.

I also understand the frustration and the concern many of the

citizens who are here today and people are feeling about this high

price of gasoline. The effect of high gas prices ripples through the

economy affecting consumers and commuters. And this area of the

country has seen some of the worst price hikes anywhere in the

Nation. That is one of the reasons why, when Mr. Ryan asked if

I would come here, of course I wanted to be here. I wanted to hear

from witnesses but also share with you some of the information

that we gathered.

Unfortunately, there are no easy reasons as to why the price of

gasoline—especially clean-burning fuel, otherwise known as reformulated gasoline—is so high. A few weeks ago, the price of—we

will call it RFG—in the Chicago-Milwaukee area was about 50

cents higher than the price of conventional gasoline. Therefore,

many believe that the culprit in the price rise was RFG. Mr. Chairman, you have joined the Governor and others in asking a Federal

court to review the Clean Air Act rules covering RFG in southeastern Wisconsin.

It has become increasingly apparent to me that we may want to,

while we are looking at this, look elsewhere for some of the problems with the high prices. Thirty percent of the Nation’s gasoline

consumption is clean-burning RFG. And outside of Chicago and

Milwaukee, the average price of reformulated gasoline is 2 cents

lower than conventional gasoline. Thus, the reformulated gasoline

requirements, in and of themselves, are not necessarily a major

contributing factor.

Since June 15, when the Department of Energy and the EPA

asked the Federal Trade Commission to investigate possible price

fixing, the wholesale price of RFG has dropped by over 38 cents per

gallon in Chicago and Milwaukee. So I think there is a sense in

which the pressure that Mr. Ryan, myself, Mr. LaTourette, and

others in the Congress have started to put on the oil companies

has, in fact, caused the prices to start to come back down.

The Oil Price Information System reported that the wholesale

price differential between RFG and conventional gasoline in nearby

cities has dropped to less than 1 cent a gallon in Chicago and 8

cents a gallon in Milwaukee. In other words, the price differential

at the pump is consistent with the EPA’s estimate that it would

cost 4 to 8 cents more to produce ethanol-based RFG. Thus, the

RFG requirements, as applied to this region, do not appear to be

the culprit.

23

So the question remains why was the price for RFG in this region 50 cents higher than the price for conventional gasoline?

I mean, people in the Cleveland area—as you talked about during the 4th of July—I was doing all these parades and people are

coming up to me shouting from the crowd: What about the gasoline

prices? And they know that there is something going on here and

this RFG just doesn’t explain the whole thing.

I think we should look closely—and Congress obviously is looking

closely—at the allegations of price fixing and price gouging by companies that profited from the price increase. Last month, Public

Citizen released figures on the first quarter profits that showed

major oil companies had profit increases as much as 473 percent

over 1999 figures, and stock prices for the largest oil companies

since the beginning of the year have risen 14 percent since January

2000, and interestingly, the price for RFG dropped precipitously

since the Federal Trade Commission announced on June 15 that it

would be investigating the industry’s pricing practices.

Also of interest is the fact that while refiners were increasing

their profit margins in the United States, they were falling in Europe. Non-U.S. refining and marketing profits were down by 57

percent in the first quarter of the year, but U.S. refining and marketing profits were up 68 percent in the same period.

Now, you take Exxon Mobil for example: its U.S. earnings on refining and marketing skyrocketed by 194 percent in the first quarter of 2000 as compared to the first quarter of 1999. But it was not

selling more gasoline, it was selling 6 percent less gasoline by volume. Meanwhile, its non-U.S. earnings fell by 61 percent while its

sales volume fell by 16 percent. I am interested in why there is

pressure on a refiner’s profits in Europe while the United States

refiners are having a profit bonanza. I look forward to the FTC’s

preliminary report on the issue which is due out in a few weeks.

Now, Mr. Chairman, a lot of the statement that I have relates

to concerns that I have expressed about how the oil companies

have manipulated this condition where the consumer demand is

the highest in the summer and they waited for the demand to be

at its peak and just socked it to the consumers, and then they turn

around and blame RFG. I have a lot of discussion about that; I am

not going to take the time to go through it, but I would ask for it

to be included in the record.

Mr. RYAN. Without objection.

Mr. KUCINICH. And also, in response to this concern, a number

of Members of Congress—myself included—have in the wings a bill

which is going to go after what we believe are windfall profits of

the oil companies, because we have to protect the consumers. I

know that is why you are here, and I applaud you for that, Mr.

Ryan, and that is why I came here to work with you, and we have

to make sure that the oil companies are not ripping off our constituents. I mean, I think that is what is going on, and while I am

going to be interested in hearing from the witnesses about their

concerns about RFG, there is one final point I want to make.

There are health concerns which arose when the EPA announced

that they wanted to have reformulated gasoline. You know, I come

from Cleveland, which has a number of days where they are not

in attainment, and it is an industrial area which has suffered

24

greatly from air pollution. We are proud of our industries but we

are not proud of our air pollution. And we have had serious health

problems in Ohio as a result of ozone and pollution in particular.

As a matter of fact, if you look at the U.S. maps of epidemiological studies of increases in respiratory problems, you will see the

Cleveland area is one of the highest places in the country right

now. So you know, ozone is an invisible toxic gas and is a prime

ingredient in smog. And the American Lung Association explains

that

At levels routinely encountered in most American cities, ozone burns through cell

walls in lungs and airways. Tissues redden and swell. Cellular fluid seeps into the

lungs, and over time their elasticity drops, susceptibility to bacterial infection increases, scars and lesions form in the airways. Breathing is rapid and painful. As

ozone levels rise, hospital admissions and emergency department visits do the same.

Children at summer camp lose the ability to breathe normally as ozone levels rise—

even when the air is clean by reference to a Federal standard—and these losses continue for up to a week.

That is from the Lung Association.

Now, the people of Wisconsin, according to information that my

staff came forward with, have paid a real health care cost for ozone

pollution. In October 1999, a report prepared by ABT Associates for

Clear the Air: the National Campaign Against Dirty Power estimated that in the 6-month period between April and October 1997,

Wisconsin residents experienced 150,000 ozone-related asthma attacks, 4,200 ozone-related visits to the emergency room, 1,400

ozone-related respiratory hospital admissions.

The same study estimated that in Racine County, alone, there

were 45 respiratory admissions, 135 visits to the emergency room,

5,319 asthma attacks, and 6,900 other symptoms attributable to

ozone during the 6-month period.

Residents are paying 8 cents a gallon at the pump to purchase

cleaner-burning fuel, that is true. But we also have to be aware

that the reason for this is to make sure that residents avoid expensive hospital visits and to improve the quality of life by reducing

the number of asthma attacks and other ozone-related symptoms.

I do not think the people of Wisconsin or Ohio, or anywhere in this

country, should have to choose between clean air and affordable,

reasonably priced gasoline.

Unrestrained, the oil industry would be happy to sell us polluting

gasoline at extremely high prices—I mean, that is what they would

love to do so they could go along and attack RFG and turn around

and when it comes to profits say, Oh, I don’t know anything about

it. Well, we understand. You know, driving over here with the deputy, he said, what do these oil companies think we are, stupid? We

know what is going on. Deputy Ericson, I appreciate that, because

that is what I am hearing in my district, too.

So I am pleased to know the FTC is going to be checking out the

oil industry’s pricing practices. Government can make sure that

consumers are getting clean-burning fuel at a reasonable price.

Otherwise, consumers may be forced to buy conventional gasoline

but be paying twice: at the pump and at the hospital.

25

I want to thank Congressman Ryan, again, for holding this hearing. I applaud your dedication to the people of your district and I

look forward to the testimony today, and again, it is an honor to

work with you, Chairman Ryan.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

26

27

28

29

30

31

32

33

34

Mr. RYAN. Thank you. And I would like to submit to my friend

and colleague from Ohio that I think these ozone health problems

are even more of a reason for Gary and Chicago to clean up their

emissions as well.

Mr. KUCINICH. I am with you.

Mr. RYAN. I would like to introduce our witnesses now, and then

we will swear them in and start testimony.

First we have Francis Lyons, who is the regional administrator

from Region V—which is this region—from the U.S. Environmental

Protection Agency. Then we will hear from Michael Koerber, the

technical director from the Lake Michigan Air Directors Consortium; Jerry Taylor, the director of Natural Resources at the Cato

Institute; and Sheriff William McReynolds, who is the sheriff here

in Racine County; and Darwin Greenwald, who is the owner of

North Star Shell in Mukwonago. Thank you, all you gentlemen, for

coming.

Would you please stand and take the oath?

[Witnesses sworn.]

Mr. RYAN. We will try and conform with the 5-minute rule, and

I understand that everybody brought written testimony. Without

objection, we will have all the written testimony from each of the

witnesses included in the record. Please feel free to stray from your

written testimony in providing your oral testimony, and we will

have this light here which will show you the 5-minute rule. And

we will start with you, Mr. Lyons.

STATEMENTS OF FRANCIS X. LYONS, REGIONAL ADMINISTRATOR, REGION V, U.S. ENVIRONMENTAL PROTECTION

AGENCY; MICHAEL KOERBER, TECHNICAL DIRECTOR, LAKE

MICHIGAN AIR DIRECTORS CONSORTIUM; JERRY TAYLOR,

DIRECTOR, NATURAL RESOURCE STUDIES, CATO INSTITUTE; WILLIAM L. McREYNOLDS, SHERIFF, RACINE COUNTY

SHERIFF’S DEPARTMENT; AND DARWIN GREENWALD, GAS

STATION OWNER, MUKWONAGO, WI

Mr. LYONS. Thank you very much, Mr. Chairman, Congressman

Kucinich, and members of the subcommittee for this invitation to

appear here today. I appreciate having the opportunity to share

what we know about the recent sharp increases in gasoline prices,

particularly in the Midwestern part of the country. I will also explain the Environmental Protection Agency’s efforts, in coordination with the Department of Energy and the Federal Trade Commission, to address this situation.

Mr. Chairman, first and foremost, we are very concerned that

consumers receive the air quality benefits of the clean-burning gasoline, also known as reformulated gasoline, or RFG. They should

receive these benefits of this program at a fair and reasonable

price. In the following testimony, I will show that the cost of producing RFG does not account for the extremely high-priced differentials we have seen in the Chicago and Milwaukee areas.

As EPA reviewed the various requests for waivers from the RFG

program, factors such as the pipeline, tank turnover, and patents

were examined. We do not believe that these factors adequately explain the price differentials that we have seen in the Chicago and

Milwaukee areas.

35

Let me begin briefly with a history of the RFG program. When

Congress passed the Clean Air Act Amendments of 1990, it put

into place a number of programs to achieve cleaner motor vehicles

and cleaner fuels. These programs have been highly successful in

protecting public health by reducing harmful exhaust from the tail

pipes of motor vehicles.

In the 1990 amendments, Congress struck a balance between vehicle and fuel emission control programs after extensive deliberation. The RFG program was designed to serve multiple national

goals, including air quality improvement, enhanced energy security

by extending the gasoline supply through the use of oxygenates,

and encouraging the use of domestically produced renewable energy sources.

Congress established the overall requirements of the RFG program by identifying the specific cities in which the fuel would be

required, specific performance standards, and an oxygenate requirement. The oil industry, States, oxygenate producers, and other

stakeholders were involved in the development of the RFG regulations in 1991 through a successful regulatory negotiation.

EPA published the final regulations establishing the detailed requirements of the two-phase program in early 1994. Thus, the oil

companies and other fuel providers have had 6 years to prepare for

the second phase of the program that began this year. In addition,

the oil industry has been involved in an EPA RFG implementation

advisory work group since 1997 and at no time during those discussions did the companies raise concerns about production, supply, or

distribution problems that might occur.

The first phase of the Federal reformulated gas program introduced cleaner gasoline in January 1995, primarily to help reduce

vehicle emissions that cause ozone and toxic pollution in our cities.

Unhealthy smog levels are a significant concern in this country

with over 100 million people living in 36 areas currently violating

the 1-hour ozone standard.

The Federal RFG program is required by Congress in 10 metropolitan areas which have the most serious air pollution levels. Although not required to participate, some areas in the northeast, in

Kentucky, Texas, and Missouri have elected to join in or opt into

the RFG program as a cost-effective measure to help combat air

pollution in their States. At this time approximately 30 percent of

the country’s gasoline consumption is cleaner-burning RFG.

The Clean Air Act Amendments of 1990 also required that RFG

contain 2 percent minimum oxygen content by weight. Neither the

Clean Air Act nor EPA requires the use of any specific oxygenate.

Both ethanol and MTBE are used in the current RFG program,

with fuel providers choosing to use either. Ethanol, however, is

used exclusively in RFG in the upper Midwest, such as the Chicago

and Milwaukee area.

Ambient monitoring data from the first year of the RFG program

in 1995 confirm that RFG is working. RFG areas showed significant decreases in vehicle-related tail pipe emissions. One of the air

toxics controlled by RFG is benzene, a known human carcinogen.

The benzene level at air monitors in 1995 in RFG areas showed the

most dramatic declines, with a median reduction of 38 percent from

the previous year.

36

The emission reductions which can be attributed to the RFG program are the equivalent of taking 16 million cars off of the road.

About 75 million people are breathing cleaner air because of the

RFG program. Since this program began 5 years ago, it has resulted in annual reductions of smog-forming pollutants of at least

105,000 tons and toxic air pollutants by at least 24,000 tons.

As required by the Clean Air Act, the first phase of RFG program

began in 1995 and the second phase in January of this year. As an

example of the benefits, in Chicago, EPA estimates that the RFG

phase II program will result in annual reductions of 8,000 tons of

smog-forming pollutants and 2,000 tons of toxic vehicle emissions,

benefiting almost 8 million citizens in the Chicago area facing some

of the worst smog pollution in the Nation. This is the equivalent

of eliminating emissions from 1.2 million cars in the State of Illinois.

In early June, as gas prices rose, particularly in the Midwest,

EPA and the Department of Energy invited the Midwest Oil Refiners to a meeting in Washington, DC. Simultaneously, EPA, the Department of Energy, and the Energy Information Agency sent two

teams of technical experts to the Midwest to investigate the situation and talk to the refiners, distributors, pipeliners, jobbers, terminal operators, and retail outlets.

Following those meetings—which occurred on June 12 and June

13—EPA Administrator Browner and Department of Energy Secretary Richardson sent a joint letter on June 15 to Chairman

Pitofsky requesting that the Federal Trade Commission conduct a

full and expedited formal investigation into the pricing of RFG in

Chicago and Milwaukee.

Since June 15, the wholesale price of reformulated gas has

dropped by over 38 cents per gallon in Chicago and Milwaukee.

The Oil Price Information Systems has reported that the wholesale

price differential between RFG and conventional gasoline in nearby

cities has dropped to less than 1 cent a gallon in Chicago and 8

cents a gallon in Milwaukee.

In our discussions, representatives of oil companies listed a number of factors which they believed contributed to the price differential between RFG and conventional gasoline in the Midwest. These

included: the additional cost of producing RFG phase II; temporary

shutdown of the Explorer Pipeline; the difficulty with replacing

winter gas with summer blends; and the Unocal patents. I would

like to now just discuss briefly each of these factors and show why

EPA believes that even taken together, they do not account for the

high gasoline prices.

Mr. RYAN. Mr. Lyons, if I could, in the interest of letting the

other witnesses testify, if you could just briefly summarize those

other five factors.

Mr. LYONS. Yes, I will, Mr. Chairman.

On June 26—this relates to the production costs—on June 26 the

average retail price of conventional gasoline across the country was

$1.64 per gallon. EPA has calculated that based on the Energy Information Agency and OPIS surveys, that the average retail price

of RFG II everywhere, except in Chicago and Milwaukee, was $1.65

a gallon, while the average retail price in Chicago and Milwaukee

was $2.08 per gallon.

37

EPA strongly disagrees, Mr. Chairman, that RFG is responsible

for increases in the gasoline prices in the Midwest. We have consistently said that the RFG program would account for perhaps 4

to 8 cents per gallon in the increased prices, but it is important to

bear in mind, Mr. Chairman, that is based on the entire RFG program, phase I and phase II included. Phase II, which began at the

retail outlets on June 1, 2000, we estimate that is only a couple of

pennies a gallon due to the phase II.

An analysis by Bonner and Moore Management Science, a nationally recognized firm that specializes in refinery cost analysis,

estimated that RFG I would add 3 to 5 cents more per gallon to

the average cost, compared to conventional gasoline, and subsequent studies estimate that RFG II would add 1 to 2 cents to the

average cost of RFG I, or 4 to 7 cents to the average cost of conventional gasoline.

Let me just briefly, Mr. Chairman, address the temporary shutdown of the Explorer Pipeline. EPA investigated the situation with

the Explorer Pipeline to respond to the waiver request we had received and we would like to share our findings.

The Explorer Pipeline has historically provided 10 to 15 percent

of the RFG supply for the Chicago-Milwaukee area. The outage of

the pipeline in mid-March meant a loss of 108,000 barrels of RFG

destined for the Chicago area. Chicago consumes about 200,000

barrels of gasoline a day; thus, the RFG loss due to the Explorer

Pipeline outage was less than 1 day’s RFG needs for the Chicago

area.

So again, Mr. Chairman, we do not attribute the temporary shutdown of the Explorer Pipeline to account for the wholesale price increases as well.

I am trying to summarize my testimony as much as possible, Mr.

Chairman.

If I could briefly address tank turnover. Tank turnover is referred to the need to replace winter gasoline in terminal storage

with summer blends. Fuel providers have been doing this for over

10 years to comply with summertime gasoline volatility requirements. This normally begins in April and, as required by regulation, the tanks at the terminals must meet all summertime RFG

requirements as of May 1. Nothing changed this year from any

other year, so we would not attribute that to account for the spike

in gasoline prices.

And finally, the Unocal patent. EPA has heard comments that

the impact of the Unocal patent might bear some responsibility.

While we understand that this matter may be in litigation, refiners

have told us in meetings with them that they are able to produce

RFG that is not subject to the patents. In our discussions with refiners and with Unocal, no one has identified any cost or supply

issues related to the patent that could in any way explain the price

increases for RFG that we have seen.

And finally, if I could briefly address the waiver issues. In recent

weeks, there have been many calls for EPA to waive the RFG

phase II requirements in Milwaukee and Chicago. The RFG regulations provide for an administrative waiver under very limited circumstances, extreme and unusual circumstances, such as acts of

God or natural disasters, where the refiner or importer is unable

38

to comply with the RFG requirements, despite their exercise of due

diligence and appropriate planning.

Various criteria for an administrative waiver under the regulations have not been met in the Milwaukee or Chicago area, so EPA

has treated all of the requests for waivers as requests for enforcement discretion. Enforcement discretion is normally used in situations such as occurred recently in St. Louis earlier this spring

when a short-term shutdown of the Explorer Pipeline led to actual

and acute shortages in the St. Louis area where the pipeline supplies 70 percent of the fuel delivered to the St. Louis region.

For Chicago and Milwaukee, the supply of RFG continues to be

adequate and prices are going down. Our refiners have strongly

recommended that EPA not grant the RFG waivers. It is highly uncertain what effect a waiver would have on supply and prices, and

refiners would need to make adjustments and switch gears, imposing short-term costs and the possibility of additional supply problems.

No RFG phase I currently exists right now and supplies of conventional gasoline are tight as well. So waiving the RFG phase II

requirements, under these kinds of circumstances, could exacerbate

the supply and price situation in the Midwest for both RFG and

conventional.

In closing, Mr. Chairman, I would like to reiterate the following

points.

Clean-burning RFG is providing public health benefits to almost

75 million citizens nationally and nearly 8 million in the Chicago

area alone.

EPA believes that the cost of producing RFG II does not account

for the extreme prices being paid in the Midwest. The pipeline disruption, the tankage issue, the Unocal patents and its implications,

as well as ethanol use, have all been analyzed. EPA does not believe that these factors adequately explain the price increases we

have seen in recent weeks.

We are concerned that consumers are paying these high prices

for RFG.

This concludes my prepared statement, Mr. Chairman.

[The prepared statement of Mr. Lyons follows:]

39

40

41

42

43

44

45

46

47

48

Mr. RYAN. Thank you, Mr. Lyons.

Mr. Koerber.

Mr. KOERBER. Thank you, Mr. Chairman, Congressman

Kucinich. My name is Michael Koerber. I am the technical director

for the Lake Michigan Air Directors Consortium.

The consortium is a non-profit organization formed by the States

of Illinois, Indiana, Wisconsin, and Michigan in 1989. The main

purpose of the consortium is to provide technical assessments for

and assistance to its member States on air quality issues and to

provide a forum for its member States to discuss air quality issues.

The consortium’s major pollutants of concern are ozone and its precursors, and the primary geographic focus is the area encompassed

by its member States, in particular the Lake Michigan region.

Since 1989 the consortium has supported the collection of air

quality and meteorological measurements in the Lake Michigan region, the development of a regional inventory of ozone precursor

emissions, and the application of mathematical computer models.

Our study of ozone in the Lake Michigan region led to three major

findings.

No. 1, ozone transport is a major problem in the eastern half of

the United States and in the Lake Michigan region. On many hot

summer days, southerly and southwesterly winds bring not only

heat and humidity into the Lake Michigan region, but also polluted

air. The air entering the Lake Michigan region on these days can

be as much as 0.08 to 0.10 parts per million which is about threequarters of the current Federal 1-hour air quality standard for

ozone of 0.12 parts per million.

The figure in my testimony shows the ozone concentrations entering the Lake Michigan region on a hot summer day. As can be

seen by the color scale, these ozone concentrations coming in from

the west and the south are on the order of 80 to 100 parts per billion, or 0.08 to 0.10 parts per million.

Transport within the Lake Michigan region also determines

which areas locally receive the highest ozone levels. On days with

southerly winds, the highest ozone occurs in eastern Wisconsin, as

is seen in the figure in the lower left-hand corner. On days with

southwesterly winds, the highest ozone occurs in western Michigan, as seen in the figure in the middle. On days with light winds,

the highest ozone occurs close to the major urban areas of Chicago

and Milwaukee, as seen in the figure in the lower right-hand corner.

Our second major finding is that 1-hour ozone air quality levels

in the Lake Michigan region have improved in the past 10 years.

The number of monitoring stations recording a violation of the 1-

hour standard has decreased from 25 to 6 over the last 10 years.

The magnitude of the peak 1-hour violation has decreased from

about 0.19 parts per million to 0.13 parts per million.

The figure on the left shows the monitoring stations which currently violate the 1-hour ozone air quality standard, and the figure

on the right shows the monitoring stations which violated the 1-

hour standard 10 years ago. As you can see, there has been a dramatic decrease in both the number as well as the magnitude of 1-

hour violations in the Lake Michigan region.

49

Our third major finding is that additional efforts are needed to

provide for attainment of the 1-hour and 8-hour ozone standards.

Despite the improvement in 1-hour ozone air quality levels, several

sites in eastern Wisconsin remain above the 1-hour standard. The

figure on the left, again, shows the monitoring stations in the Lake

Michigan region which currently violate the 1-hour standard.

Furthermore, current 8-hour ozone levels are above EPA’s new 8-

hour ozone standard at many sites throughout the Lake Michigan

region, and this is shown in the figure on the right-hand side.

In conclusion, ozone is a public health issue in the Lake Michigan region, and the Lake Michigan States are committed to working together to achieve clean air. Thank you.

[The prepared statement of Mr. Koerber follows:]

50

51

52

53

Mr. RYAN. I think those are fascinating maps. I would like to add

that you asked that these maps also be included in the record separately.

Dr. Taylor.

Mr. TAYLOR. Good morning. I would like to thank Congressman

Kucinich and Congressman Ryan for the opportunity to testify

today on the effect that Federal regulations have had on gasoline

prices in the Milwaukee-Chicago area.

My testimony argues that there is absolutely, positively, without

a doubt, not one bit of mystery about why gasoline prices have

gone up about $1 a gallon over the past year in this area. The Milwaukee-Chicago market is suffering from a shortage of gasoline,

and this shortage is entirely responsible for the surge in prices, and

a little bit of economics 101 could explain exactly this matter.

As the EPA and the Department of Energy are fond of pointing

out, supplies of gasoline as of early June in this area were about

what they were in 1998, and that is absolutely correct, but that is

only part of the story. Demand for gasoline in the Milwaukee-Chicago area has grown by about 4 percent over the past year.

Now, this might seem minor and inconsequential to anyone who

does not understand the economics of this industry, but it is actually quite important, because demand for gasoline is inelastic in

the short run. That is, it takes a large increase in the price of gasoline to reduce consumer demand even a little bit. People do not

drive less because the price of gasoline per gallon goes up a nickel,

a dime, or a quarter; it has to go up a lot just to get us to drive

a little less.

Economists, for instance, calculate that if prices go up by about

1 percent, consumer demand will decrease in the short run by only

about 1/20th of 1 percent. Thus, if local gasoline supplies are 4 percent below where they need to be to meet unmoderated consumer

demand—the figure most market analysts believe to be correct for

the Milwaukee-Chicago area—prices would have to jump by about

100 percent in order to prevent 1970’s-style gas lines and spot

shortages.

Now, there is absolutely no dispute about these two facts: one,

that supplies are no higher than they were last year, and two, that

demand has increased. And the 4 percent demand figure comes

from AAA. That should pretty much set to rest the question of

whether economics can explain this, but there are other mysteries.

What is responsible for the shortfall in supply? Three things:

OPEC, pipeline breakdowns, and environmental mandates. First,

because of OPEC production decisions, the cost that refiners are

paying for crude oil has risen by about 48 cents per gallon of gasoline over the past year and a half, so that neatly explains about

half of the price increase.

Second, two of the main gasoline pipelines serving the area have

broken down, as has already been pointed out. The alternative

ways of getting gasoline into the region, trucks and barges, are

very costly and insufficient to fully make up for the shortfall. Accordingly, economists at the Congressional Research Service calculate that the pipeline problems are responsible for about 25 cents

of the dollar’s worth of price increase.

54

Third, the Milwaukee-Chicago area, beginning June 1—as has

been discussed—was forced to sell nothing but ethanol blended reformulated gasoline, a fuel sold nowhere else in the Nation. This

has spawned several problems.

Problem one, whenever new gasoline mandates are imposed on

a market, an adjustment period almost always takes place. Refiners and merchant facilities need time to figure out their place in

the marketplace, their role in it, profit opportunities, and to learn

the most efficient ways to deliver the new products to consumers.

This shakeout almost always results in initial price shocks, as it

did in California in 1996.

To argue that the industry has had 6 years of warning and

should have operated perfectly at the whim of Congress is silly.

Whenever new mandates, especially as breathtaking as these have

been, are imposed on an area, there will be an initial shakeout. It

will be temporary, but it will have price implications and it always

has in the past.

Problem two, thanks to pressure from the farm lobby, the reformulated gasoline sold in this area is blended with ethanol rather

than MTBE. Because ethanol evaporates easily, unburned evaporated fuel is a major contributor to smog. The gasoline intended for

blending must be specially prepared so as to minimize ethanol

evaporation rates.

This has sparked a host of complications. Because of its unique

characteristics, this fuel must be segregated from other gasoline all

the way up the transportation system, which drives up costs and

restricts the ability of refiners to deliver it to market. And because

manufacturing gasoline for ethanol blending is so different from

manufacturing conventional gasoline, refiners find it costly and

time-consuming to switch from producing one type of fuel or another. Thus, the industry cannot quickly move to address spot

shortages due to a shortage of ethanol-blended reformulated gasoline.

Now, I take a moment here to note that this has nothing to do

with the cost of production. To dwell excessively about how much

it costs, a few cents more, to produce ethanol, as if that alone

should dictate what ethanol-blended gasoline prices should be, is

economic silliness. There are a lot more things that go into the cost

of gasoline at the pump than the cost of production.

Economists at the Congressional Research Service, like economists everywhere who have spent any time looking at this market,

understand this and calculate that the problems of ethanol-blended

reformulated gasoline are responsible for about 25 cents out of that

dollar price increase. Thus, we can explain everything here of the

dollar price hike per gallon of gasoline in mid-June: 50 cents is due

to OPEC, 25 cents due to pipeline ruptures, and 25 cents due to

environmental mandates.

That prices began dropping at June 15 is no mystery, either.

While we could argue that an investigation was launched at that

time and that obviously explains it, I could also argue that the Baltimore Orioles began losing on June 15 and attribute that to the

reason why gasoline prices went down.

The main reason prices go down is when prices for something go

up as much as they have for this gasoline in this market, profit opVerDate 11-MAY-2000 12:10 Jun 11, 2001 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 C:\DOCS\72583.TXT HGOVREF1 PsN: HGOVREF1
55

portunities are available to anybody who can get this blended gasoline in here. Every barge and truck that was not busy was corralled into bringing gasoline to market. Every refiner that can

switch production, switched from conventional gasoline to this ethanol-blended reformulated gasoline. That is what high prices do in

an economy: it signals the producers that profit opportunities can

be made by meeting demand that is being unmet.

So it is the natural course of economics, of supply and demand,

that explains why prices began to go down after they peaked at

about $2.30 a gallon. It would have been shocking had they not

gone down, because it would have meant that there was absolutely

no opportunity in the refinery business to shift production. There

was, and it is costly and it took time, but it has occurred.

So while government cannot take the blame for or do much about

three-quarters of the price spike, it can take steps to address the

25 cent price increase that has occurred temporarily due to these

environmental mandates. First, Congress should repeal the reformulated gasoline mandate in its entirety. It accomplishes absolutely nothing in the way of air quality.

The fuel injection systems that replaced conventional carburetors

in cars built since 1983 included computerized oxygen sensors to

determine when the fuel-air mix is optimized from an emissions

perspective. This is all by way of saying that by automatically mixing gasoline in such a way as to minimize carbon monoxide emissions, fuel injectors accomplish through technology what the mandated reformulated gasoline attempts to accomplish via fuel design.

They are redundant approaches.

Eric Stork, the head of EPA’s Mobile Source Air Pollution Control Program from 1970 to 1978, told the New York Times recently

that reformulated gasoline was a good idea 30 years ago but in cars

built since 1983, the fuel is ‘‘obsolete and pointless.’’ Second, refinery margins are tight because refining capacity continues to shrink. Because of onerous environmental regulatory burdens, the refining business is simply not profitable. No new refineries have been built in 30 years and plants continue to shut down

even while demand increases.

Congress should relieve the regulatory burdens facing the refining industry in two ways: First, it should heed the advice of the

National Petroleum Council, an official advisory body to the Secretary of Energy, and shelve the new fuel mandates in the works

that could cause a national repeat of the Milwaukee-Chicago experience.

Second, Congress should direct EPA to cease and desist from

spelling out in painful bureaucratic detail exactly how companies

go about meeting environmental standards. Instead it should just

simply set standards and allow companies to meet them in any

manner it chooses. Economists believe that this simple change

could reduce regulatory costs on refiners by about 80 percent. This

would go a long way toward attracting important needed investments in this industry, investments that are crucial to the supply

of plentiful, affordable gasoline.

On a final note, the idea that the price fixing or price gouging

charge has residence because oil profits have gone up recently is

another example, I think, of not understanding markets. Prices are

56

means by which we allocate scarce goods. If you are an infra-marginal supplier of gasoline in the Milwaukee-Chicago area, you certainly made a lot of money. You lost about that much money in

1998 when prices collapsed through the floor, and nobody held

press conferences about that.

This is an industry that has historically been less profitable than

the average industrial sector in the United States over the past 20

years, but the high prices were absolutely necessary to allocate a

scarce good. Even if gasoline is only a few percent below where it

needs to be to meet unmoderated consumer demand is enough,

given the inelasticities of demand, to cause shortages if prices do

not go up.

There are only two ways of allocating scarce goods: we can let

prices do it, or we can let politicians do it. If we let politicians do

it by controlling prices and allocating and rationing the stuff, we

get price lines and we get pumps that run dry. I believe despite the

dislocations that occurred here were painful to everybody, that they

were preferable to those that occurred in the 1970’s which would

be the national course of results if we impose windfall profits taxes

or try to second guess market prices.

Thank you for the opportunity to testify, and I will certainly look

forward to answering any questions you have.

[The prepared statement of Mr. Taylor follows:]

57

58

59

60

61

62

63

64

65

66

67

68

69

Mr. RYAN. Thank you, Mr. Taylor. I appreciate it.

[Applause.]

Mr. RYAN. I see some agree with you. For the audience, we try

to get all sides of the view here in our hearings, and I think it is

very important to hear from each side. Clearly, there is disagreement as to the source of the price, and as to the science of the regulation. That is the purpose of having a hearing, to hear from all

sides involved to try and get to the heart of the matter, and I think

it is very good that we have such a rich composition of different

viewpoints here on the panel.

Now I would like to turn to you, Sheriff McReynolds. I know you

guys are all sharing one microphone there; if you could just bring

that in front of you, please indulge us, Sheriff McReynolds.

Sheriff MCREYNOLDS. Good morning, members of the subcommittee. Thank you for inviting me here today and giving me the opportunity to explain how high gas prices affect our community here in

Racine County.

The Racine County Sheriff’s Department has been serving the

county since 1836. Perhaps 164 years ago, Congress convened field

hearings like this one when the price of steel to make horseshoes

went up, but times have changed dramatically from the days of

horses and buggies. Today the sheriff’s department has a sophisticated fleet of motor vehicles, several patrol boats, and even snowmobiles which, when in season, run consistently 7 days a week,

some 24 hours, and rely on gasoline to keep moving.

As the modes of transportation that the sheriff’s department uses

have changed in the past century, so has the nature of crime here

in Racine County. Today Racine County, like many other counties

in the United States, faces the threats of gang violence and the

crimes related to drug abuse and drug usage, for example. The department has initiated a successful and broad range of programs,

not only to fight crime but to prevent it as well. These include the

Metro Drug Enforcement programs, a Gang Awareness program,

the community oriented policing services, Deputy Friendly, and

DARE, among other types of programs to address this need.

Funding is critical to assure that the department can successfully

run these programs, investigate crimes, enforce traffic laws, operate the county jail, and to maintain a law enforcement presence

and availability throughout Racine County on a 24-hour basis. This

is my first priority.

Funding for the sheriff’s department comes from local residents’

tax revenue. The recent high gas prices are straining and do have

an effect on the Racine County Sheriff’s Department budget. We

have calculated that the increase in fuel prices for the department’s

motor vehicles will cost somewhere over $25,000 in excess of budgeted amounts for 2000. And if I may add that if the price holds at

what it is today for what we pay, this budgeted amount will be

overrun by over $46,000. In the $25,000 estimate we did try to conclude that maybe prices will continue to go down. This is money

that should be spent on policing and preventing criminal acts.

Fire departments, city police departments, public works departments all depend on cars and trucks and gasoline to get their jobs

done. For both the quality of life and the safety of Racine County,

I hope that none of these services is forced to cut back because of

70

the impact high gas prices have on their budgets. The extra money

needed for gas this year has to come from somewhere. One way to

make up for the increase is to cut back on vital programs or to direct our patrol cars to drive less; the other way, naturally, is raise

taxes. Neither of these are good options.

Businesses pass cost increase to consumers. My business, the

consumers are the residents of Racine County, and increased costs

are passed down through tax increases.

From a personal perspective, I think it is unfair that local taxes

should have to increase to pay for more expensive gas because of

new Federal regulations, such as the EPA’s reformulated gas mandate. In my view, it is double taxation. As an individual, I not only

am paying more for gas because of EPA regulations, but I am paying more in local taxes to support these essential community services that must also pay higher gas prices.

On a separate note, I think it is important to note that the State

of Wisconsin excise tax on motor vehicle fuel is 26.4 cents per gallon; the Federal Government tax on motor vehicle fuel is 18.4 cents

per gallon. For Wisconsin residents, that is an extra 44.8 cents per

gallon. If the average retail price per gallon of gas is now around

$1.70 in our area, over one-quarter of that price is tax. If I am paying more at the pump because of fuel excise taxes and for new

clean air regulations, I also have to pay more in income and property taxes to pay for the higher costs of services due to higher gas

prices. Does that mean I am getting taxed three times now?

I am willing to pay for a clean environment, but the EPA must

understand that its actions in Washington, DC, have ramifications

throughout the local communities. There must be ways to help

these agencies with responsibilities to the public, such as mine, to

mitigate these costs or give us relief from the reformulated gas

mandate.

I am seeing the regulation burden firsthand as a result of increasing fuel costs for the Racine Sheriff’s Department. I think the

public needs to be aware of all the unintended consequences associated with each new formula of gasoline called for by the EPA. As

I see it, their safety depends on it.

Mr. Chairman, thank you again for this opportunity to present

my views before this distinguished committee.

[The prepared statement of Sheriff McReynolds follows:]

71

72

73

Mr. RYAN. Thank you, Sheriff.

Now we will go to Mr. Greenwald. Your station is in Mukwonago.

Correct?

Mr. Greenwald. Correct.

Mr. RYAN. Mr. Greenwald, please.

Mr. GREENWALD. I would like to thank you, Congressmen Ryan

and Kucinich for the opportunity to express to you the various factors that I am aware of that have caused increases in gasoline

prices at my gas stations and its effect on my business. I feel I am

here to put a human face to the policies that are made by the EPA

in Washington, DC, and how their ramifications are felt down to

the local consumer.

I own two gas stations, a Citgo station and a Shell station, in the

Village of Mukwonago, which is located in Waukesha County, WI,

which are located on the non-attainment border and are required

by the EPA to sell reformulated Tier II gasoline. Six miles down

the road from my stations in the Village of East Troy, which is in

the county of Walworth, WI, the stations are allowed to sell conventional gasoline.

The wholesale cost of gasoline began skyrocketing in May 2000.

This was a result of the decrease in supply of gas as the gasoline

terminals prepared for the Tier II reformulated gasoline, as required by the EPA. The terminals were draining their supply of the

old reformulated gasoline and cleaning them out in preparation for

the Tier II gas to be ready for the June 1, 2000 deadline.

The decrease in supply of reformulated gasoline was so great

that during the months of May and June 2000, I was not able to

get gasoline for my Shell station from their terminal in Milwaukee.

Instead, I had to pay extra freight costs in having the gasoline delivered to me from the Chicago terminals. This happened to me

seven times in May and June. The additional cost of shipping this

gas from Illinois resulted in an increase in my cost of over 11⁄2

cents a gallon. This is in addition to the higher base price of gasoline from Chicago, resulting in the wholesale cost of gas to me

being 21⁄2 to 5 cents higher than what it would have cost me if I

was able to get it out of Milwaukee.

This was being caused by a decrease in supply due to the EPA’s

Tier II mandate; I had not had a problem with this in the past.

Another factor in the rising price of reformulated gasoline is that

the Tier II gasoline costs more to produce. I have read where the

EPA estimated the cost to produce the Tier II gas at 5 to 8 cents

a gallon.

It is also my understanding that the EPA has not released any

cost benefit analysis for the new reformulated gasoline, and that

the EPA has not shown any scientific analysis it used to justify the

formula changes and the higher costs. This leads me to believe that

the EPA did not really do their homework on the additional cost

but just sent down the mandate and let the chips fall.

I believe there are other factors that have caused prices to increase, such as the higher cost of crude oil, breakdowns of supply

pipelines, rising cost of ethanol, the cost of refiners paying Unocal

after they won the court case against six of the Nation’s largest refiners for infringement on the patent of the formula for the new reformulated gasoline—which is also something else that bothers me,

74

how the EPA can require that only a certain type of gasoline can

be used and it can only be made the way Unocal makes it. This

would be like the government saying you can only own a computer

if it has Microsoft software on it.

I realize the EPA and many blame big oil for the price gouging.

I have a hard time seeing these leaders of oil companies getting together in a smoke-filled room and deciding to gouge the Milwaukee

and Chicago markets. There is always someone who will try to

lower the price to beat the competition. I know that is the way it

works in Mukwonago and with every other station owner I know.

I cannot imagine getting together with my competitors in

Mukwonago and trying to gouge our community. The meeting

would never happen, and even if it did happen, it would not have

any lasting effect.

Whatever the cause is, I know for sure that the effect of the

EPA’s mandate had been devastating to my business. Both of our

stations are fairly new: the Citgo is 31⁄2 years old and the Shell is

11⁄2 years old. Both are trying to get established in the already

competitive market. It used to be that my competition was the

other stations in town; now with the EPA changing the rules in the

middle of the game, my biggest competition is with the stations

across the county line.

Over the past 2 months I have seen them sell their conventional

gas for up to 30 cents a gallon cheaper than I was. They were selling it for less than I was paying for it. People flocked across the

county line to get their gasoline. Numerous times every day, people

stopped at my station to purchase maybe $1 or $2 worth of gas just

to get enough so they could go down the road to buy the conventional gas. Many of my regular customers, even friends, left and

said they would be back when things settled down.

At the conventional gas stations, their lines at the pumps would

often overflow out into the streets. People are filling their vehicles

and numerous gas cans with conventional gas, creating mobile

bombs on the road. There are even times when police have to direct

traffic around these conventional gas stations. One station owner

was quoted on the news saying that his conventional gas sales

were up over 200 percent; at the same time, my sales were down

38 and 39 percent at both stations, as shown on the chart provided.

During the month of May, business is supposed to begin to pick

up for the summer, but as you can see by this chart, this year the

opposite has happened, and June 2000 was the worst month in

over 14 months.

One loophole in the EPA’s mandate is that they can require us

to sell the reformulated gasoline, but they are not requiring anyone

to purchase it, and this is putting me out of business. To make

matters worse, the gas that we have been selling for the most part

has been sold at a break-even point or even at a loss. Much of the

last part of May and the month of June, we sold gas at both stations making a gross profit of only 21⁄2 to 31⁄2 percent. When you

consider that when someone pays with a major credit card, I have

to pay a 3 percent processing fee, I am, at best, breaking even on

those sales.

75

Forty-seven percent of the purchases made at the Citgo station

were with a credit card, and 53 percent at the Shell station, so on

all those sales I either broke even or lost money.

If we were to try and match the prices of the conventional gas,

we would be out of business by now. We have tried to be as low

as possible on our gas prices, hoping to hang onto some of our customers, and attempt to make up for the loss of the income with

convenience store sales, but it is not enough. It is interesting to

note that back when we were selling gas at 89 cents a gallon, our

gross profit margin was higher than it is now.

Our business continues to spiral downward. We have tried talking to our local bank to get some help, but with both stations being

so new, there is not much equity built up in them, and they, too,

seem hesitant about the future of the gas business in our town. We

have been forced to reduce expenses to a bare minimum, to a point

that has even hurt sales by not having enough products on the

shelves to sell. We have cut inventory dramatically; we have gone

from 37 total employees in April to 25 at the end of June, many

of whom are not even regularly scheduled. I used to have a manager at each station but now I manage both stations, in addition

to working 46 hours at the register and doing the landscaping.

This crisis in our business has not only affected me and my family, but it has affected each employee who is now or has recently

worked for us. Our vendors are upset because I and many of the

other stations around us are not buying as much as we used to,

and so they are losing sales. Some companies who deliver to us

have added fuel surcharges to their invoices, and the effect goes on.

I feel we have two of the nicest gas stations you will ever see.

We have invested a lot of time and money into making these stations not look like your typical gas stations. Out of concern for the

environment, we spared no expense in putting in the most up-todate gas containment and leak detection equipment we could find.

The name of our company is 5 Star Stations, Inc., and we have

tried to build stations that live up to the 5 Star title. I feel strongly

that we can compete in the open marketplace and do well if on a

level playing field with our competitors.

One of the buzzwords we hear a lot today is ‘‘equal rights.’’ Well,

I would like equal rights as well. I want the right to run my business without the EPA and the Federal Government coming in and

giving an unfair advantage to my competitors by telling me I have

to pay 30 cents a gallon more for my gas than they do so they can

undercut me and try to put me out of business.

I want the right to be able to sell the type of gasoline my customers want. Many customers inquire about reformulated gasoline

at our stations. I have not had anyone say: Good, I am going to buy

my gas here because you have reformulated gasoline. The response

has always been: Where do I have to go to get the good gas? When

I tell them that the EPA says we have the good gas, they usually

have an unfavorable comment as well. I have never had a single

customer comment favorably to me about the use of reformulated

gasoline; I do not know of anyone who is glad we have had this

forced upon us.

In my opinion, there are only two options for solving this problem. The first is to require reformulated gasoline nationwide. I do

76

not see how the EPA believes that the air is cleaner 2 miles down

the road across the county line than it is where we exist. Wherever

you create a border area for reformulated gasoline, you will have

someone like me. I used to wish it was a statewide mandate, but

then I realized the people on the Wisconsin, Illinois and Minnesota

borders would be in the same position I am.

If the EPA is correct in stating that Tier II gasoline is only 5 to

8 cents a gallon higher, this will still not solve the problem. I will

still lose customers for a 5-cent difference. Think about it yourself:

if you were to come to a gas station that is 5 cents a gallon cheaper

than one that you normally go to and you know that you will get

better gas mileage using the cheaper gas, what would you do? You

would probably do what most people do and start buying your gas

where it is cheaper and runs better in your car.

If this reformulated gasoline is the answer to our ozone concerns,

then make it nationwide. If not, if it is just a placebo that really

is not making any difference, then the EPA needs to go with the

second option and lift the reformulated gasoline mandate in Wisconsin. I strongly prefer this option. There may be areas of the

country that need it or it may be doing some good, but it is not

here. The six reformulated gasoline counties in Wisconsin do not

live in a vacuum, mountains do not surround us. Our air is constantly moving. It is blowing in from places like Chicago and Gary,

IN. The air that they are monitoring does not originate in Milwaukee; the EPA needs to focus their attention on the source of the alleged problem—which is not here—and leave us alone.

The fact that we in Waukesha County are in a reformulated gasoline area and we have an ozone level of 84 parts per billion, according to the Wisconsin DNR Bureau of Air Management, and

that Door County, WI—which is almost entirely surrounded by

Lake Michigan, which causes higher ozone readings, just like the

monitors in Milwaukee—their county has the highest ozone level in

the State, with 97 parts per billion, and they do not have the reformulated gas mandate forced upon them.

This is only one of the reasons that cause me to question the legitimacy of reformulated gasoline in our area. It seems there are

many other valid reasons to lift the mandate, including air quality

studies done by independent firms.

My biggest error in going into business was building these stations in the town I have grown up in and lived in most of my life.

I should have built them 6 miles down the road, across the county

line. As we did the site analysis and had projections done for both

stations, we did not calculate in or expect the EPA to come in and

try to put me out of business. Thanks to the EPA and the Federal

Government, my American dream has turned into a nightmare.

I plead with you, Chairman Ryan, and members of the Subcommittee on National Economic Growth, Natural Resources, and

Regulatory Affairs, to do the right and fair thing and to do whatever it takes to permanently—not temporarily but permanently lift

the reformulated gas mandate before my family and I become another statistic of a small business gone under at the hands of the

Federal Government and the EPA.

Thank you.

[The prepared statement of Mr. Greenwald follows:]

77

78

79

80

81

82

83

Mr. RYAN. Thank you, Mr. Greenwald, for your insight and your

individual story and your analysis.

What we will do is we will each do 5 minutes—Dennis and I will

do 5 minutes of questioning each and we will just go back and

forth. How does that sound, Dennis? Does that sound all right?

Mr. KUCINICH. Sounds great.

Mr. RYAN. Mr. Lyons, I would like to start with you. In your testimony you claim that the RFG mandate, in its isolated vacuum—

or I will let you use your own words—had nothing to do with the

type of price spike we had. When I spoke with your boss, Carol

Browner, last week, she claimed that they work in concert with the

Department of Energy and their experts in analyzing these markets. Is that correct that you work with the Department of Energy

in analyzing the data that the DOE produces, that the Energy Information Agency [EIA] produces in trying to analyze the markets

that you are involved in?

Mr. LYONS. Mr. Chairman, if I could just clarify. I do not believe

I testified that the RFG had nothing to do with the price differential. We have consistently maintained that the RFG program at the

production cost level, we would expect to see something in the

neighborhood of 4 to 8 cents, and we believe that is exactly what

has happened. We have never maintained that that necessarily

means a corresponding retail differential of 4 to 8 cents per gallon,

we have always said production costs of 4 to 8 cents. What that

might mean on the retail end, frankly, Mr. Chairman, no one from

my agency is qualified to say that.

Secretary Richardson and Administrator Browner have asked the

FTC to look into that; that is more in their area of expertise, not

ours. We have never said the production costs of 4 to 8 cents must

translate into a corresponding retail cost, and in fact, the data

bears that out.

If I might, Mr. Chairman, yesterday the wholesale prices in the

Milwaukee area were 108.57 and the corresponding retail cost was

174.27, so indeed, there is quite a differential between wholesale

and retail. But we have never said that 4 to 8 cents must translate

into retail. We have asked the FTC to look into it because, frankly,

Mr. Chairman, we could not account, based on our significant discussions with the oil industry and the refineries, what would account for the different differentials. We have heard from a number

of the panelists suggestions of a number of things, and the Department of Energy and the Environmental Protection Agency was not

able to reconcile those different factors with the price differentials

that we were seeing, and, therefore, asked the FTC to look into it.

I have not come here, Mr. Chairman, to point fingers, I have not

used the word ‘‘gouge,’’ I have not used the word ‘‘collusion.’’ I have

simply maintained that we are willing to stipulate that the RFG

program may have accounted for 4 to 8 cents differential, but the

price increases we have seen have been in Chicago in the neighborhood of 50 cents per gallon, and we are at a loss to explain that,

and so have asked the FTC to look into it.

Mr. RYAN. Let me ask you a brief question, if you could give me

a very brief answer. We want to keep to the time limit. In doing

this analysis on what RFG would cost at the wholesale level, did

84

the EPA look at how reformulated gas might affect the supply in

this region?

Mr. LYONS. Mr. Chairman, yes. This was looked at back in 1994

when the regulation was developed. And I might add, we have

heard the word ‘‘EPA mandate’’ used a lot today.

Mr. RYAN. It is a congressional mandate, for the record.

Mr. LYONS. This is a congressional mandate, this is part of the

Clean Air Act; EPA did not impose this midstream or anywhere

else. This was a congressional mandate that was passed in 1990 by

the Congress, went into place in 1995, phase II in the year 2000.

Our estimates were based on significant discussions with the industry itself.

Mr. RYAN. So the last supply estimates were done in 1994?

Mr. LYONS. Well, we certainly looked at the supply issue this

spring when the price spikes began to happen. We looked into it;

we had heard from a number of refiners who said that their supplies were adequate, so that is why we are at a loss to explain this.

We looked at the pipeline breakage; that, we were not able to determine, would account for this. I am sure that it accounts for some

of the price spike, Mr. Chairman, but not the numbers that we

were seeing.

Mr. RYAN. See, this is a cause for my concern, because your own

Department of Energy contradicts what you just said. The Department of Energy, in a memorandum on June 5, says that the problem we have here in the Milwaukee and Chicago region is largely

a supply problem. It goes on to say, through a very elaborate study

and memo, that there are several reasons brought forth with the

reformulated gas mandate that has given a supply shock.

Now, I am not here to point fingers at the EPA solely to suggest

that the EPA manufactured all of this. OPEC has a lot to do with

this as well, and when the base price of crude oil goes up, as has

been happening, that clearly increases the price of gasoline for the

entire country. The problem with us here in Wisconsin is that it

did not just happen—we did not get the national average, we got

a huge price spike, 40 to 50 cents more for a gallon of gasoline in

southeastern Wisconsin than the rest of the country.

And the Department of Energy—which is a department that I do

realize the EPA relies upon for expert analysis—has said that

there is a supply shock, there is a supply problem associated with

this mandate. The Congressional Research Service, a very non-partisan objective think-tank within Congress, says that the RFG situation in the Milwaukee-Chicago area can be accountable for, at the

retail level, between 25 and 34 cents to a gallon of gasoline because

of the unique RFG situation that we have here.

I understand your analysis shows that at the wholesale, RFG in

a vacuum on its own only adds 4 to 8 cents per a gallon of gas,

but we do not live in a vacuum. The retail level is not a vacuum.

We have several factors that on their own are not excessively high:

the Unocal patent, the pipeline problems, the fact that Mr.

Greenwald had to truck in his gasoline from a new place in Chicago rather than the typical place from Milwaukee, and the fact

that we have our refineries at top utilization rates, meaning they

are basically topped out, and the fact that the kind of gasoline we

have to use here in Wisconsin is a boutique fuel, so to speak. It is

85

unique to this area. We cannot get the gasoline from Minnesota or

from Iowa because they do not have the same kind of gasoline.

So it is a supply problem and that is not my words, that is your

own Department of Energy which said in the beginning of June

that it is a supply problem. So all of these factors, when combined,

when brought together by the reformulated gas deadline and mandate, according to the Congressional Research Service and the

DOE, have given us this problem.

I along with Senator Herb Kohl, Russ Feingold, and Jim Sensenbrenner, asked for a waiver, a temporary waiver on May 23. We

saw that these unique situations were occurring here in Wisconsin,

that there are a lot of factors, not just EPA factors, but a lot of factors, and that if this regulation were to actually occur on June 1,

as it was scheduled to occur, we would have this huge price spike.

On May 26, the Environmental Protection Agency rejected our

waiver, suggesting there was no supply problem. Then on June 5,

the Department of Energy wrote in their own memorandum that,

in fact, there was a supply problem, a very large supply problem

which was a convergence of several factors brought together by this

unique RFG mandate. The Congressional Research Service followed

up with exactly the same request.

My basic question is this. In St. Louis you were able to use what

you referred to as enforcement discretion in granting them a temporary reprieve or waiver from the reformulated gas mandate for

a number of weeks due to their supply shocks from the Explorer

Pipeline which does provide gasoline to this area as well. Why did

the EPA reject the waivers here in Wisconsin and Chicago and not

use the same kind of enforcement discretion that was used in St.

Louis?

Mr. LYONS. Mr. Chairman, the factors that contributed to the St.

Louis shortage was a pipeline breakage from a pipeline that serviced the St. Louis area for a much, much higher percentage—I believe 70 percent of the fuel in the St. Louis area.

Mr. Chairman, I agree with you there are a number of factors,

and we have heard some of them today, that have contributed to

a shortage and I have never maintained that there has been no

shortage or tight supply. What we have said consistently is that

the supply has been adequate to meet demand and was not a tight

enough supply and did not rise from an acute enough situation, an

extraordinary circumstance that would justify granting such a

waiver under the regulations, and that is why that request was denied.

I might add, Mr. Chairman, that we received a letter from May

25 of the year 2000 from the American Petroleum Institute specifically expressing concern about the waiver application and requesting that the EPA in fact deny that waiver application. We have received a number of similar letters from other refiners who have

said it would give an unfair advantage to competitors who, for

whatever reason, may not have planned ahead. The American Petroleum Institute asked us not to grant the waiver, and in fact, it

was the following day that that waiver was denied.

Mr. RYAN. Yes, well, that also is a compelling point. I think for

the interest of this waiver discussion, waivers earlier, I suspect,

would have had a much, much more profound effect; waivers now,

86

now that conventional gas in this area is nonexistent because of

the EPA standards, would actually probably produce a price spike

because if we all of a sudden got a waiver off of RFG on to conventional gas, we would not have any conventional gas in the area,

and we would, in fact, experience a price spike. That is why I think

the waivers earlier on made more sense than they do right now.

But I see that my time has expired and I would like to turn to

Mr. Kucinich for some questioning.

Mr. KUCINICH. Thank you very much, Mr. Chairman, and again,

I appreciate the chance to be here. I want to thank the witnesses.

I have to say that as a Member of Congress, I have always been

appreciative of the information provided to my office by the Cato

Institute. I always find it quite informative, and occasionally I find

something that is of great use for my office.

I am concerned about some of the testimony on page 9 of Mr.

Taylor’s comments for the record, and it said, ‘‘Spectacularly high

industry profits are not evidence of gouging.’’ Well, before we saw

this sharp increase in the price of gasoline, even before that, Mr.

Chairman, oil companies had profit increases as high as 473 percent, 371 percent, 257 percent over 1999 figures, and they were

making high profits before the latest rounds of increases.

The thing that concerns me in this latest round of increases, I

have a copy here of a subscription circular from an industry publication called Octane Week, and I am going to submit it for the

record.

Mr. RYAN. Without objection.

Mr. KUCINICH. Without objection. Anyhow, they go on—you

know, this is their promotion—‘‘There has never been a more critical time to read Octane Week. As refiners gear up for the 2000 gasoline season, EPA issues the toughest sulfur diesel specification

imaginable. And while this might be the most challenging season

in years, with the new phase II RFG summer spec gasoline proving

to be tough to produce, its differential over conventional gasoline

shows this might be the most lucrative season in years.’’ So the oil

industry was getting ready to play RFG during a period of peak demand in order to sock it to the consumers.

Now, I understand it is the position of some that there are inelasticities of consumer demand for gasoline. Well, the truth is that

the oil company knows that, and if demand is going to be constant

at a period when people want to go places during their summer vacations, they are going to pay. Many people will pay it, and the oil

companies can anticipate even higher profits. I mean, we are not

talking about charitable institutions here, we are talking about oil

companies, and in some cases, you are talking about oil companies

in an industry where there has been less oil companies because of

mergers, so there has been growing monopolies in oil as well.

So you know, I am not here to become moist-eyed about the oil

companies and about how tough they have it. They have really

been sticking it to consumers and with all due respect to the Cato

Institute, I think the EPA ought to have a chance to answer this

suggestion that Congress would be best advised to eliminate the reformulated gasoline mandate in its entirety, that it accomplishes

absolutely nothing in the way of air quality, according to one witness.

87

Now, would the EPA like to respond to that?

Mr. LYONS. Thank you very much, Congressman Kucinich, I certainly would.

I think it is stating the obvious to say I strongly disagree with

any suggestion that the RFG program has not been extremely successful in increasing the air quality of our Nation in the areas

where RFG is used. In fact, the American Lung Association of

metro Chicago has found that RFG has done more to reduce air

pollution in the Chicago area than any other program that we have

had.

If I can just be permitted to cite a couple of statistics to you, because I think it bears directly on this question. In phase I of the

RFG program—which was instituted in 1995—the program reduced

smog-forming emissions from automobiles by 17 percent and toxic

air pollutions from auto emissions by 17 percent. Monitored levels

of benzene—which is a known human carcinogen—were reduced by

50 percent from automobiles under phase I of the program.

Under phase II of the program, we expect further smog-forming

emissions to be reduced by 27 percent over conventional gasoline

and toxic air pollutants by an additional 22 percent over conventional gasoline, and phase II is expected to reduce the risk of cancer to humans from automobile emissions by 19 percent.

The RFG program, Mr. Chairman, has gotten us the equivalent

of removing 16 million automobiles from the Nation’s roadways and

reducing 105 tons of smog throughout the Nation. Sixteen million

automobiles removed from our Nation’s roadways is a very favorable statistic. I think it bears in mind when we talk about 4 to 8

cents, or we could quibble about the amount that that might translate into retail. I would suggest, Mr. Chairman, that a 4 to 8 cents

production cost would not rise to the level of a—— Mr. KUCINICH. I would like to cut in here a minute and just ask

the EPA. According to the oil companies, Americans have to choose

between clean air and cheap gas, and over the past 30 years we

have enacted numerous environmental laws and regulations over

their objection that we cannot afford the massive costs associated

with them. Are there instances where the issue of cost was raised

by the industry yet, in reality, it was not so costly to comply with

the regulations?

Mr. LYONS. Mr. Chairman, we have frequently seen numerous

times over the 30-year history of the Environmental Protection

Agency when a new environmentally beneficial regulation is proposed that there are those who would pit that regulation against

the cost of putting that regulation into play, and those who would

pit environmental regulation over gas prices, I think, miss the

point. Americans are entitled to clean and healthy air.

This regulation was arrived at after heavy consultation with the

industry itself back in 1994, and it was approved by Congress after

extensive debate and deliberation over the cost-benefit analysis,

what the health benefits would be, the environmental benefits

would be, and what the corresponding incidental minor cost adjustment would be, and it was ultimately determined by the Congress

and by the President that it was well worth that minor expense.

And so I cannot make the point strongly enough. This is not an

EPA mandate that was imposed midstream, this is a well-thoughtVerDate 11-MAY-2000 12:10 Jun 11, 2001 Jkt 000000 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 C:\DOCS\72583.TXT HGOVREF1 PsN: HGOVREF1
88

out, well-deliberated, well-crafted program that was contrived back

in 1990 by the Congress, signed into law by the President. No one

should be surprised by this; the oil companies have known for 6

years now that June 1, 2000 was coming; it was their responsibility

to plan adequately for supplies.

Mr. Chairman, you mentioned the Department of Energy study.

We concede that the supplies were tight, but not tight enough so

as to meet the requirements of granting such a waiver.

Mr. RYAN. Well, in reclaiming time, I wonder where that threshold is a tight enough threshold. The markets were tight enough to

give us a huge spike in gas prices.

Now, as far as the point of price gouging, I want to differentiate

myself with my colleague from Ohio. It clearly could be happening,

but I do not think either of us know that for sure. I for one do not

know whether or not price gouging is occurring. That is why I,

along with every other member of the Wisconsin congressional delegation, Republicans and Democrats, met with Robert Pitofsky before the DOE and the EPA did, asking him to investigate whether

or not price gouging is occurring, not just in the RFG counties but

in the other counties as well, and we were able to secure that investigation before the June 15 date in which the Secretary of DOE

and Administrator Browner did.

The point I am trying to make is we do not know, we simply do

not know. I am simply not enough of an expert to know whether

or not collusion or gouging occurred. That is precisely why we have

experts such as the Federal Trade Commission to do that.

Mr. KUCINICH. Would the gentleman yield?

Mr. RYAN. Sure.

Mr. KUCINICH. Just to quote Shakespeare, ‘‘Something smells

rotten in Denmark.’’

Mr. RYAN. But the point is there are other factors as well, and

it is not myself as a member from Wisconsin who is simply saying

that, it is the Department of Energy, it is the Congressional Research Service, it is the maps that are before us that are pointing

to many other factors that are causing the price of gas to increase

which do not talk about price gouging. It could clearly be the case

that gouging may be occurring and adding to the price increase of

gas, but clearly, from the Department of Energy’s own analysis and

the CRS, there are many other factors out there, and to simply

brush those other factors aside and point at price gouging and wait

for the FTC to give us an answer in my opinion is just totally irresponsible.

Mr. Taylor, you were involved in this last question and this last

discussion. Just in the interest of fairness, I would like to give you

an opportunity to respond to the discourse that has just taken

place.

Mr. TAYLOR. I appreciate that, Congressman Ryan.

First, for Mr. Lyons, there were a number of remarks that,

frankly, are rather jaw-dropping. The first is the allegation which

is commonly made that business anticipates that regulations will

cost a tremendous amount of money, EPA says they will not, it

turns out it does not, and it proves once again, according to some,

that industry is either making this stuff up or that industry is

89

somehow nefarious, that industry is incompetent when it comes to

counting beans.

The real story here is fascinating, and I cannot resist from telling

it for a moment. When industry calculates the cost of a regulation,

it assumes that it will be enforced fully and that the standards

being imposed will be met fully, and they then calculate the cost

of what that will mean.

When EPA issues a regulation, they do not necessarily calculate

cost based on full implementation, based on total compliance. A

classic example of this was 2 years ago when the administration

issued a rule to reduce particulate matter emissions in urban

areas. Particulate matter, for those who are not immersed in this

jargon, is basically dust and fine particles. EPA said it would cost $4 billion to comply with the rule; indus- try economists said $60 billion. Well, where is the truth? The truth

is, as it turns out, is that EPA anticipated virtually very little compliance and a lot of waivers; industry calculated full compliance.

And when EPA was put up against the wall a year later, they increased their estimate to $40 billion based on an increased assessment of compliance.

So this is the reason why sometimes industry estimates cost will

be X whereas an agency estimates cost will be Y and the numbers

might turn out differently, because generally EPA rules and regulations and mandates and standards are not fully enforced, and

thus, the costs are a lot less than anticipated by industry.

Now, as far as Mr. Lyons’ charge that there have been reduced

emissions in RFG areas and somehow that proves that RFG has

something good to do with it, this is silliness. There are a lot of

things which go into urban air quality, there are a lot of sources

of emissions, and emissions have been reducing across the country

steadily year-in, year-out, whether it is in an RFG area or a nonRFG area. There are co-founding variables, in other words, and it

would be silly to simply assess where air quality is moving and attribute all that improvement to RFG, particularly since it has not

been refuted anywhere, that I can tell, modern fuel injector systems do what the fuel is designed to do already.

In other words, the technology is already there, and this from

Eric Stork—no employee of the oil company—the former guy at

EPA who ran these programs in the 1970’s. He has no reason to

make this up.

The argument that oil industries had 6 years to get involved in

making things work smoothly in Milwaukee and Chicago is another

bit of silliness. The industry is not a welfare organization, it does

not work simply to make Congressmen happy or to make the EPA

happy; industry is there to make a profit and Congress has ensured

that there are virtually no profits in the refining business. There

has not been a new refinery built in 30 years, they keep shutting

down, even though demand is going up. That should tell you about

how little money there is to be made generally in this business.

They do not invest simply to make us happy, they invest to make

a profit, and if Congress is going to ensure that no profits can be

gained, they will not invest.

And the argument that supplies were not tight enough to induce

increasing prices is the statement of someone who still does not get

90

the inelasticity question. If supplies are only 2 percent lower than

they otherwise would be, that is 50 cents at the pump. Now, anybody who has taken an economics course understands that. That

is why people at the DOE understand that and people at EPA,

which generally are scientists and other analysts, do not.

Now, as far as Mr. Kucinich, I think as he realizes, profiteering

can only occur if there is collusion. After all, as Mr. Greenwald

pointed out, in business you make profits when you can underprice

your competition and still make a profit. So only if industry gets

together and colludes can any profiteering really be going on here,

because otherwise there is still competition. Mobil still wants to

make money, as do other companies, and to set prices without

colluding is to voluntarily choose to make less money than they

might otherwise would. So that is why collusion is a necessary ingredient to this profiteering.

Is there any evidence of collusion? I have not seen a bit of it. Mr.

Kucinich, I have not heard any evidence suggested by EPA, DOE,

or anyone else that any back door meeting has ever occurred. You

say that something is rotten in Denmark. For 30 years, Mr.

Kucinich, this industry has faced these investigations of collusion.

For 30 years, FTC, DOE, special White House panels, special congressional investigations, all through the mid-1970’s has been

charged with collusion. Never once has a single shred of evidence

of collusion ever arisen. The reason why is that too many of us

really do not understand this question of inelasticity.

Even a small change in supply or demand in either direction will

send prices moving dramatically in either direction. A small change

in supply, a small reduction in supply compared to demand will

send prices shooting through the roof; a small increase in supply

without a corresponding change in demand will send prices collapsing through the floor.

Two years ago, as Mr. Greenwald mentioned, gasoline was selling at 89 cents a gallon. If industry had the power to gouge us or

profiteer at will, believe me, that would have been the time to do

it. They laid off hundreds of thousands of employees, they returned

no profit whatsoever. If you talk to your stockbroker and ask him

what kind of investment are oil companies over the past 20 years,

they will tell you not as good as a lot of them, believe me.

It is amazing to me that somehow we are to believe that industry

has all along had this power to collude at will and set prices but

they only chose to do it this year and they only chose to do it to

Milwaukee and Chicago. It is amazing. That is my reaction.

Mr. RYAN. I will yield to Mr. Kucinich now for 5 minutes.

Mr. KUCINICH. The FTC is conducting its investigation on issues

of price gouging, collusion, price fixing, whatever you want to call

it, and I think we will wait for those returns to come in. I would

maintain that absent any formal meeting that takes place—and I

am not about to say that I have any information on that and I do

not know that anyone does—you do not have to have a formal

meeting to be able to just go out and look at—as soon as someone

raises their price of having one price chase another. You do not

have to meet for that.

Mr. TAYLOR. Have you ever been in business, Mr. Kucinich, and

been involved in these decisions?

91

Mr. KUCINICH. Yes, I have, and the witness, when I direct the

questions, will answer it. I am not here to answer your questions,

sir.

I am here to say on behalf of the people I represent that we believe that the oil companies have taken advantage of market conditions to be able to sock it to the consumers during the summer

when they know the demand is the highest and to withhold from

the market gasoline in order to make sure that people are going

to pay more. That is what I believe; that is what people that I represent believe.

And a lot of them, frankly, do not have stock in the oil companies

so they may not know as much as you do about oil company stocks,

but they do pay twice what they have been paying before. At least

it is costing them $30 to $40 to fill up their tanks; that is what

they understand, and they understand that they are being taken

advantage of.

Now, you know, I am here to hear what you have to say—and

I am listening. I listened to Mr. Greenwald say there were long

lines for conventional gas, and I heard the gentleman from Cato

state that raising the price of RFG would avoid such lines. You

know, they raised it so high that RFG sat in tanks, but what happened was that the environment suffered because no one purchased

the RFG, Mr. Greenwald, and consumers suffered by waiting in

long lines or paying higher gas prices, and the oil industry made

high profits, because they could abuse their position of selling a

product with inelastic demand.

So you know, I am impressed by the testimony by Cato but I do

not think that it covers the entire situation. It seems to me that

the price increase for RFG did not put any more RFG in anyone’s

tanks. In fact, the price hike meant a lot of RFG, as I mentioned,

sat unused at the gas stations and consumers who needed gas were

forced by high prices to buy dirtier conventional gasoline. I would

ask the gentleman from Cato it does not sound to me like this result really helped anyone but the oil industry, do you agree, and

I would be happy to hear your response.

Mr. TAYLOR. No. It was exactly what it was supposed to do.

Mr. KUCINICH. I am sorry, I did not hear that.

Mr. TAYLOR. The price increase accomplished exactly what it had

to accomplish which is reduced consumption of the scarce commodity. There was not enough RFG to go around, given demand. There

was a shortfall of about 4 percent in mid May and about 2 percent

by early June. Prices, because of the inelastic demand for this product, had to go up a lot just to reduce consumption a little. The fact

that they went past Mr. Greenwald’s store and went to the other

one to buy the conventional gasoline meant that the high prices did

exactly what they had to do: it had to ration the scarce good.

The reason why lines formed, nonetheless, is because in border

areas consumers—— Mr. KUCINICH. I have never heard Cato make a statement on behalf of rationing before.

Mr. TAYLOR. No, I am not. I am saying that prices ration scarce

goods; that is what prices do. Now, when politicians ration scarce

goods, they generally mess it up; when markets ration scarce

goods, it usually works as intended, and in this case it did. There

92

was not enough gasoline to go around; that is why prices had to

go up, people avoided buying the product, they went to competitors’ stores that did not sell RFG, and that is one of the reasons why

lines formed there, there was a border area.

Mr. KUCINICH. I am sorry, but I have heard the gentleman argue

both sides of this question and it is very impressive. On one hand

you have said that gasoline, you have inelastic demand, and there

is a point at which in your prepared testimony you stated that people are going to keep buying it up to a point. On the other hand,

you are saying that people will not buy it, there is a shortage, and

that helps to provide for prices to go up because there is a shortage. Which is it?

Mr. TAYLOR. Gasoline demand is inelastic, but not zero. In other

words, as economists will tell you, if you increase prices by 1 percent, demand will decrease by 1/20th of 1 percent. In other words,

consumers do not react very quickly or very efficiently to higher

prices. Now, that is what makes gasoline different from apples or

frozen food or something like that. If the price of apples goes up,

maybe I will buy an orange instead; it is easy to transfer. But gasoline is not like that.

Now, high prices can affect consumption, but the price hike has

to be very steep. In other words, if there is a 4 percent difference

between supply and demand, prices have to go up 100 percent. According to what economists tell us about consumer demand for gasoline, it is different than consumer demand for other things, and

what do you know, there is about a 4 percent shortfall between

supply and demand in this market, according to everybody who has

examined the data that I am familiar with, and that correlates

quite efficiently with the 100 percent price increase. It seems to me

the market realties of consumer demand for gasoline explain everything we need to explain.

Mr. RYAN. We are going to give Mr. Kucinich another 5 minutes

simply because he has a flight to catch.

Mr. KUCINICH. And I appreciate that. We have 5 minutes. Is that

right? OK.

Again, to the gentleman from Cato, you testified that the oil industry did everyone a big favor by raising prices when you said,

‘‘Prices had to go up substantially to bring demand in balance with

supply. If they had not, then the Milwaukee-Chicago area would

have undergone a replay of the 1970’s, when long gasoline lines

and dry service station pumps traumatized the nation.’’ That was

in your prepared testimony.

However, Mr. Greenwald testified there was no threat of long

lines, because consumers fled to nearby stations that sold conventional gasoline.

Now, would you, sir, explain why this region would have seen

long lines even though conventional gasoline is available nearby?

Mr. TAYLOR. Well, the reason why long lines did not form in the

Chicago-Milwaukee area is because prices went up and moderated

demand by about 2 percent. When EPA and DOE asked refineries

and asked merchant facilities do we have enough supply, their answer was yes. Well, of course their answer was yes because prices

had gone up enough to reduce demand by about a couple of percent, which balanced the market.

93

Now, given what we know, if prices did not go up, and let’s say

they only went up by a nickel, we know that that would reduce demand by only a smidgeon. If there was 2 percent or 4 percent less

gasoline in the market than there is demand for it, there is not

enough gasoline to go around. That just follows. If there is not

enough gasoline to meet demand, given price, then shortages will

exist.

Now, why were there lines in the border area where they were

selling conventional gasoline? In that particular circumstance, of

course, drivers avoided the high price—which the high price was

designed to do, reduce demand—they went to a borderline area,

bought this gasoline. You did not see gas lines anywhere else except at these borderline service stations.

So in other words, there is no mystery here. If you do not believe

that high prices affect demand, then I am not sure what to say. If

you do not think that the prices had to be this high to affect demand, again, I am not sure what to say.

Mr. KUCINICH. Well, I would say that consumers kept buying the

gas. They became very upset about it because it started to affect

materially their quality of life, because we can have a nice little esoteric discussion about supply and demand here, but the reality

outside of this chamber happens to be that people have their lives

affected by these high prices and they want to know what is happening, and I have to give the gentleman from Cato credit because

he is making an attempt to try to explain the position of the oil

industry, when in fact, the oil industry has not anywhere come

before—— Mr. TAYLOR. Excuse me, Mr. Kucinich. I am not explaining the

position of the oil industry.

Mr. KUCINICH. No, excuse me.

Mr. TAYLOR. You made an accusation.

Mr. KUCINICH. Mr. Chairman.

Mr. RYAN. We will have order. You have to respond to his questions.

Mr. KUCINICH. You may not be familiar with congressional hearings.

I thank you for your testimony. It is time right now—I have to

go catch a flight. I would hope that the EPA at some point in the

rest of the hearing would be able to speak to whether or not they

are advocating replacing the RFG program and they have a particular program that they would advocate to bring about similar

improvements in air quality.

I want to thank the Chair for giving me this opportunity. It is

nice to work with you. We do not always agree on things but we

are here to try to answer questions that I am being asked by my

constituents, and frankly, that is why I am here, to represent people in the 10th Congressional District from Ohio and across this

country.

Thank you, Mr. Chairman. I applaud the work you are doing for

your constituents.

Mr. RYAN. Thank you, Dennis. I really appreciate you coming by.

[Applause.]

Mr. RYAN. I just want to thank Congressman Kucinich for traveling up here from Cleveland. He spent a good portion of the day

94

leaving his family and his district to fly up here from Cleveland,

so I just want to thank you very, very much for doing that.

We are going to continue on with questions, but I wanted to give

him ample time to get his questions in before he had to go catch

his flight.

We will come back to this issue with the EPA and with Mr. Taylor, but I would like to involve the other witnesses as well, and specifically I would like to get into the ozone transport issue that you

have identified, Mr. Koerber. Mr. Koerber, looking at your maps,

and actually looking at your map on page 3, on No. 2—and I know

everyone does not have these maps, but the testimony is available

outside—looking at the 1997 to 1999 graph where you explain that

the 1-hour ozone air quality levels in the Lake Michigan region

have improved in the last 10 years, that the number of sites measuring a violation of the standard have decreased from 25 to 6, and

the magnitude of peak violation has actually decreased. What is

the lowest point of your Wisconsin point which is 0.128, where is

that? Is that Milwaukee?

Mr. KOERBER. That is actually in Kenosha County near Pleasant

Prairie.

Mr. RYAN. No. That is the one that you have down on the border

there. Correct?

Mr. KOERBER. Correct.

Mr. RYAN. And then the one up on top?

Mr. KOERBER. Sheboygan, I believe.

Mr. RYAN. That is Sheboygan. So in between Sheboygan and the

Illinois-Wisconsin border. Correct?

Mr. KOERBER. Right.

Mr. RYAN. So from the 1997 to 1999 region, the 1-hour standard

has not been hit in the area below Sheboygan and above the Wisconsin-Illinois border. Is that correct?

Mr. KOERBER. Right. That is the only area that currently violates

the 1-hour ozone standard in the Lake Michigan region.

Mr. RYAN. It is the 1-hour ozone standard that determines nonattainment. Correct?

Mr. KOERBER. That is the current basis that EPA used. As you

may be aware, a couple of years ago EPA adopted a new ozone

standard, an 8-hour ozone air quality standard, which has been

challenged and subsequently appealed to the Supreme Court.

Mr. RYAN. That is right; that is a court challenge that is coming

out in the near future. The 8-hour map is the one you have on the

bottom of the page. Correct?

Mr. KOERBER. Right.

Mr. RYAN. And the most recent one, 1997 to 1999, I believe, is

the one you have on the right?

Mr. KOERBER. Right.

Mr. RYAN. And the one on the left is the up above 1-hour standard. Correct?

Mr. KOERBER. Right.

Mr. RYAN. So under the current EPA 1-hour standard, all of the

areas above the Wisconsin-Illinois border and below Sheboygan are

within attainment—correct—according to the 1-hour standard from

the 1997 to 1999 period? Am I reading your map correctly?

95

Mr. KOERBER. Between Sheboygan and the State line, going from

north to south, those are in non-attainment.

Mr. RYAN. Those are in non-attainment.

Mr. KOERBER. Those counties are considered to be in non-attainment.

Mr. RYAN. I understand that. But where the meters or the measurements triggered a non-attainment measurement, that is the

Wisconsin border and then Sheboygan, not in between. Correct?

Mr. KOERBER. A number of counties between Sheboygan and the

State line are also classified as non-attainment, even though monitors in those counties may not currently be showing a violation.

Mr. RYAN. Right. OK, thank you. Since there are only a handful

of days, usually one or two a year, when counties such as Racine

and Kenosha exceed the 8-hour standard—which is not in place

now—and they have not exceeded the 1-hour standard in the last

3 years—which is in place right now—is it safe to say that if

Racine County and Kenosha County were not sandwiched in between Milwaukee and Chicago, say in the western part of the

State, over by Janesville or Prairie du Chien, that they would not

be in the non-attainment area? Meaning, is it safe to say that if

Racine and Kenosha were not between Milwaukee and Chicago, it

would be in attainment?

Mr. KOERBER. I think that is a question for Mr. Lyons, because

EPA is actually in the business of classifying areas, but for me to

respond to your question, I would agree with you. It is a matter

of geography. The approach that the States have taken, the Lake

Michigan States, is to recognize that we have a regional air quality

problem which requires a regional solution, so involving a number

of counties throughout the region need to adopt emission control

regulations in order for the entire region to meet the ozone air

quality standard.

As you mentioned earlier in your opening remarks, the local contribution might be about one-third of the ozone problem that we

are seeing in this area which means two-thirds is coming in from

outside, so clearly there is a very heavy regional contribution that

needs to be addressed, and EPA has a number of programs in place

with requirements for controls on power plants, industrial boilers,

their new Tier II low sulfur standards for motor vehicles, a number

of programs focused on reducing the regional contribution. Programs like RFG are focused more on the local contribution, specifically the VOC emissions within the local urban areas, Chicago, Milwaukee, Gary.

Mr. RYAN. So given your data and looking at the statistics on

your maps and your modeling, you can basically say that those who

live in Racine and Kenosha Counties, sandwiched in between Milwaukee and Chicago, are essentially through the mandates paying

for the pollution that is being created, based on your wind charts—

I know it is a crude term—are paying for the pollution that is being

emitted from Cook County, IL, Lake County, IN, and those areas.

Mr. KOERBER. They certainly are a recipient, but it also needs to

be recognized that they are a source. Because they are within the

Lake Michigan region, they do contribute locally to the problem.

They do not contribute as much, I certainly agree with you, Mr.

Chairman.

96

Mr. RYAN. And if these two counties, Racine and Kenosha, were

not within the region, if they were in western Wisconsin, they

would not be designated in non-attainment. Correct?

Mr. KOERBER. Correct. It is a matter of geography here.

Mr. RYAN. So it is a matter of geography. I think that is just a

very compelling point that because Racine and Kenosha are where

they are, they are not a significant contributor to the ozone pollution as measured by the EPA, but because of where they are, they

are designated in the non-attainment zone and thereby required to

have reformulated gas. That is essentially a summary of what we

just discussed here?

Mr. KOERBER. The term ‘‘significant’’ that you mentioned has

come under challenge over the last several years. I do not know exactly what their contribution is. Certainly they emit less so they

contribute less than, say, Cook County, the Chicago area, but because they are within the region, they do have some contribution.

It is less than Cook County, but there is some.

Mr. RYAN. And Kenosha County is 1/100th of Cook County and

Racine is around the same area?

Mr. KOERBER. I do not have the specific numbers in front of me,

but I do not doubt that.

Mr. RYAN. I think that is what we calculated from your maps.

Mr. KOERBER. OK.

Mr. RYAN. Let me get to you, Sheriff McReynolds, briefly. Those

are probably your cars right out there that we hear out the window

now. What kind of impact did you foresee in your budgets? When

you do your budgeting—and you probably can speak to the police

department and the fire department, because I know you are very

familiar with how they do business—when you are putting together

your transportation budget for Racine County Sheriff’s Department, do you factor in price fluctuations in gasoline? And clearly,

you did not factor in this kind of price spike to gasoline. I would

just like to ask you to repeat from your testimony what kind of hit

this did to your budget for the gasoline prices.

Sheriff MCREYNOLDS. Well, one thing during the budget process

that we figure in and that we did notice and look back, from the

year of 1998, comparing 1998 to 1999, the gas usage for our operation—and I should clarify that, the gas usage that we found for

Racine County, and that would be some other vehicles, not just the

sheriff’s department—went up about 19,000 gallons from 1998 to

1999, so we did adjust in our budget for 2000 for that, but what

we did not do is adjust for the spike that we were experiencing in

the year 2000.

Now, also looking at it, we actually, in discussing this, we were

kind of surprised at the number of gallons that we had been using

compared to other years, because our automobile usage has not increased. I mean, the number of cars we have out on the road every

day has not increased, our number of staff people has not increased.

Mr. RYAN. What do you think the cause for that is?

Sheriff MCREYNOLDS. Well, you know, I do not have any scientific evidence, but I do not think that we are getting the mileage

that we were at one point. That is just a gut feeling from my opinion; I cannot substantiate that with any good figures. But we have

97

seen increased gallons going up every year, so we do adjust for that

but we do not adjust for the spike.

Mr. RYAN. With this hit to your budget, what will you have to

do now to compensate for that? Are you going to have to cut back

on driving, on policing certain areas, or what are you going to try

and attempt to do to solve this?

Sheriff MCREYNOLDS. What will happen, we are not going to advocate that we are going to cut down on patrol time, that we are

going to do less investigations. We will start looking at this about

October 2000, and what will happen is one of our line items in our

budget that we have saved money on will have to be used to offset

the cost in gas prices and the increase.

The thing that will happen, though, is that looking at 2002 budget, if this would continue at the rate it is, something will have to

suffer within our operation. And a lot of times when those types

of cuts occur, it is the preventive side of our operation that gets

cut, it is your Deputy Friendly programs, your DARE programs,

those types of programs which I think are essential but really nonessential when you are taking care of responding to calls and serving the public.

Mr. RYAN. Mr. Greenwald, you mentioned that—did you not say

an East Troy station was the one you were comparing to? I actually

drove by there quite a bit and saw those lines, and I think the

radio was broadcasting that there was cheap gas over in East Troy.

You mentioned that it was 30 cents cheaper in East Troy which

is in Walworth County, a non-RFG county, than what you had to

sell it for. Clearly, as Mr. Taylor mentioned, demand is not totally

inelastic, it is not zero, so a 30-cent difference and then the perception that the mileage difference exists has changed consumer behavior. How long can you sustain that kind of a difference? How

long do you think—did you calculate how long you would have been

able to sustain that, and what do you think, in a nutshell, your

consumers were saying and what was their impression as to the

cause for that, and what does this do to you in your business as

far as sustaining that kind of differential?

Mr. GREENWALD. As far as sustaining it, it has been very difficult. We have not made any projections; all we know is that I

guess the answer is not long—we are talking months, not years,

that we could last at that present rate. The consumers, we have

had some at the beginning who came in and were actually mad at

me, feeling that I was making this big profit off of them. I had to

explain to them that it is not me, and most of them seemed to understand that. But in the meantime, like I said in my testimony,

most of them had the comment that, well, when things settle down,

hopefully we will be back, but that does not help the immediate

need.

When you are talking for us a tank load of gas would roughly cost around $10,000—now the cost has gone up to around $15,000.

Well, when you get maybe two loads a week—we used to get them

every other day, sometimes even more—now you get them twice a

week and you are not making anything on it, it does not take long

to go in the hole.

I think maybe initially there was a shortage of conventional

gas—or of reformulated gas, but when the price difference took

98

place, actually the opposite happened. There was a surplus, from

what I understand, of reformulated gas because nobody was buying

it. They had time to bring it in and let it sit in the tank, but at

the same time, conventional gas, they could not keep up. If my

Citgo station was across the county line, I would not have been

able to get gas for a week from Milwaukee, because the tanks were

drained out; they would have had to go to Madison or Illinois.

So by putting in reformulated gas, it has not, I do not think,

made any—I have a hard time seeing where it would make a big

decrease in the environment because people are still going somewhere to buy conventional gasoline. We have always had problems

from day one of people wanting the conventional gas. And to think

that we are making the big profit or big oil is making the profit.

Congressman Kucinich mentioned these ‘‘astronomical profits’’ and

this was during the time when gas was $1.25 and sometimes less

than $1. You know, when milk prices go up, I do not see a big

study, the Congressmen getting after the farmers saying you guys

are gouging us out there, but yet in the oil industry that seems to

be the mentality, that that type of thing is going on.

Things are getting better. As you mentioned, prices have started

coming down and people are starting to come back, but we are not

anywhere near where we were a year ago. Our stations are new,

our projections show that every year business should be building,

and that is not happening now. It was doing that up until around

the June turnover time, then business just dropped off the charts.

Mr. RYAN. If I could ask you to pass the microphone down to Mr.

Lyons, and we will involve you, because I know Dennis wanted to

get you back involved in the mix of things, and sorry to make you

guys keep passing the mic around.

Mr. Lyons, the reason I wanted to ask Mr. Greenwald to just answer before your questioning is I think there is a real life example,

a case in which 2 miles—is it 2 miles that separated?

Mr. GREENWALD. Two miles to the border, 6 miles to the station.

Mr. RYAN. Six miles to the station, 2 miles to the border. You

saw a difference in price of 30 cents per gallon of gasoline, a distance of 6 miles between these two stations where the non-RFG

Walworth County gasoline station in East Troy was 30 cents lower

than the RFG gasoline station in Mukwonago. Do you believe that

that differential is because of price gouging?

Mr. LYONS. Mr. Chairman, I really do not know what would account for that differential. I strongly believe that the RFG program,

in and of itself, does not account for that price differential, as I

have stated earlier. It would account for a small portion of that

price differential, but I cannot account for what would completely

account for that, no.

I might add you have to draw the line somewhere. The lines have

been drawn at the Milwaukee-Chicago-Gary, IN non-attainment

area, and Mr. Greenwald’s gas station is located in a border area

of that non-attainment area. Unfortunate as it is, I believe that his

situation represents somewhat of an anomaly similar to what you

would have with tobacco taxes or alcohol taxes in State border

areas or county border areas, but we do have to draw the line

somewhere, and the way the line has been drawn is with Milwaukee, Chicago, and Gary, IN. That line actually is based on a census

99

tract which involves a non-attainment area that goes back to the

Clean Air Act Amendments of 1990

I might add it was the Governor of the State of Wisconsin that

requested that the Milwaukee area be included within that Chicago-Gary, IN area rather than be separated out.

Mr. RYAN. And that is, I think, one of the reasons why the Governor and the State assembly and others are proposing a lawsuit

to try and get Wisconsin out of the Chicago attainment area, based

on the newer evidence revealed by the charts that we have just

been seeing to give us our own attainment area.

But given the fact that we are in the same attainment area, I

would like to ask a question which I think is very compelling,

posed by a professor from a local university here, from University

of Wisconsin-Parkside, Dr. Frank Egerton, who makes a compelling

point in something that I think has been handed out here, that if

the air quality in southeast Wisconsin can be improved by placing

greater control in Illinois and on their air that blows into Wisconsin, that would be great he says. Let me ask you this—and for Mr.

Koerber as well—if the air quality was significantly controlled and

improved in Illinois, meaning specifically Cook County and possibly

Gary, IN which is Lake County, IN, would that improve our air

here in Wisconsin?

Mr. LYONS. I believe it would, Mr. Chairman, and in fact, EPA

has proposed new tighter NOx standards for NOx emissions and

has required the State of Illinois and the State of Indiana—this actually was proposed over a year ago; it was stalled in litigation for

1 year; the courts have now recently lifted that stay and have ordered the State of Illinois and the State of Indiana, among others,

to submit a plan under what is known as the NOx SIP call. That

would have significant NOx reduction both in Illinois and Indiana,

as well as across the border into Wisconsin, and I think this area

would benefit greatly from that.

However, Mr. Chairman, this area still has its own emissions

and the NOx is a regional component of the smog and ozone problem. You still need VOC, volatile organic chemical emissions reductions locally right here in this area in order to ultimately come into

attainment, and the VOC reductions come, in large part, due to the

RFG program.

Mr. RYAN. But we are producing 1/100th of Cook County, so it

seems to me that the statistics bear out that given the way the regional wind patterns are directed, given the fact that we produce

1/100th of the emissions coming from Cook County and Lake County, IN, that that is where the brunt of the burden ought to be

borne. I think that is one of the reasons why many of us would like

to see a separate attainment area for Wisconsin.

I think it is just very unfortunate that those of us in Racine and

Kenosha Counties are saddled with this kind of designation, this

kind of mandate simply because of where we are located geographically, and that if we were located over by Janesville or Lake Geneva, we would not have this mandate, given the current makeup of

the VOCs in Racine and Kenosha Counties.

Mr. Taylor, I would like to actually turn to you for a second. I

know there was a good back and forth going on there, and you have

done a lot of studying on this. I would like to ask you for your comVerDate 11-MAY-2000 12:10 Jun 11, 2001 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 C:\DOCS\72583.TXT HGOVREF1 PsN: HGOVREF1
100

ments, and what I would like to get to is what are the reforms that

are out there that we can do to go after the emissions, go after the

source of the pollution rather than necessarily the recipients of the

pollution, and what in your opinion is your response. I know Mr.

Kucinich and you went back and forth and I know you wanted to

comment about that, and I wanted to give you that opportunity as

well.

And if anybody else wants to comment on some of those questions, I would be happy to offer that opportunity to any other witnesses.

Mr. TAYLOR. Regarding the back and forth with Congressman

Kucinich, Mr. Chairman, I am unusually sensitive to suggestions

of motive. It is one of the reasons I do not like oftentimes being

involved in politics, and twice Mr. Kucinich made a suggestion that

my motives were less than pure. He suggested that maybe somebody does not know as much about oil companies as I do because

they do not have stock. I do not own any stock in oil companies but

I do look at a business page and understand that they are not a

particularly profitable industry, say, compared to the telecommunications industry.

And second, I do not represent big oil, I do not represent oil companies, I have no idea what their opinions are, they do not talk to

me, I do not talk to them. The opinions that I am offering today

are the opinions of every economist who has spent more than 20

minutes looking at the data regarding the market in this area, and

I get rather sensitive to suggestions that—— Mr. RYAN. If I could just ask, please. Mr. Kucinich is not here

to defend himself, so if you could just stick to the topic.

Mr. TAYLOR. All right. Now, regarding the issue of pollution, I

thought it really ironic. One of the reasons that we all celebrate the

Clean Air Act is theoretically it allows us to protect ourselves from

other polluters in other areas. In other words, if I were to say, well,

why do we not just allow Chicago to worry about Chicago’s own

pollution, why do the feds tell Chicago how to reduce pollution, why

not just leave it to Chicago? Well, someone would say, well, if we

did that, then Chicago would just pollute all the nearby areas at

will; they would maybe not optimize their control practices, and

they would impose pollution burdens on Kenosha and other cities

and towns. That is why we need a Federal law to make sure that

local communities do not impose pollution burdens on somebody

else who does not want them.

Well, here we are 30 years after the Clean Air Act, and what is

happening? Places like Chicago are imposing their pollution burdens on other neighboring communities and getting away with it.

Everything the Clean Air Act was supposed to address when it

comes to urban ozone is being unaddressed today by the EPA.

What should we do about that? I think one thing we could do and

should allow are communities to sue neighboring communities that

are imposing these environmental burdens. Today most courts will

not accept a suit from, say, the city of Racine against the city of

Chicago based on pollution burdens it is imposing, because the

Clean Air Act preempts such suits. In other words, the Clean Air

Act is implicitly suggesting that the Federal Government has all

property rights in this area, Racine has no property interest here,

101

and that the right place for adjudication of this dispute between,

say, Racine and Chicago, is in the halls of Congress.

Far better, I think, to allow Racine to exercise its own prerogatives and to initiate suits against those who are polluting it and

imposing burdens. We could allow this sort of regime in such a

way, I think, as to alleviate much of the need of the Clean Air Act,

because the Clean Air Act is not accomplishing what it is supposed

to accomplish. Just the virtue of the fact we are having this debate

tells us that the Clean Air Act is not living up to what it is advertised to do.

Mr. RYAN. Yes, Mr. Koerber.

Mr. KOERBER. If I could, a bit of history, Mr. Chairman. Twelve

years ago, the State of Wisconsin sued Federal EPA over ozone

transport. That led to, among other things, the Lake Michigan Air

Directors Consortium and the regional approach that we are trying

to take with our four States to address this problem within this air

shed. We are trying to account for the differential contributions of

areas like Racine and Kenosha versus Cook County, Chicago area,

Gary, IN. So that clearly is a factor that has gone into the policymaking in assigning the relative contributions in developing control

strategies.

But as Mr. Lyons noted earlier, the general approach to adopt

NOx controls on power plants and industrial boilers regionally and

to adopt VOC controls locally has been shown through our studies

to be the most effective approach for this area to achieve the 1-hour

ozone quality standard, and preliminarily, to also meet the 8-hour

ozone air quality standard.

Mr. RYAN. Mr. Lyons.

Mr. LYONS. Yes, Mr. Chairman. A lot has been stated and I will

not be able to respond to each of the points, but certainly I would

agree with Mr. Koerber that we work very closely with his organization and our State partners in ensuring a regional approach in

reducing smog in the ozone non-attainment area. We feel very

strongly that a regional approach is the only way that we will ever

achieve the goals that we need in the NOx area. And again, I

would like to re-emphasize the VOC reductions need to come locally and the RFG program is a significant part of that.

I would also add that, Mr. Chairman, you are very much correct

that Chicago and Gary produce a much higher amount of smog

than this area here, but I might note that they have reduced their

smog in almost a corresponding fashion: the larger the emissions,

the larger the reductions there will have to be, and they are making significant progress in that area. I think that those benefits

will be seen here in Kenosha County.

Mr. RYAN. Let me ask you this, just on behalf of the Illinois delegation, I think, did they not appeal to you for an emissions credit

from the RFG mandate?

Mr. LYONS. Yes, they did, Mr. Chairman, and the agency right

now is proposing to approve a portion of that credit. It is not as

significant as the State of Illinois initially proposed but it is something more than the EPA was initially proposing to do. So that is

still under review right now, but I believe that the end result will

be a credit. That might have a minor effect on production costs,

very minor. It is really kind of a tempest in the teapot, I think.

102

Mr. RYAN. Well, I would like to summarize and say I think we

reached the purpose of this hearing, and the purpose of this hearing was to hear all sides of the debate, hear from who is being affected by high gas prices and hear from all different sides of the

debate as far as what has been going on.

We in the Wisconsin congressional delegation, meaning myself

and other members from the Wisconsin congressional delegation,

have repeatedly appealed to the EPA for waivers early on in the

hopes that we could have some more time to have a smooth transition into the reformulated gas mandate. Those waivers were denied, and I think that I would agree with Mr. Lyons now that if

those waivers were actually given today we would have a supply

shock, because we do not have conventional gas here in southeastern Wisconsin.

The problem, as I have seen it, from listening to the EPA, from

reading internal documents and studies, from the Department of

Energy, the Congressional Research Service, and many others, is

that this regulation and the timing of it, in conjunction with all of

these other factors, the Unocal patent, the transportation costs and

problems, the supply disruption from the pipeline—which is still

not at full capacity—all of these factors combined, on their own are

not a large total, but all these factors combined and brought together by the imposition of this mandate on June 1 balkanized the

market in Illinois and Wisconsin.

And what I mean when I say balkanized the market, it placed

us out of touch, it said that the gasoline in Wisconsin, the gasoline

in Illinois is different than everywhere else, we cannot tap into reserves over in Minnesota, over in southern Illinois, in Iowa, we

have a unique situation here. The situation was defined unique by

the Department of Energy.

The price that has been affixed by the most recent studies suggests that the RFG mandate, in its unique situation, accounts for

about 25 to 34 cents a gallon of gas. Thirty cents was a gallon of

gas difference between Mr. Greenwald’s pump and that which was

in East Troy. Maybe that hits the mark right there.

The point that was frustrating, I think, from consumers in southeastern Wisconsin, from those of us trying to get this temporary

regulatory relief, is that your estimations, your models were way

off the mark. The models that we were told was that the price of

gasoline would be absolutely minimal at the pump, at the retail

level, when phase II of RFG came into place. What then occurred

was a 40 to 50-cent change, meaning that we were paying 40 to 50

cents more for a gallon of gas than the rest of the country.

Was price gouging the cause for that? Well, the Congressional

Research Service and the Department of Energy say no. Is price

gouging a part of this? It certainly could be, and I think that is

why we asked for the experts at the Federal Trade Commission to

determine that, but to suggest that that is the only answer, when

in the face of all this other evidence, when in the face of the internal documents with the Department of Energy, the Congressional

Research Service, when in the face of the fact that we have what

is typically referred to as a balkanized market, is irresponsible, I

believe.

103

So hopefully from this we will learn a couple of lessons. We will

learn the lesson that it is unfortunate that Racine and Kenosha

Counties are between these areas that if they were over where

Janesville is, so to speak, we would not have the reformulated gas

spikes. It is unfortunate that we as a country have become more

dependent on foreign oil to the point where we are now 50 percent

dependent on foreign oil. It is unfortunate that when trying to

clean up our air, we cannot pinpoint the source of the pollution and

treat it at the source; rather, in many ways we miss that and go

and treat the pollution where the wind blows and where it ends up

being.

So hopefully from this hearing we will have gained more insight

as to the different explanations that are out there and hopefully

the Environmental Protection Agency in the future, when it is

doing its cost estimates, will not do simply a national average estimate of what is going to happen in the country as a whole, but it

will look at the individual regions; it will look at the individual

unique situations in regions like Milwaukee and Chicago.

The cost estimates from the EPA did not incorporate what would

happen in individual regions. Rather, it just said nationwide. That

is unfortunate. And had we been given the same kind of enforcement discretion such as the one that St. Louis got, whose prices did

not spike as high as ours, I think we could have avoided this kind

of crisis that we have incurred.

So the goal now is as prices are declining—which is a good

thing—they are still high but they are declining, the goal now is

to try and learn from this, and I hope the lesson that the EPA

learns is do regional analyses, look at the separate regions, and

hopefully for those of us who are in public policymaking, who are

truly interested in cleaning up our air, that we do it in the most

common sense, scientifically based method that is attainable for us.

So no one is right 100 percent in this issue, I think. There is a

lot of finger pointing that is going around here. Hopefully we have

gained some more insight into this issue, and I want to thank those

of you who have traveled large distances to get here. Specifically,

Mr. Taylor, I know you came from Washington, DC; Mr. Lyons and

Mr. Koerber, I know you have traveled a good distance to come

here; and Mr. Greenwald, thanks for coming over from

Mukwonago; and Sheriff McReynolds, I know it is a few blocks but

I know you are a busy man, and I appreciate you taking your

morning out to share with us your insight.

I appreciate those of you for coming, and right now I will adjourn

this hearing.

[Whereupon, at 11:14 a.m., the subcommittee was adjourned.]

Æ