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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

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

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
72-583 DTP                  WASHINGTON : 2001
_______________________________________________________________________
 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

                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)
DAVID VITTER, Louisiana

                      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                 DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    TOM LANTOS, California
LEE TERRY, Nebraska                  PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho          HAROLD E. FORD, Jr., Tennessee
DAVID VITTER, Louisiana

                               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

                            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

 
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 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 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 Gary-Chicago-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 understood, 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:]
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    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.
    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 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.
    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:]
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    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.
    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.
    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.
    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 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:]
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    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 three-quarters 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.
    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:]
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    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.
    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 opportunities 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 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:]
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    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 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:]
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    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 1\1/2\ 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 2\1/2\ 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, 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 3\1/2\ years old and 
the Shell is 1\1/2\ 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 2\1/2\ to 3\1/2\ 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.
    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-to-date 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 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:]
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    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 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 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, 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.
    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-
thought-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 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; 
industry 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 non-RFG 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 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?
    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 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.
    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 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 
non-attainment. 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?
    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.
    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 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 non-essential 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 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 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 comments, 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, 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.
    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.
    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.]

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