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S. HRG. 109–1026

THE IMPACT OF THE ELIMINATION OF MTBE

HEARING

BEFORE THE

COMMITTEE ON

ENVIRONMENT AND PUBLIC WORKS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 29, 2006

Printed for the use of the Committee on Environment and Public Works

(

Available via the World Wide Web: http://www.access.gpo.gov/congress.senate
COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JAMES M. INHOFE, Oklahoma, Chairman

JOHN W. WARNER, Virginia

CHRISTOPHER S. BOND, Missouri

GEORGE V. VOINOVICH, Ohio

LINCOLN CHAFEE, Rhode Island

LISA MURKOWSKI, Alaska

JOHN THUNE, South Dakota

JIM DEMINT, South Carolina

JOHNNY ISAKSON, Georgia

DAVID VITTER, Louisiana

JAMES M. JEFFORDS, Vermont

MAX BAUCUS, Montana

JOSEPH I. LIEBERMAN, Connecticut

BARBARA BOXER, California

THOMAS R. CARPER, Delaware

HILLARY RODHAM CLINTON, New York

FRANK R. LAUTENBERG, New Jersey

BARACK OBAMA, Illinois

ANDREW WHEELER, Majority Staff Director

KEN CONNOLLY, Minority Staff Director

(II)
(III)

CONTENTS

Page

MARCH 29, 2006

OPENING STATEMENTS

Boxer, Hon. Barbara, U.S. Senator from the State of California ........................ 4

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma .................... 1

Jeffords, Hon. James M., U.S. Senator from the State of Vermont, prepared

statement .............................................................................................................. 36

Lautenberg, Hon. Frank R., U.S. Senator from the State of New Jersey .......... 6

Lieberman, Hon. Joseph I., U.S. Senator from the State of Connecticut, prepared statement ................................................................................................... 38

Murkowski, Hon. Lisa, U.S. Senator from the State of Alaska, prepared statement ...................................................................................................................... 37

Obama, Hon. Barack, U.S. Senator from the State of Illinois, prepared statement ...................................................................................................................... 37

Warner, Hon. John W., U.S. Senator from the Commonwealth of Virginia ....... 5

WITNESSES

Caruso, Guy, Administrator, Energy Information Administration, U.S. Department of Energy, Accompanied by: Joanne Shore, Lead Analyst, Energy

Information Administration ................................................................................ 8

Prepared statement .......................................................................................... 39

Response to an additional question from Senator Thune ............................. 49

Dinneen, Bob, president and chief executive officer, Renewable Fuels Association ........................................................................................................................ 26

Prepared statement .......................................................................................... 75

Responses to additional questions from Senator Inhofe ............................... 78

Douglass, Bill, chief executive officer, Douglass Distributing Company ............. 23

Prepared statement .......................................................................................... 70

Responses to additional questions from Senator Inhofe ............................... 74

Early, A. Blakeman, American Lung Association ................................................. 25

Prepared statement .......................................................................................... 58

Meyers, Robert, Associate Assistant Administrator, Office of Air and Radiation, U.S. Environmental Protection Agency ................................................... 10

Prepared statement .......................................................................................... 52

Responses to additional questions from Senator Inhofe ............................... 54

ADDITIONAL MATERIAL

Analysis, Energy Information Administration, Eliminating MTBE in Gasoline

in 2006 .................................................................................................................. 40

Article, Hidden Poison, MTBE Tainting Water Across State, by Matt Pacenza,

staff writer, April 9, 2006 .................................................................................... 66

Chart, Estimated Increase in Ethanol Demand, Relative to Recent Ethanol

Use ......................................................................................................................... 91

Study, A Review of Cost Estimates of MTBE Contamination of Public Wells,

American Water Works Association ................................................................... 60

Court Case, South Tahoe Public Utility District vs., Atlantic Richfield Company ................................................................................................................... 119–126

Letters from:

American Lung Association, April 20, 2006 ................................................... 65

U.S. House of Representatives, Committee on Commerce, Bob Meyers,

counsel; Stephen Sayle, counsel, June 5, 1995 ......................................... 92–118
Page

IV

Statements:

American Petroleum Institute ......................................................................... 80

National Petrochemical and Refiners Association.......................................... 82–90
(1)

THE IMPACT OF THE ELIMINATION OF MTBE

WEDNESDAY, MARCH 29, 2006

U.S. SENATE, COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, Washington, DC.

The committee met, pursuant to notice, at 9:30 a.m. in room 628,

Senate Dirksen Building, Hon. James M. Inhofe (chairman of the

committee) presiding.

Present: Senators Inhofe, Warner, Murkowski, Thune, Jeffords,

Boxer, Carper, Lautenberg, and Obama.

Senator INHOFE. Our meeting will come to order. I understand

Senator Boxer is almost here, and some others, here she is. We

went ahead and decided to start without you, but I was going to

talk until you got here. How is that?

Senator BOXER. All right.

Senator INHOFE. We will have others that will be joining us.

We have two panels today, and I want to welcome the first panel.

Guy Caruso, it is nice to have you here, and Robert Meyers. You

have an extensive background over in the House. You have all the

answers and it’s always refreshing to know that there is someone

on a panel that has all the answers.

[Laughter.]

OPENING STATEMENT OF HON. JAMES M. INHOFE,

U.S. SENATOR FROM THE STATE OF OKLAHOMA

Senator INHOFE. We appreciate your being here.

We will have other members here on both sides of the aisle and

their staffs are here. There will be questions submitted for the

record.

MTBE may be the most carefully scrutinized and debated substance since the 1990 Clean Air Act amendments required its use.

Today’s oversight hearing on the impacts if the elimination of

MTBE is the latest in a long history before this committee. I am

going to summarize that history.

The 1990 Clean Air Act Amendments established the reformulated gas program, that’s the RFG program, which most regard as

an environmental success story. Yet, the inclusion of the oxygenate

requirement as a component of RFG resulted in a few unintended

consequences. I would like to remind my colleagues that the 2 percent oxygen requirement was not included in the bill passed by this

committee which laid on the foundation for the amended Clean Air

Act.

Rather, the oxygenate requirement was added after vigorous debate and was the only successful amendment on the Senate floor.
2

Senators from both sides of the aisle hope that the requirement

would lay the groundwork for greater ethanol use, but acknowledged that MTBE would likely be preferred as it is more affordable

to the consumers.

Yet, although MTBE exceeded air-related goals, it tainted the

taste and the smell of the water in some instances. Further, the

2 percent oxygenate requirement and the air quality concerns of

the certain areas created boutique fuel regions, leading to higher

prices during supply problems.

Last year, this committee passed S. 606, the Reliable Fuels Act,

which called for the elimination of the 2 percent requirement and

the phase-out of MTBE within 4 years, but still preserving the

MTBE authority for States. As was the case with the bill that

passed this committee in 1989, S. 606 was changed in material

ways after we reported the bill. Today the Nation faces—although

temporary—some potential unintended consequences.

Pursuant to the Energy bill, the 2 percent oxygenate requirement

will be repealed this May. A majority of members recommended

that oxygenate producers and marketers be afforded liability protection against defective product lawsuits for their mere compliance

with the law. Unfortunately, that provision was not included in the

Energy bill. To me, that is just remarkable, that we as Government

can mandate things to take place and then not offer the protection

for those who are simply following the law.

Therefore, refiners have been forced to stop using MTBE more

suddenly than stakeholders, industry or the committee have ever

considered. They had to stop, because after this is no longer a requirement, then that could be used against them in lawsuits, as we

all know.

One of the facts is that MTBE has been the preferred oxygenate

used in reformulated gas, and its elimination means a corresponding loss of fuel supply that must be made up. Ethanol is

needed to replace MTBE, but the ethanol industry, refiners and

marketers, infrastructure operators, are working hard to make

sure that the transition is as painless as possible.

We have a chart up here and you can see, in terms of the supply,

the green bar on this chart from the EIA illustrates just how much

ethanol is currently being produced, a significant amount in a relatively short period of time. However, the sudden elimination of

MTBE and the current state of the ethanol industry means that

significant volumes of ethanol must be imported.

The orange bar shows that about 130,000 barrels per day of additional ethanol is needed to replace MTBE. In other words, the

United States needs to come up with close to half of the ethanol

currently being produced domestically.

Actually, the transition means even greater supply loss than this

chart illustrates, because the production of ethanol-blended RFG,

yields 5 to 6 percent less fuel per barrel. It is critical for the Nation

to increase its petroleum and biorefinery capacity. My legislation,

the Gas PRICE Act, and then the amendment that we tried to put

on LIHEAP, the Energy Price Reduction Act, would have assisted

in this transition.

I really believe that the Gas PRICE Act was one of the biggest

surprises I had here, to see it defeated right down party lines,
3

when it was a very moderate bill that would have had a dramatic

effect, a positive effect on the refining capacity of this country. We

would expedite the permitting process for traditional as well as renewable fuels infrastructure, so that regions of the country would

not have to face the temporary supply shortfalls and corresponding

price increases likely this summer.

Congress must be mindful of the unintended consequences before

considering any future action. I urge my colleagues, stakeholders

and the public to allow the recently enacted fuels title of the Energy bill to be fully implemented.

The EIA and our other witnesses will testify that the Nation’s

fuel system requires infrastructure investment and most importantly, time to develop. The refining industry’s position dealing

with fuels policy, warning against sudden transition, the need for

liability protection and so forth, that is very understandable. This

hearing is squarely centered on the imminent future, not the past.

I look forward to hearing from our witnesses if they have any policy recommendations for Congress, including the likelihood of importing more ethanol.

[The referenced chart referred to may be found on page 91.]

[The prepared statement of Senator Inhofe follows:]

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM THE

STATE OF OKLAHOMA

MTBE may be the most carefully scrutinized and debated substance since the

1990 Clean Air Act amendments required its use. Today’s oversight hearing on the

impacts on the elimination of MTBE is the latest in a long history before this committee. I am going to summarize that history.

The 1990 Clean Air Act amendments established the reformulated gasoline or

RFG program, which most regard as an environmental success story. Yet, the inclusion of the oxygenate requirement as a component of the RFG program resulted in

a few unintended consequences.

I would like to remind my colleagues that the 2 percent oxygen requirement was

not included in the bill passed by this committee, which laid the foundation for the

amended Clean Air Act. Rather, the oxygenate requirement was added after vigorous debate and was the only successful amendment on the Senate floor.

Senators from both sides of the aisle hoped that the requirement would lay the

groundwork for greater ethanol use, but acknowledged that MTBE would likely be

preferred as it is more affordable for consumers.

Yet, although MTBE exceeded air-related goals, it tainted the taste and smell of

water in some instances. Further, the 2 percent oxygenate requirement and air

quality concerns of certain areas created boutique fuel regions, leading to higher

prices during supply problems.

Last year, this committee passed S. 606, the Reliable Fuels Act which called for

the elimination of the 2 percent requirement and a phase-out of MTBE within 4

years, while preserving the authority of States to continue its use.

As was the case with the bill that passed this committee in 1989, S. 606 was

changed in material ways after we reported the bill and today the Nation faces, although temporary, some potential unintended consequences.

Pursuant to the Energy bill, the 2 percent oxygenate requirement will be repealed

this May.

A majority of members recommended that oxygenate producers and marketers be

afforded liability protection against defective product lawsuits for their mere compliance with the law. Unfortunately, that provision was not included in the Energy bill

either.

Therefore, refiners have been forced to stop using MTBE more suddenly than

stakeholders, industry, or this committee had ever considered.

Fact: MTBE has been the preferred oxygenate used in reformulated gasoline, and

its elimination means a corresponding loss of fuel supply that must be made up.

Fact: Ethanol is needed to replace MTBE.

Fact: The ethanol industry, refiners, marketers, and infrastructure operators are

working hard to make sure that the transition is as painless as possible.
4

The green bar on this chart from EIA illustrates just how much ethanol is currently being produced—a significant amount in a relatively short period of time.

However, the sudden elimination of MTBE and the current state of the ethanol

industry means that significant volumes of ethanol must be imported.

The orange bar shows about 130,000 barrels per day of additional ethanol is needed to replace MTBE. In other words, the United States needs to come up with close

to half of the ethanol currently being produced domestically.

Actually, the transition means even greater supply loss than this chart illustrates

because the production of ethanol-blended RFG yields 5 to 6 percent less fuel per

barrel.

It is critical for the Nation to increase its petroleum and bio-refinery capacity. My

legislation—the Gas PRICE Act and Energy Price Reduction Act amendment to the

LIHEAP bill—would assist with the transition away from MTBE.

We would expedite the permitting process for traditional as well as renewable fuel

infrastructure so that regions of the country will not have to face the temporary

supply shortfalls and corresponding price increases likely this summer.

Congress must be mindful of the unintended consequences before considering any

future action. I urge my colleagues, stakeholders, and the public to allow the recently enacted fuels title of the Energy bill to be fully implemented.

As EIA and our other witnesses will testify, the Nation’s fuel system requires infrastructure, investment, and most importantly, time to develop.

The refining industry’s positions dealing with fuels policy—warning against sudden transitions, the need for liability protection, etc.—are well understood.

This hearing is squarely centered on the imminent future not the past. I look forward to hearing from our witnesses and if they have any policy recommendations

for Congress, including the likelihood of importing more ethanol.

Thank you.

Senator INHOFE. Senator Boxer, would you like to be recognized

for an opening statement?

OPENING STATEMENT OF HON. BARBARA BOXER,

U.S. SENATOR FROM THE STATE OF CALIFORNIA

Senator BOXER. I would. I thank you very much, Mr. Chairman.

Thank you for holding this hearing and I am pleased to say that

we have a ban on MTBE in California already in place, which will

without a doubt aid in the prevention of additional damage to our

drinking water supply, damage already estimated to reach $7 billion.

Seeing an end in sight to MTBE use nationwide is good. I want

to add that MTBE is gone from the gas in California, and the removal of it was never, to my knowledge, and we have researched

all the records on this, cited as a reason for high gas prices. Oil

companies have been long on notice that MTBE must be phased

out of the gas supply. Its use was never mandated by the Clean

Air Act. In fact, oil companies have even been found to have acted

‘‘with malice’’ by a California jury in the South Lake Tahoe case.

They settled for nearly $70 million.

It has long been obvious that MTBE was the wrong oxygenate

to use in gasoline. The oil companies have known for years that

MTBE is extremely soluble in water, persistent and smells and

tastes foul. Even if it was safe to drink, no one would drink it because of the odor and the appearance. It renders water containing

fairly low levels, 20 to 40 parts per billion, unusable for drinking.

There are also potential health concerns with MTBE, including

possible carcinogenicity and other toxicity. The oil companies were

also put on notice of the serious problems with MTBE when 25

States, including California, enacted some sort of MTBE ban. The

question I would have liked to have posed to the oil companies in

today’s hearing, although they were not invited, is what has taken
5

them so long to deal with this threat to our drinking water. Why

haven’t they addressed the MTBE problems years ago?

Unfortunately, again, they were not invited here to explain why

they have let this mess go on all these years. We have asked to

have them here. The claim that the Government made them use

MTBE is patently false. In the Lake Tahoe case, for example, the

court found that use of MTBE was permissible, but not required,

underscore, not required. We now hear the oil companies intend to

phaseout MTBE immediately and may potentially disrupt gas supplies. It’s sort of like, let’s punish the public again, for something

they had nothing to do with. It’s the oil companies who chose

MTBE.

Interestingly, the oil companies themselves testified in hearings

almost 5 years ago on this issue. Mr. Edward Murphy stated in a

House hearing on behalf of the American Petroleum Institute that

phasing out MTBE would be, and here it is, a walk in the park.

He said, making up roughly 300,000 barrels a day of MTBE volumes when we are producing gas at 8 million barrels a day over

a 4-year-period is a virtual walk in the park.

So lots of crocodile tears and worries about nothing. That was almost 5 years ago. The oil companies were ready then for a walk

in the park, now it would be a stroll in the park all these years

later.

That gentleman who testified for the oil companies never said

disruption was inevitable, gas price hikes were inevitable, or that

consumers would have to pay through the nose. The oil companies

failed to remove MTBE for years, even though they knew and they

admitted that a reasonable phase-out would smooth the way. The

oil companies now claim legal liability due to the elimination of the

oxygenate requirement which forces them to act immediately. It is

not true. Nothing in the law forces them to act immediately. Period. These liability defenses have not been accepted by the courts.

What are the oil companies taken for now? We’ve heard waivers

from environmental laws are on their wish list, they also again

may want waivers of liability for MTBE. That’s a get out of jail free

card. Tom DeLay led that fight in the House and lost.

There are new initiatives underway in my own State to get big

oil off the hook, a proposed ballot initiative in California that would

eliminate punitive damages for MTBE. No surprise, the L.A. Times

reports this proposal is backed by Chevron.

Mr. Chairman, I see my time is running low. I would ask that

the rest of my statement be placed into the record. But the bottom

line here is that all the crocodile tears about how they always

wanted these liability waivers, the fact is, oil profits have never

been as good and they have always been liable for MTBE as they

should be, as the courts have so stated. Thank you.

Senator INHOFE. Without objection, all the entire statements will

be a part of the record.

Senator Warner.

OPENING STATEMENT OF HON. JOHN W. WARNER,

U.S. SENATOR FROM THE COMMONWEALTH OF VIRGINIA

Senator WARNER. Thank you, Mr. Chairman.
6

First, I supported you on the amendment that this committee

very wisely and properly put into the Energy bill, the 4-year phaseout program. I am not a fan of MTBE. All of us who have been

around here for a while recognize this is one of the political footballs that is being kicked back and forth. But it really has a serious

impact on the health of the Nation and other things. I am fully

supportive of whatever initiatives this committee wishes to take regarding this problem.

I think this hearing is timely to try and elevate from politics

some of the real serious ramifications in the marketplace of this

conference revision of your amendment. So I would simply ask to

have my full statement placed in the record and once again commend the Chair for its leadership on this issue.

[The prepared statement of Senator Warner follows:]

STATEMENT OF HON. JOHN W. WARNER, U.S. SENATOR FROM THE

COMMONWEALTH OF VIRGINIA

Mr. Chairman. Thank you for calling this hearing today on the impact of the

elimination of MTBE from the Nation’s fuel supply. Like you, I share significant

concerns about our fuel supply system and our ability to meet market demands as

well as minimize price volatility. That is why I have long advocated an expansion

in the sources of our domestic supply of oil and natural gas and supported efforts

to expand the capacity of our refineries.

The supply of transportation fuels in our Nation are subject to myriad influences

including national and global politics, increasing worldwide demand, Federal and

State policy, and the ever unpredictable Mother Nature. As a result of last year’s

Hurricanes we saw supply disruptions that this committee attempted to address

through a refining capacity bill and we now see the potential for a similar situation

with regard to supply as a result of the virtual wholesale replacement of MTBE

with ethanol.

With the removal of the oxygenate requirement and industry’s decision to effectively eliminate MTBE from our fuel mix, octane boost and emission requirements

must be met with some sort of additive. Ethanol is the obvious answer for to near

term because of relatively widespread infrastructure, the ability for 99.9 percent of

vehicles to accept the fuel, and a generous Federal tax code.

However, as the Energy Information Administration (EIA) has provided in its report, there are regions of the country that will likely see short-term disruptions in

supply due to a number of factors. In the mid-Atlantic for example, we currently

rely on MTBE and don’t have the infrastructure set up for the transportation and

distribution of ethanol. Other areas of the country with established distribution systems, an educated marketing and customer base, and boutique fuels requiring ethanol will continue to be a draw on this supply. All the while we are expecting a

net increase in ethanol consumption of more than 200,000 barrels a day of ethanol

nationwide in a very short period of time. The competition for this demand surely

will place pressure on prices.

I have been critical of our Federal policy toward ethanol, especially in the current

climate, because I feel that market forces are already strong enough to support the

ethanol industry and meet demand. And while I don’t agree with all of our current

Federal policy in this arena, our mission today is not necessarily to debate those

points. We have a responsibility to explore the potential effects during this transition phase to ethanol during the upcoming peak driving season and discuss possible

solutions. One thing is clear, the removal of the oxygenate requirement is going to

have a significant effect on the market this season and I look forward to hearing

from our witnesses about this issue and how Congress may address it.

Senator INHOFE. Thank you, Senator Warner.

Senator Lautenberg.

OPENING STATEMENT OF HON. FRANK R. LAUTENBERG,

U.S. SENATOR FROM THE STATE OF NEW JERSEY

Senator LAUTENBERG. Mr. Chairman, thank you for calling this

hearing.
7

I sit here as a grandfather of a child who has asthma and that,

for those who witness the condition, know that it a blight and often

with serious overtones. His life depends on the quality of air and

his functioning, as a child, and my daughter’s functioning as a

mother of four, in many areas during the summertime there are

days when parents are advised not to let their children play outdoors if they have asthma.

What my daughter does is when he plays sports and when they

go away from the home area, she checks to see where an emergency facility is, just to be prepared. It is painful to hear him

wheeze and lose his energy. So in many areas during the summertime, there are days when parents are advised not to let their children play outdoors if they have asthma, because the air is

unhealthy and could trigger an attack.

But air pollution is not only a threat to children with asthma.

According to a study from the Harvard School of Public Health, as

many as 4 percent of premature deaths in the United States can

be attributed to air pollution. When we look at the costs for shifting

away from MTBE, I don’t think we dare ignore the other side of

the seesaw which says all kinds of expenses are incurred as a result of the cost of health and family dislocation and other problems.

As many as 30,000 Americans die prematurely every year because

of problems related to air pollution.

So I support the Clean Air Act and I support the requirement for

the past decade for cleaner gasoline in cities with the worst air pollution, something I supported. It is up to the oil companies to decide how they met the requirements for cleaner fuel. Some used

ethanol, others chose to use MTBE. The problem with MTBE, we

know now, it is polluting groundwater, that’s been known for several years. It’s considered to be a likely human carcinogen. Many

States are banning this chemical, including New Jersey. Now New

Jersey is going to take some time for it to be fully in effect, 4 years

to be specific. I wish that we could accelerate that pace. Apparently

California has done much better in clearing up that problem.

So this issue doesn’t come up overnight. The oil companies have

plenty of time to consider other options. They certainly have been

making enough money to invest in developing for alternative additives. I hope these companies will not use this phase-out of MTBE

as an excuse to manipulate a shortage in the market, drive up

prices further.

Mr. Chairman, Exxon reported the largest profit ever, not just

for an oil company, but for any company, $36 billion in a single

year. That was in the year when Hurricane Katrina struck and

Americans were being hit hard at the pump. It was a bad year for

everybody, everyday Americans, but a great year for big oil.

We need to put the oil companies on notice that they can’t use

MTBE as another excuse to boost up oil prices. Mr. Chairman, I

appreciate the fact that you’ve called this hearing and I look forward to the testimony from our witnesses and the opportunity to

talk to them.

Senator INHOFE. Thank you, Senator Lautenberg.

We will now proceed to our witnesses. We would like to ask you

to try to confine your statements to 5 minutes. Your entire state-
8

ment will be a part of the record. We will start with you, Mr. Caruso.

STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY, ACCOMPANIED BY: JOANNE SHORE, LEAD ANALYST,

ENERGY INFORMATION ADMINISTRATION

Mr. CARUSO. Thank you, Mr. Chairman, members of the committee. I appreciate the opportunity to appear before you today to

discuss possible consequences of eliminating MTBE in U.S. gasoline supplies this summer.

I am accompanied by Joanne Shore, the EIA’s lead analyst on

this issue.

EIA is the independent statistical and analytical agency in the

Department of Energy. We do not promote or formulate policy positions. We do conduct analyses. Last month we completed an analysis of the effects of the elimination of MTBE on gasoline in 2006,

which I will be summarizing and updating.

In 2005, a number of petroleum companies announced that they

would remove MTBE from their gasoline in 2006, due to a number

of State bans and liability concerns. EIA’s discussions indicate that

the industry is trying to eliminate virtually all MTBE prior to the

driving season this summer.

Currently the largest use of MTBE is in reformulated gasoline,

or RFG, in Texas and in parts of the East Coast. Other areas are

using reformulated gasoline—in the Midwest, California, New York

and Connecticut. They have already removed MTBE and moved to

ethanol as the oxygenate replacement.

Due to a provision in last year’s Energy Policy Act, as the Chairman has mentioned, as of May 2006 the previous oxygen content

requirement for reformulated gasoline will no longer be in effect.

In theory, this means that suppliers could sell reformulated gasoline made without either MTBE or ethanol. However, given the

need to replace the octane and clean-burning properties of MTBE,

nearly all companies have been planning to blend ethanol into gasoline as they eliminate MTBE.

This shift from MTBE to ethanol involves major changes in operations and supply sources to the East Coast and Texas, particularly

for those reformulated gasoline markets. While refiners, marketers,

pipelines, terminal operators and ethanol suppliers have been preparing for the transition, this change is taking place on a tighter

time schedule than previous MTBE to ethanol transitions in California, for example, which was noted by Senator Boxer. A shift in

this magnitude in this short of time could cause temporary local

supply dislocations and price volatility.

To make reformulated gasoline using ethanol, refiners must

change their operations to produce a base reformulated gasoline

blend stock, so-called RBOB. This change results in some loss of

RFG production capability and product volume. Other petroleum

blending components can be used to replace the lost volume and

meet emissions limitations. But finding supply of suitable blending

components may pose a problem for some gasoline producers, limiting their production and requiring other refiners to find or

produce more.
9

The Northeastern gasoline markets receive about 90 percent of

their RFG supplies from East Coast refineries and imports into the

New York harbor area, with the remainder coming from Gulf Coast

refineries. As the shift to ethanol reduces RFG production capability at East Coast refineries, supplies from the Gulf Coast and

imports are expected to increase. However, some foreign refiners

are currently unable to produce RBOB components, and hence

there will be fewer potential foreign suppliers for ethanol blended

reformulated gasoline. Shifts in past supply patterns for RFG will

add to supply uncertainty during this transition.

Changes are also required to the distribution system. Ethanolblended gasoline cannot be mixed with other gasolines and cannot

be moved through pipelines. RBOB is moved through the petroleum distribution system, but unlike MTBE, ethanol must be

transported and sold separately, then blended with RBOB at the

end of the distribution chain. This requires time and investment to

add blending facilities, to add or convert storage facilities and to

convert retail outlets.

Pipelines and terminals are limited in the number of products

they can carry efficiently. In many cases, the system would be

strained to handle MTBE-blended RFG, ethanol and RBOB. As a

result, even if some suppliers had wanted to continue to use

MTBE-blended RFG, the distribution system could become a barrier in many areas. The recent FERC decision regarding the Colonial Pipeline announcement raised the question of whether or not

suppliers were planning on using MTBE into this summer season.

The FERC decision was only directed at how Colonial Pipeline

should respond if a supplier wished to continue shipping MTBE

RFG. Colonial is still bound by its usual shipping requirements and

physical constraints and EIA is not aware of suppliers wanting to

provide MTBE-blended RFG this summer.

This large increase in ethanol demand and associated transportation needs implies a tight ethanol market at least the first half

of 2006. As noted, January 2006 production of ethanol was 288,000

barrels a day and about 130,000 barrels a day may be needed to

replace MTBE.

Moving additional ethanol from the Midwest to the East

Coast——

Senator INHOFE. Mr. Caruso, try to wind up, would you, please?

Mr. CARUSO. Yes, sir. Moving additional ethanol from the Midwest to the East Coast also poses a transportation challenge. East

Coast ethanol use is expected to increase 90,000 barrels a day,

which, if it all came from the Midwest, would result in 31⁄2 times

the volume in 2006 compared with 2005.

In conclusion, Mr. Chairman and members of the committee, petroleum and ethanol companies are working diligently to make this

transition away from MTBE to ethanol. This transition does pose

some of the challenges that I have mentioned for both supply and

logistics. As a result, ethanol supplies are expected to remain tight

through the summer, and increased potential exists for short-term

supply disruptions and associated price volatility.

Mr. Chairman, I would be pleased to answer questions at the appropriate time.

Senator INHOFE. Thank you, Mr. Caruso.
10

Mr. Meyers.

STATEMENT OF ROBERT MEYERS, ASSOCIATE ASSISTANT ADMINISTRATOR, OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION AGENCY

Mr. MEYERS. Yes, Mr. Chairman, members of the committee, I

appreciate the opportunity to come before you today to testify regarding the impact of eliminating MTBE.

My testimony will address how recent amendments to fuel quality regulations and ongoing implementation of the Energy Policy

Act of 2005 affect U.S. fuel programs, in particular, the Reformulated Gasoline Program, or RFG. Following passage of the 1990

Amendments to the Clean Air Act, EPA was tasked with developing and implementing several new motor vehicle emission and

motor vehicle fuel quality programs to reduce harmful evaporative

and exhaust emissions that negatively impact our Nation’s environment and the public health. Among many other new provisions, the

Clean Air Act required implementation of new fuel quality programs with prescribed fuel parameters.

In 1992, the Wintertime Oxygenate Fuels Program was implemented, and that program was required in more than 30 areas exceeding air quality standards for carbon monoxide.

Senator BOXER. Would you speak up a little, Mr. Meyers? I’m

having a hard time hearing you.

Senator INHOFE. Move your microphone a little closer to you, Mr.

Meyers.

Mr. MEYERS. I apologize. I was just referencing the implementation in the 1990 Amendments, and in 1992, we began that implementation in our fuel quality programs by implementing the

Oxygenated Fuels Program at that point in time. This program required gasoline to contain 2.7 weight oxygen and it was instrumental, actually, in bringing many of the areas that had been in

carbon monoxide non-attainment into attainment.

Subsequently, in 1995 after a period of regulatory negotiations,

we began implementation of the RFG program. The 1990 amendments, I think as people are well aware, required RFG to contain

2.0 weight percent oxygen and established essentially a two-phase

program in 1995 and 2000. Historically, the RFG program has used

large quantities of MTBE. In 1995, I think our figures showed

about 2.5 billion gallons of MTBE was used in RFG compared with

about 300 million gallons of ethanol.

Today, after roughly 10 years of the program, 35 percent or

thereabouts of our gasoline is RFG. Both ethanol and MTBE have

been used in the program, but until recently, the MTBE percentage

was approximately 85 percent or so.

Over the last 6 to 7 years, concerns have arisen with respect to

groundwater contamination from leaking underground storage

tanks having gasoline containing MTBE. As the Senator from California referenced, these concerns have prompted some States to

ban MTBE, including such large markets as California, New York

and Connecticut. That has had an impact on MTBE usage over the

last 2 or 3 years.

Altogether, EPA estimates that about 3.2 billion gallons of MTBE

were used in the RFG program in 1997. This level increased about
11

3.4 billion gallons in 2000. In 2004, following California’s ban, the

use of MTBE declined to around 2.1 billion gallons. Correspondingly, ethanol usage in the RFG program has grown from 420 million gallons since 1997 to 1.7 billion gallons in 2004.

I mentioned before at the beginning of the testimony the Energy

Policy Act, which Congress passed in August of last year. So far,

in response to the law’s enactment, EPA has promulgated a direct

final rule of the RFG regulations in order to eliminate regulatory

standards requiring the use of oxygenates in RFG. This rule, when

it becomes effective, will remove the current regulatory standards

nationwide. The rule will also serve to implement provisions regarding commingling of ethanol and non-ethanol blended reformulated gasoline.

In terms of other energy-packed provisions, we have published a

direct final rule regarding the default rule for RFS compliance in

2006. We are continuing to work on the renewable fuels standard

regulation, which will be necessary for 2007 and beyond.

I don’t have much time left, so I would just sum up to say that

the Agency understands as a result of the changes made by the Energy Policy Act of 2005, in particular the removal of the RFG oxygen requirement, MTBE use in the RFG program will decline significantly. As noted by EIA, some providers are already

transitioning away. The Northeast market may undergo substantial conversion to ethanol RFG. Southern RFG markets, too, such

as Houston and Dallas, are likely experiencing a changeover to ethanol RFG as well.

While we defer to EIA on the broad economic analysis, as an

Agency we remain committed to successful implementation of the

Energy Policy Act. I want to thank the Chairman of the committee

and members of the committee for your attention. This concludes

my prepared statement and I am willing to answer whatever questions you might have.

Senator INHOFE. Thank you, Mr. Meyers, for that excellent statement.

Mr. Caruso, I am going to pick up on his last statement concerning what will result from the oxygenate elimination. For years,

refining and related industries urged Congress to protect them

from product liability lawsuits for following the law and using

MTBE under the oxygenate requirement. The Energy bill repealed

that requirement but did not include the product liability protection. We spent a long time on the floor looking at this, because this

is one of the things that seemed to be so logical.

Yesterday, the Wall Street Journal, I suspect everyone in here

has read that article, it is an excellent article, they published a

piece about the elimination of MTBE from gasoline without liability

protection, noting that Congress was well aware that high prices

would result. I imagine that you are familiar with that article.

Would you agree that much of the industry made the public

aware that it would stop using MTBE without the liability protection? To me, it’s a no-brainer. In a court of law, I would assume

if they had the oxygenate requirement, that would offer some defense. But you take that away, then they would be without defense.

Would you agree with that, and what’s your assessment of the conclusions of the article that I referred to?
12

Mr. CARUSO. Well, the specific issue of how well informed the

public was, that’s very difficult to know. But certainly it’s clear

that the refining interests sought the MTBE liability protection,

based on testimony before this committee and the Energy and Natural Resources Committee during the debate on EPACT last year.

So I don’t think there’s any doubt about that part of it.

It’s also my impression that they generally favored the repeal of

the oxygenate requirement and/or were actually opposed to an explicit near-term Federal ban on MTBE during those hearings.

Senator INHOFE. All right, thank you. Mr. Meyers, you testified

that MTBE was among, I’m quoting now, ‘‘the primary product

used to implement both the winter oxy and RFG programs.’’ According to the information we have seen, implementing these Federal mandates would have been practically impossible without

MTBE. Would you agree with that?

Mr. MEYERS. Well, as I noted in my testimony, the RFG program

heavily utilized MTBE from the initial start of the program in

1995. I cited 2.5 billion gallons.

If you look at the regulatory history of the program, I think it

is also instructive to look at what the EPA did in 1999. At that

point in time, there was concern about the utilization of ethanol

and the Agency promulgated what was known as the renewable oxygenate requirement, which would have established a 30 percent

renewable standard for the RFG program. That requirement was

later overturned in the courts, but is instructive in terms of the

views at that point in time concerning renewables and the RFG

program.

If you step it up a little bit further after that, in 1999, there was

a blue ribbon panel commission on this issue on the use of

oxygenates in RFG. In that report, it seems to indicate from the

1999 perspective that moving away from MTBE would be very difficult in the short term, because of the heavy reliance of MTBE in

the program. Although it urged that in terms of recommendations

it noted the difficulties, since MTBE at that point was so integral

to the program.

I think going further, until very recently, MTBE has certainly

been the most predominant oxygenate utilized in the program. In

2000, it was about 87 percent of the entire RFG program.

Senator INHOFE. Well, I think that it’s been stated by a lot of the

strongest supporters of ethanol. I remember Senator Daschle made

the statement that MTBE would still be necessary. Of course, what

all this translates in, back in supply and demand, is increased

costs.

Mr. Caruso, your report notes that ethanol production is at capacity, and tight capacity leads to higher prices, a situation facing

the refinery industry for years. I have tried twice now to introduce

legislation that would increase capacity at the traditional and biorefineries. The Gas PRICE Act was one that I thought was a very

moderate and modest proposal that would encourage additional refineries, really at virtually no cost.

Now, I would ask you the question, is it true that consumers

want reasonably or lower priced fuels? Since tight capacity leads to

higher prices, wouldn’t it make sense that greater capacity leads to

lower prices? In other words, do you believe in supply and demand?
13

Mr. CARUSO. Most definitely. As an economist and the head of a

statistical, analytical agency, all of our studies indicate that one of

the reasons prices are so volatile and the market inflexible now is

lack of spare capacity from the upstream all the way through the

downstream.

Senator INHOFE. Yes, it’s obvious.

Senator Jeffords, let’s go ahead and have 6-minute rounds, because we’re going to have to confine this to one round. I will recognize Senator Jeffords.

Senator JEFFORDS. Mr. Caruso, in gathering information for its

report in February, did EIA learn whether the oil companies had

an extensive planning effort in place to minimize price impact of

removal of MTBE from gasoline, and ease any supply disruptions?

Mr. CARUSO. I’m not aware of any information that we may have

gotten on the price aspect of it. Most of our focus was on asking

the industry how they were going to deal with the requirement in

EPACT 2005 to eliminate or remove the oxygenate requirement in

270 days, which comes up in early May of this year.

So we are focused on how are they going to meet this and how

are they going to deal with their statements that they felt that

without the oxygenate requirement they no longer had product liability coverage. Most of them said to us that they were going to

move out of MTBE into ethanol as quickly as possible. So that’s the

information we gathered from not only those companies, but the

distribution companies, to see if it could be done—are the rail cars

there, the whole logistical chain of this moving out of MTBE within

270 days from the passage of EPACT 2005.

Senator JEFFORDS. Do you believe your report spurred the market to begin grappling with possible supply issues this spring?

Mr. CARUSO. Well, we’d like to think that one of the roles we

play is to inform the market participants when we think an issue

such as this is impending. Because oftentimes, for either legal or

competitive reasons, some of the market participants aren’t talking

with each other, and especially an issue where there are so many

moving parts from the production of ethanol to the transportation

to the distribution. We’d like to play that role as an information

agency.

Hopefully it did perhaps stimulate some movement. We know

that the economic incentives were there, ethanol prices were rising.

So clearly the incentive for the refiners is to have adequate supplies for their customers. So it was a question of, is there going to

be enough time to overcome some of these logistical challenges.

Senator JEFFORDS. Since the release of your report, Colonial

Pipelines’ plans to phaseout MTBE from gasoline shipments have

changed. On St. Patrick’s Day, the Federal Energy Regulatory

Commission denied their request to stop shipping these products.

Have you examined this issue, and do you know its potential to alleviate supply problems?

Mr. CARUSO. Well, we have talked to the Colonial Pipeline people, and they will honor their regular contractual agreements to

move the product as specified in the arrangements with the company. So we have looked at it. But it doesn’t really alleviate the

problems mentioned because, if the companies are essentially all

moving out of MTBE, the only issue that was on the table for
14

FERC was whether companies who wanted to continue shipping reformulated gasoline containing MTBE would still be able to do it.

Colonial Pipeline officials have told us the answer is yes, in response to the FERC decision.

Senator JEFFORDS. Will you commit to updating your report before early May, and including an actual price prediction?

Mr. CARUSO. Well, we certainly are following this very closely. I

would be happy to make sure that we do have an updated report

by May.

The second thing is, on price, we do on a monthly basis make

gasoline and other product price projections and the next one will

be presented on April 11 at our Summer Fuels Outlook Conference

in conjunction with the National Association of State Energy Officials, NASEO, here in Washington. So we will have a summer outlook projection which includes our latest expectations for meeting

the MTBE phaseout on April 11.

Senator JEFFORDS. Mr. Meyers, in your testimony you stated the

EPA is now working on an implementation plan for future years

of the renewable fuels standard. When do you expect to issue that

plan?

Mr. MEYERS. It’s our current intention, we have to go through

normal process of a proposed rule, at the end of this summer or

early fall, it would be our projection when we will have a proposed

rule out.

Senator JEFFORDS. Mr. Meyers, the new energy law allows

unformulated gasoline in tanks that contain MTBE to be mixed

with reformulated gas that does not, a practice known as commingling. EPA has yet to issue rules to implement this section of the

law. Would this practice help supply situations this summer?

Mr. MEYERS. In actuality, that was contained in our direct final

rule that we placed for removal of the oxygen standards. So we actually have, we included it in our direct final rule which removed

the oxygen requirement and we specified, as the Act specified, the

circumstances under which commingling could occur.

Senator JEFFORDS. Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Jeffords.

Senator Warner.

Senator WARNER. Thank you, Mr. Chairman.

Mr. Meyers, on the subject of the environment, can you speak to

the expected effects on the environment and health of ethanol replacing the MTBE?

Mr. MEYERS. I can speak in terms of the air program.

Senator WARNER. Yes.

Mr. MEYERS. As you know, the effects of MTBE are multi-media

and they have water quality effects. In moving from MTBE to ethanol, the way our RFG program works is a series of performance

specifications, plus some actual formulated requirements for the

gasoline. So both MTBE based RFG and ethanol based RFG have

to meet the same requirements. They will have to meet the benzene cap, they will have to——

Senator WARNER. I’m not getting what you’re saying. Once again,

more slowly. Both have? Go ahead, once again.

Mr. MEYERS. Both have to meet the same requirements.
15

Senator WARNER. Correct. But have you done an evaluation of

which is least detrimental to the health?

Mr. MEYERS. From an air emissions standpoint, I don’t believe

we have any analysis. Again, we are dealing with a program that

utilizes, it is a little bit complicated, but uses refiner baselines as

a measurement for the gains of the program. So we’d measure the

performance requirements against the gas that refiners actually

use to produce, and it’s a percentage. So both MTBE and ethanol

will meet the same percentage air quality gains under the requirements that we have.

Senator WARNER. Is there any basis for assuming that ethanol

would be better for the future in terms of the environment?

Mr. MEYERS. There are different emission profiles in terms of

what would come out the tailpipe. But I don’t believe from an air

quality standpoint, if we are talking about non-attainment, that we

would have substantial differences between the performance.

On that point, though, I would be happy to provide for the record

anything that we do have. My knowledge may not be comprehensive of the analysis that we have. I would be happy to provide that.

Senator WARNER. Well, I thank you for your candor. I do believe,

Mr. Chairman, it would be important for the record if you would

canvass the Federal Government——

Mr. MEYERS. Of course, sir, I will.

Senator WARNER [continuing]. To determine what is out there.

Because I have to assume that someone has run some fairly significant tests and evaluations on this subject.

Mr. MEYERS. Well, we have evaluated the impact of the RFG program and certainly think it’s produced large environmental gains.

After 1995, we studied its impact and previously we have testified

as to the reductions in VOx, NOx and the air toxics that occur from

the program.

Your specific question as to the emission performance between

ethanol and MTBE, that I’m not aware of a specific study, but I

will check that and get back to the committee as soon as possible.

Senator WARNER. What about the water quality? Is someone at

the EPA looking at that?

Mr. MEYERS. That falls under the Office of Water. Right now,

there’s an action level for MTBE between 20 and 40. The Office of

Water has been looking at it in terms of the Safe Drinking Water

Act and establishment of regulatory standards under the Safe

Drinking Water Act.

Senator WARNER. Presumably they would be in favor of shifting

to the ethanol? It seems to me somebody, we have to begin to reach

some conclusions down here.

Mr. MEYERS. I need to stay within my office.

Senator WARNER. All right, you’re being very careful and very accurate and very candid. Do what you can to bring that information

before the committee.

Mr. MEYERS. Thank you.

Senator WARNER. Mr. Caruso, on the supply and demand thing,

it’s a complicated responsibility you have. Do you think that the

EIA had any thoughts about the ability of imports to meet the demand?

Mr. CARUSO. Yes.
16

Senator WARNER. Nobody has a free lunch. What about the tariffs that are likely to be put on these imports and the effect of the

tariffs?

Mr. CARUSO. One of the reasons ethanol imports have been down

is that there is a high tariff—it’s 54 cents a gallon plus the 21⁄2 percent ad valorem. So that ethanol imports have been very low, as

recently as even 2005. They are ramping up now in 2006. We already saw that at the end of 2005, imports of ethanol from Brazil

were up over December 2004. We would expect that that would be

part of the answer, because the price of ethanol has gone up as demand has increased. Therefore, even with a 54-cent-a-gallon tariff,

it’s economic to bring in ethanol.

However, there is a limit as to how much ethanol is available on

the foreign market.

Senator WARNER. Right. Maybe we ought to address the issue of

tariffs. Clearly there’s tremendous demand for the domestic supply,

and maybe it doesn’t need such protection as a tariff may afford.

You’re nodding your head.

Mr. CARUSO. Well, as an economist I would agree with you.

Senator WARNER. Beg your pardon?

Mr. CARUSO. As an economist, I certainly would agree with you.

But obviously as the head of EIA, I can’t take a position on the policy issues.

Senator WARNER. I appreciate that nod. Will the record indicate,

Mr. Chairman, that he is in assent?

[Laughter.]

Senator INHOFE. The record will so indicate.

[Laughter.]

Senator INHOFE. Thank you, Senator Warner.

Senator Boxer.

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

Mr. Caruso, you make it sound very difficult for the oil companies to make this transition away from MTBE. So on that, you disagree with the sentence, again, I am going to read to you, Edward

Murphy, American Petroleum Institute, said, ‘‘making up roughly

300,000 barrels a day of MTBE volumes will be producing gas at

8 million barrels a day over a 4-year-period is a virtual walk in the

park.’’

So I just wanted to note that the oil institute, the Petroleum Institute itself in testimony said it was no big deal to do this. Then

you said in answer to Senator Jeffords’ question, something I found

very interesting, I wanted to probe you a little bit on it. You said

that you learned from the oil companies, and this is true, because

this is what they’re saying, but I just wanted to ask you about it.

That with no more oxygenate requirement, oil companies no longer

have product liability coverage. Those were your words.

Now, they never have had waiver of product liability. So what

are you talking about? Are you talking about the fact that when

they go to court to fight these cases, they say, ‘‘Well, Your Honor,

don’t hold us liable, Congress made me do it?’’ Isn’t that what you

mean?

Mr. CARUSO. That’s what the companies have been saying.

Senator BOXER. That’s what they’re saying.

Mr. CARUSO. Yes.
17

Senator BOXER. But isn’t it a fact that Congress has never given

them a waiver of liability?

Mr. CARUSO. That’s correct.

Senator BOXER. Isn’t it a fact that although they’ve had this liability on their shoulders, and believe me, I know about it, because

they polluted Lake Tahoe, they destroyed 75 percent of the water

supply in Santa Monica, CA, they went to court, we have discovery,

we saw what they were writing to one another almost as jokes. The

fact is during that whole time that they had liability, between now

and that time, haven’t they had record profits? So clearly this burden hasn’t been such a burden, is that right?

Mr. CARUSO. Well, they see the burden being in the future—

without the oxygenate mandate, they wouldn’t have a product, a

legal argument, that is what they are telling me.

Senator BOXER. But they’ve lost in court. They haven’t ever won

in court. So the fact of the matter is, I would like you to give them

a little bit of a reality check. They have never had a liability waiver. They don’t deserve it. The courts have found they have no excuse. All of a sudden now they’re coming and crying again. I just

love it. It’s just extraordinary.

Now, Mr. Meyers, did the Clean Air Act legally mandate the use

of MTBE in gasoline?

Mr. MEYERS. The Clean Air Act contained the 2 percent oxygenate requirement.

Senator BOXER. Did the Clean Air Act legally mandate the use

of MTBE in gasoline, yes or no?

Mr. MEYERS. The Clean Air Act did not specifically reference

MTBE. It required a 2 percent oxygenate requirement.

Senator BOXER. Right. So there is, no mandate for MTBE ever

was in the law?

Mr. MEYERS. The language of the Clean Air Act does not contain

a reference to MTBE.

Senator BOXER. Correct. So, yes or no, did the Clean Air Act legally mandate the use of MTBE in gasoline, yes or no?

Mr. MEYERS. The issue in your question is with respect to legally

mandating——

Senator BOXER. Can you answer yes or no? You’ve said it didn’t,

why can’t you just say no?

Mr. MEYERS. I thought I had said that the Clean Air Act did not

require the specific use of MTBE in the statutory terms.

Senator BOXER. So there is no mandate for MTBE, is that correct?

Mr. MEYERS. It’s not in the statute in terms of a specific legislative reference to MTBE.

Senator BOXER. Thank you. Because you’ve just supported my argument and the argument that the court has found in favor of, and

the fact that Mr. Caruso, the next time you see the oil companies,

you might mention that Mr. Meyers, who certainly knows about

this, says there has never been a mandate for MTBE from this

Congress.

I would ask to place into the record a document that dates back

to 1995, Special Counsel Robert Meyers, who was the counsel to

the House Energy and Commerce Committee, in which he said, ‘‘In

essence, since various fuels and fuel constituents compete for the
18

RFG and alternative fuels market, an effort was made by Congress

to avoid dictating any particular fuel choice.’’ Now, that could be

used in court.

Senator INHOFE. Without objection, that will be included.

[The referenced information follows on page 92.]

Senator BOXER. Thank you.

So let’s get off this business of the poor oil companies were forced

into MTBE when they clearly were not. It’s important for us, if this

issue of a liability waiver comes up again, let me just say now, that

it isn’t going to go anywhere on the Senate floor. It’s going to go

down.

Mr. Meyers, the Houston Chronicle reported on March 24, 2006

that Lyondell Chemical Company, a major MTBE producer, sent

EPA a letter urging the Agency to extend a rule that Lyondell believes will help them avoid paying MTBE cleanup costs. Do you

know about this letter?

Mr. MEYERS. I don’t have personal knowledge of the letter. I

would be happy to provide a response for the record.

Senator BOXER. I would be delighted if you would please send me

a copy of the letter and any response that you plan to make.

I think, Mr. Chairman, that I will stop here. I just feel very, very

strongly, that if this new bill that we passed is another excuse for

the oil companies to try to get off the hook for poisoning so much

of our Nation’s water supply, it would be a travesty if this Congress

went along with it. Thank you.

Senator INHOFE. Thank you, Senator Boxer.

Before you start, Senator Lautenberg, I will ask unanimous consent to submit for the record statements from the National Petrochemical and Refiners Association and the American Petroleum Institute. Without objection, those will be entered.

[The referenced information follows on pages 80–91.]

Senator BOXER. Mr. Chairman, I’m not going to object, but I

want to clarify a matter with respect to putting these letters here.

As you know, we wanted to have the oil companies and they were

not invited here. I just want to make sure, on behalf of Senator Jeffords and myself——

Senator LAUTENBERG. And me.

Senator BOXER [continuing]. Senator Lautenberg, I want to make

sure that these documents you are putting in the record are not regarded as testimony, but rather as additional written material offered to you, the chairman, in the form of a letter, and accepted

into the record to inform members of the NPRA’s point of view.

Senator Jeffords and I want to make this clear, because we have

some questions about the content of these letters. We would have

liked to have asked the oil companies about them and we were not

able to do so. But I will not object.

Senator INHOFE. I would respond, that’s always the case. They

will be in as submitted letters.

Senator BOXER. Thank you.

Senator INHOFE. Senator Lautenberg.

Senator LAUTENBERG. Thank you. Is it possible, if these letters

are not particularly lengthy, to have the general context of these

explained here or read here?
19

Senator INHOFE. Well, why don’t you go ahead with your time,

and I will look at these and see if that would fit into this.

Senator LAUTENBERG. I think it would be very helpful.

Senator INHOFE. Thank you.

Senator LAUTENBERG. Mr. Chairman, I’d like to ask Mr. Caruso

a question about something that is in his testimony that I’d like

to be more certain about. That is, it’s page 6, he’ll know as soon

as I identify it. Where you talk about the cost for ethanol imports

generally less attractive than domestic production, because imports

are subjected to an ad valorem tariff of 2.5 percent, second duty of

54 cents a gallon, which offsets the 51-cent-per-gallon tax credit for

blending 10 percent ethanol into gasoline.

Could you in quick form tell me exactly what the 51-cent-per-gallon credit is for, why that derives in here? It’s obviously an offset

to the tariff. What happens with the 51-cent-a-gallon credit? Who

does that go to? What’s the mission, what’s the purpose of that offset?

Mr. CARUSO. With the permission of the Chairman, if I could ask

the author of the report, Joanne Shore, to answer that question?

Senator INHOFE. Without objection.

Ms. SHORE. Actually where it goes I’m not sure.

Senator INHOFE. State your name and your title, please.

Ms. SHORE. Joanne Shore, Senior Analyst with the Energy Information Administration.

Where it goes at this point I don’t know, but there is a credit

that’s allowed, that the blenders are allowed to take. I believe it’s

51 cents a gallon right now. The import tariff is roughly the same

amount, so when that ethanol gets blended——

Senator LAUTENBERG. It creates sort of a trust fund from which

to take——

Ms. SHORE. Exactly.

Senator LAUTENBERG. So is that designed to relieve the gasoline

companies of some part of the cost for having to make this transfer

to ethanol?

Ms. SHORE. No, I believe the 51 cents has always been there as

a credit. The ethanol producers will be able to realize a higher

price. Then the blender is able to take that credit down the road

at that point where it is blended to be able to make it more competitive with alternative materials as it is blended.

Senator LAUTENBERG. So it saves the companies some part of the

cost of producing the product?

Ms. SHORE. Yes, it saves the blenders.

Senator LAUTENBERG. Are the blenders separate and apart from

the gasoline companies?

Ms. SHORE. They can be. Some companies do their own blending

and there are many independent blenders out there as well.

Senator LAUTENBERG. I see. So that if they didn’t have this waiver, then they would have to pick up the costs? I just want to be

sure, tax credit, sorry, they would have to pick up the cost out of

their revenues, perhaps pass it on to the public or otherwise?

Ms. SHORE. Yes, or the ultimate price, then, of ethanol would

drift accordingly to settle at a new price, whatever the market balance would bear at that point.
20

Senator LAUTENBERG. Yes. I guess what I see is that we want

to help the companies make a reasonable profit on their activities,

like $36 billion. Anybody know whether Exxon has its own blending structure?

Ms. SHORE. Yes, they have both, in the sense that they sell product to others who do blending. They also would have some of their

own blending. But the price that they pay at that point for the ethanol that comes in would effectively be, for example, 50 cents higher than the price of gasoline. Frequently ethanol prices, when the

market is relatively well balanced, will be at the price of gasoline

after the credit.

Senator LAUTENBERG. There are offsetting amounts?

Ms. SHORE. Right.

Senator LAUTENBERG. OK. I just wonder at what point they pitch

in and say, OK, it costs us more to do a little more business. But

we’ve got a pretty good business without that. So the profits are

enormous and it’s just amazing when we look at this how the gasoline companies perform. There was a $5 billion punitive award for

the spill in Prince William Sound. It’s never been paid, it’s gone to

court and they keep on, it’s about 15 years now I guess, since that

judgment was made. But they manage to stave off paying their

share of responsibility. It’s very interesting.

Mr. Caruso, you said that you would be creating, or releasing a

projection for the cost in the coming months, on April 11, was it?

Mr. CARUSO. Yes, Senator.

Senator LAUTENBERG. Do you have any idea of the range of what

the increased costs might be? Is it a nickel, is it a dollar?

Mr. CARUSO. Our current outlook is for about $2.50 average price

of gasoline for the summer. I think that’s about 12 cents higher

than last summer per gallon.

Senator LAUTENBERG. I thank you.

Senator INHOFE. Thank you, Senator Lautenberg. We want to

hear from Senator Thune, but before we do let me just, Senator

Boxer, since you had mentioned several times that you wanted the

oil companies to be present at this hearing, I’ve been advised that

your staff made that clear and we said that we’d be happy to have

them as your witnesses if you wanted to name them as witnesses.

You declined to do so.

Senator BOXER. Well, that’s because you said we couldn’t have

any of our other witnesses.

Senator INHOFE. Well, we have a limited number that is very

consistent with the way we’ve done it in the past. If you wanted

them here, you had the opportunity.

Senator Thune.

Senator BOXER. Mr. Chairman, I guess since you brought it up,

I don’t understand why you wouldn’t have wanted them here.

Senator INHOFE. I didn’t say I didn’t want them.

Senator BOXER. I mean, this is about them. If you read their letter, by the way, they claim that we mandated MTBE and other falsity, right in there. By the way, they put out a press release about

their letter to you.

Senator INHOFE. Thank you, Senator Boxer.

Senator Thune.
21

Senator THUNE. Thank you, Mr. Chairman. I will reserve most

of questioning for the next panel. I thank you, by the way, for holding this hearing.

I think this is a critical issue obviously to our economy. As we

head into the summer season, dealing with gasoline costs in a

State like South Dakota, where we are very agricultural intensive

and tourism intensive, that has a profound impact on the economy.

I think we need to be examining all the policies that we have in

place that will impact adversely the cost of fuel oil in this country.

I think that—I’m hoping we will get a chance to move another Energy bill this year that will help address some of those concerns as

well.

But this hearing is obviously very important in terms of what we

are doing to take a very close look at this.

I will reserve most of my questions for the next panel, but I do

want to ask Mr. Caruso a question, if I might. That has to do with

the supply and stock data that EIA publishes and the timing of

that publication tends to track about 2 months behind. How do you

determine the availability of ethanol in the marketplace with numbers that are so outdated once they’re published?

Mr. CARUSO. You’re correct, the actual final data on a monthly

basis has about a 60-day lag, on the monthly data. We do collect

on a weekly basis some blendstock information. So it gives us some

idea of what the blending components that go into the reformulated

gasoline are doing. So we have incomplete information on a weekly

basis, but we do have to wait for that 60 days.

So one of the things we try to do—people like Joanne Shore and

other experts in EIA—is to communicate with companies that are

producing ethanol, with refiners and blenders to get the sense on

a real-time basis of how things are going when we are in a situation that requires more close monitoring. We couldn’t afford the resources to have this done on a regular basis, but now that we know

there’s an issue, for example, this 270-day phase-out of oxygenate,

in this case MTBE, Joanne immediately started communicating

with the participants in the marketplace. Are you going to be able

to do this, what problems do you anticipate? That’s what led to the

analysis that I presented this morning.

Senator THUNE. It seems at least that not having real time data

available would make it awfully difficult to track with any specificity what’s happening right now. If you’re getting information

that is dated, it seems to me at least that closer coordination with

the industry and to understand exactly, and I know you’re doing

that, sounds like you’re doing that, communicating with the industry to figure out what their capacity is going forward, but if you

have a 2-month lag in this day and age, I think it’s going to be awfully difficult to predict with any reliability what prices or supplies

or anything else are going to be.

So I guess my follow-up question would be, what would it take

to close that 2-month gap? What do we have to do to get to where

this is, we’re getting more of a real time assessment of where

things are?

Mr. CARUSO. There was a provision within the Energy Policy Act

of 2005 that we do a survey on a weekly basis of ethanol production in more detail. However, there was no budgetary—excuse me,
22

on a monthly basis. However, there was no budgetary authority

that went along with that request.

So we looked at what it would take, and we initially made an es- timate that there would be about a $2 million cost of starting up

a survey to allow us to collect that data on a monthly basis, and

about $800,000 a year thereafter. But as of yet, this budgetary authority has not been made available.

Senator THUNE. Well, I guess in light of the fact that now with

the phase-out of MTBE and that ethanol is becoming the additive

of choice or perhaps necessity, and the importance of knowing on

an I think more day-to-day basis rather than month-to-month or

60-day- to 60-day-basis what the real situation is in the marketplace would suggest that the steps be taken. You do, my understanding is you do real time tracking of petroleum. Now the blends

that are going to be required to be used in the future, it seems to

me that you would want to use a similar type process, a more timely type process of keeping availability, supply, capacity of ethanol

at your disposal as well. Because otherwise, I just think that the

reliability of the data is really questionable, if you’re talking about

data that’s 60 days old, and trying to make any predictions about

capacity or supply, demand, price, anything going forward.

Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Thune.

Senator Murkowski.

Senator MURKOWSKI. Thank you, Mr. Chairman.

I apologize to the committee and to the witnesses that I haven’t

been able to be here to hear your testimony. This is an issue that

I think people in the country are looking at. They want to know

what’s going to happen to the price of gas. We can talk about the

specifics of MTBE and the liability issue, but at the end of the day,

what Americans want to know is, so what am I going to be paying

at the pump?

I understand that a couple of the questions that I had prepared

for you gentlemen have already been asked and answered. But do

you have a simple answer for me in terms of what we can expect

to be paying this summer?

Mr. CARUSO. Our latest outlook, which is our best judgment and assumes no disruptions, is about a $2.50 a gallon average price for

gasoline.

Senator MURKOWSKI. So about 20 cents over what we’re seeing

here in this region right now? Is that about right?

Mr. CARUSO. Actually this week I think our numbers are just

about $2.50, maybe slightly under that, on a national average

basis. I mentioned in the testimony that the issue that we think

is before us is the possibility that there could be some logistical dislocations in this transition and therefore on a regional basis you

could have price volatility. We don’t see that as likely to be a national issue. But clearly in places like Houston, Dallas, Fort Worth,

and the East Coast, where they have not already phased out

MTBE, you could get price volatility, which could go certainly

above the national average.

Senator MURKOWSKI. If that assumption holds true, then, how

long do you anticipate that these prices stay at these levels? When

will it settle?
23

Mr. CARUSO. We think it’s a short-term problem. That’s the other

point I mentioned. It’s a temporary issue. We do think the ethanol

producers are ramping up and will meet the demand increase.

However, it takes time and we’re very tight for the first half of

2006. But it’s a summer driving season problem that we think we

face, and we’ll be presenting that in more detail at an April 11th

Summer Fuels Outlook Conference.

Senator MURKOWSKI. We’ll look forward to that.

Let me ask you just in terms of the liability aspect of MTBE, do

either one of you want to venture an opinion on whether the MTBE

processing industry has any greater legal exposure now than it’s

faced since the 1990’s for the water quality impact of the MTBE

if it leaks into the groundwater? Is there any greater exposure now

than we saw before?

Mr. MEYERS. I think the question is a good one, but would require a very studied legal analysis that I would not be prepared to

offer.

Senator MURKOWSKI. Mr. Caruso, any comments on that?

Mr. CARUSO. I think that’s a legal question I really have no competence to answer.

Senator MURKOWSKI. If we had a legal expert here, he would

probably say, it’s a legal complex question. Thank you, Mr. Chairman.

Senator INHOFE. Thank you, Senator Murkowski.

We thank the panel very much for their indulgence. I would ask

the next panel to come forward, which would be Bill Douglass,

CEO of the Douglass Distributing Company, on behalf of the National Association of Convenience Stores; Blakeman Early, American Lung Association; Bob Dinneen, president and CEO for the

Renewable Fuels Association.

Please take your seats. Gentlemen, thank you for your presence

here. We are going to kind of watch the clock a little closer this

time, because we are running out of time. We would like to have

you confine your statements to 5 minutes, but your entire statement will be made a part of the record. I will definitely let you

know when your time is up. The same will go for the timing of the

questions that will be asked.

We will start with you, Mr. Douglass.

STATEMENT OF BILL DOUGLASS, CHIEF EXECUTIVE OFFICER,

DOUGLASS DISTRIBUTING COMPANY

Mr. DOUGLASS. Good morning. My name is Bill Douglass, and I

serve as the chief executive officer of Douglass Distributing in

Sherman, TX. My company owns and operates 14 fuel outlets in

the Dallas-Fort Worth area and supplies gasoline and diesel fuel to

165 additional retail outlets in the area under long-term supply

contracts.

I appear before the committee representing the National Association of Convenience Stores, which we call NACS, and the Society

of Independent Gasoline Marketers of America, which we call

SIGMA. Together NACS and SIGMA members sell approximately

80 percent of the gasoline and diesel fuel purchased by motorists

in the United States each year.
24

Over the past 3 months, I’ve witnessed such a blizzard of announcements in developments regarding gasoline production and

distribution that even I, who study and participate in gasoline marketing every day, am uncertain as to what to expect over the next

6 months. This hearing is an attempt to sort through these announcements, rumors and questions.

You’ve heard testimony this morning from Government experts

regarding the facts and statistics associated with the transition

from MTBE to ethanol. I will not duplicate their testimony. Instead, I will move beyond the statistics and examine my real world

situation.

First, the use of MTBE as a gasoline additive will decline in the

future, whether rapidly as some have predicted this spring and

summer, or more gradually. This decline is a direct result of Congress’ failure to adopt liability reform provisions for MTBE as part

of last year’s Energy bill.

I’m not seeking to get into the debate as to whether Congress

should have adopted the MTBE Safe Harbor last year, but this

committee and the Congress as a whole must understand the decisions made last year are having repercussions in the gasoline market this year.

Second, ethanol is the most likely and immediate substitute for

MTBE in RFG. EIA has estimated on average refiners lose approximately 5 percent of their production capacity when making RFG

with ethanol, when compared to RFG with MTBE. This is a significant reduction in domestic gasoline production capacity that should

be of a concern to policymakers, marketers and consumers.

Third, in general the Nation’s refiners are not positioned to

produce substantial quantities of clear RFG, which is not blended

with either ethanol or MTBE, which will be authorized for the first

time in May. Fourth, it’s clear that the domestic ethanol industry

is doing its utmost to maximize of ethanol it will produce and sell

this year. But it’s uncertain whether these best efforts will be sufficient to meet the demand for ethanol in the next 6 months, as the

Nation transitions away from MTBE.

Fifth, boutique fuels continue to complicate the supply and distribution of gasoline. As noted in the EIA study, the Energy bill’s

cap on the number of boutique fuels does not cover State boutique

renewable fuels mandates. Such mandates constrain the availability of ethanol in other areas of the Nation and limit the supply

flexibility in the marketplace.

Sixth, the bulk gasoline storage and terminal infrastructure in

many parts of the Nation is not prepared for a transition from

MTBE to ethanol. Finally, the transition from MTBE additized gasoline to ethanol additized gasoline will be problematic for motor

fuel retailers like me. Retailers will be undertaking preparations to

market gasoline blended with ethanol, at the same time they are

preparing to switch from winter to summer gasoline blends.

While many retailers have been selling ethanol blended fuels for

years, there are others like myself that will be making the transition for the first time. I recently received a 20-page document from

one of my gasoline suppliers, explaining the steps I must take to

prepare to sell ethanol-blended gasoline. Increasing my challenge is

the fact that I do not have the lead time many of my colleagues
25

in other parts of the Nation had to prepare for this conversion.

This could be problematic, as there are many others in my situation.

Unfortunately, there are few public policy options open to Congress to mitigate potential gasoline or ethanol supply shortages and

price volatility in the short run. NACS and SIGMA propose that

the action that would have the greatest significant positive effect

on supply and the consumer prices in the next 6 months would be

a temporary suspension of the tariff on imported ethanol. Such a

move would help supplement the efforts of the domestic ethanol industry to satisfy the rapidly escalating demand without penalizing

the consumers with a 54-cent-per-gallon tariff. This would be

meaningful, sound public policy enacted for the good of the consumer.

In the medium term——

Senator INHOFE. Thank you, Mr. Douglass, your time has expired. Thank you very much.

Mr. Early.

STATEMENT OF A. BLAKEMAN EARLY, AMERICAN LUNG

ASSOCIATION

Mr. EARLY. Mr. Chairman and members of the committee, I appreciate the opportunity to appear today on behalf of the American

Lung Association.

The American Lung Association supports the removal of MTBE

from gasoline. As you know, MTBE has been found to contaminate

ground or surface water in nearly every State, and has rendered

thousands of public and private drinking water sources unusable.

Addressing the cleanup or replacement of these sources has been

estimated to cost upwards of $25 billion. These statistics provide

reason enough to eliminate MTBE from the Nation’s fuel supply.

But the American Lung Association is particularly interested in

eliminating MTBE from reformulated gasoline because many areas

with unhealthy levels of ozone have avoided adopting RFG for fear

of contaminating local water supplies. Therefore, we see the recent

trend of refiners choosing to eliminate MTBE from RFG as a welcome development, which may facilitate the option of RFG in more

areas that need it. If so, the public will benefit from the reduced

exposure to ozone and toxic air pollution.

The elimination of the oxygen requirement in RFG in combination with the sulfur limit in all gasoline implemented as part of

Tier II rules, and the limitation on boutique fuels adopted in

EPACT should eliminate the proliferation of boutique fuels, while

providing clean fuel choices to areas that need them. We believe

that any additional limitations on States’ ability to select clean

fuels would have an adverse air quality impact and are unnecessary, given all the changes I just described.

Refiners are eliminating MTBE from RFG this spring entirely

voluntarily. The American Lung Association endorsed a ban on

MTBE phased in over 4 years, a timeframe that was originally

identified by the industry itself in testimony before this committee.

The Congress chose not to adopt such a measure during its consideration of EPACT, but did remove the oxygen requirement. This

enables each refiner to use as much or as little MTBE as it chooses.
26

Now this spring, refiners are attempting to remove MTBE from

RFG all at once, rather than pursuing a phased elimination. The

current action to remove MTBE from the remaining RFG supply is

voluntary and is not required to meet any law. We see no credible

basis for finding that the use of MTBE in RFG in 2006 gives rise

to special liability, given the nature of MTBE groundwater contamination and the difficulty of distinguishing when contamination

occurred. Whatever liability refiners may be subject to will be

based largely on past actions, not future actions.

It has long been predicted that the removal of MTBE from RFG

would spike a demand for ethanol. I provided testimony to this effect before this committee in June 2000. The fact that refiners are

voluntarily and precipitously withdrawing MTBE from use, knowing that such action would cause a spike in RFG prices, provides

testament to the indifference the refining industry has to the calls

of consumers to restrain fuel prices.

As you know, in EPACT the Congress provided EPA with the authority to temporarily waive a fuel additive or additive requirement

under the Clean Air Act, in cases of an extreme or unusual fuel or

fuel additive supply circumstance. The statute explicitly states that

shortages that reasonably could have been foreseen or derive from

a lack of prudent planning do not qualify. We believe the ethanol

and fuel shortage we are discussing today was foreseeable and in

fact, is exactly the result of a failure of prudent planning. The

American Lung Association hopes no one will suggest the need for

invoking the need for the EPACT waiver authority.

Under EPACT, 9 months after the enactment, EPA is required

to establish standards for each refiner and importer designed to

maintain the level of toxic air pollutant reduction achieved on average during 2001 and 2002. This so-called anti-backsliding provision

was enacted to ensure that as refiners reduce the amount of MTBE

they use in RFG, the level of toxic air pollution from the use of

such fuel did not increase.

The dramatic shift away from MTBE use occurring this spring

well illustrates why this provision is needed. EPA recently announced it will not implement these provisions, but will defer these

protections until the mobile source air toxics rule is implemented

in 2011. This allows at least 5 years for refiners to increase toxic

air pollution in RFG from past levels, the very backsliding the law

requires EPA to prevent.

We call on the EPA to issue backsliding rules as expeditiously as

possible to prevent toxic air pollution increases in RFG over the

next half decade.

This concludes my remarks. Thank you.

Senator INHOFE. Thank you.

Mr. Dinneen.

STATEMENT OF BOB DINNEEN, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, RENEWABLE FUELS ASSOCIATION

Mr. DINNEEN. Good morning, Mr. Chairman, and thank you. This

is an important and timely hearing and I am certainly pleased to

be able to be here today to discuss with you all that the industry

is doing in coordination with refiners, gasoline marketers and the
27

fuel distribution network to make sure that the transition from

MTBE to ethanol is indeed a success.

As you know, Mr. Chairman, the ethanol industry is growing

rapidly. In addition to the 97 ethanol biorefineries that produce

more than 4.5 billion gallons of ethanol today from a billion and

a half bushels of grain, there are 33 plants and several major expansions that will add another 2 billion gallons of ethanol production capacity very shortly.

This remarkable growth can most certainly be attributed in no

small part to passage of the Energy Policy Act of 2005, which included a renewable fuels standard that provided a clarion call to

our industry and the financial community to grow with confidence.

Mr. Chairman, I hope that you and the members of this committee

are very proud of the role that you had in getting a renewable fuels

standard passed as part of the Energy Policy Act. It has done exactly what it had been intended to do in terms of stimulating the

production of ethanol and biodiesel. We certainly are very appreciative of the role that you had and others on the committee, like

Senator Thune and Senator Obama and others, that worked so

hard to get that passed.

One of the consequences of the Energy bill, though, is that refiners have begun to hemorrhage MTBE from the marketplace. It’s

important to note, though, that no provision of EPACT or the Clean

Air Act or any other congressional action has compelled such a

rapid transition away from MTBE. This decision is the refiners’

alone. I can assure you, though, that there will be sufficient ethanol supplies to meet this new demand.

First, as noted, domestic ethanol supply is growing rapidly. We

anticipate more than 500 million gallons of new capacity coming

online before the end of the summer. Another 900 million gallons

will be completed by the end of the year. That reflects a 37 percent

growth rate this year alone. That’s a phenomenal pace, particularly

given the rate of growth we have already seen over the past several

years. Moreover, several ethanol producers and refiners have been

building ethanol stocks in anticipation of this increased demand.

Second, several refiners have contracted with Brazilian and/or

Caribbean ethanol suppliers for product. Approximately 130 million

gallons were imported last year. We anticipate even higher imports

this year. I would note parenthetically that as Senator Lautenberg

was sort of getting to, the secondary tariff that is imposed on imported ethanol is repaid essentially as soon as the refiners get the

tax incentive that’s available. To remove the secondary tariff, all

you’re doing is then subsidizing already subsidized Brazilian ethanol to come into the marketplace.

The marketplace is doing it fine already today. There will be increased imports. There is really no need for the U.S. taxpayer to

pay Brazilian sugar growers and Brazilian ethanol producers, it is

already subsidized to come into the marketplace.

The other important point I would like to make is that there will

be migration from existing conventional gasoline markets to areas

of the country where ethanol will be needed to replace MTBE. Already many gasoline marketers and ethanol producers are arranging exchange agreements to make sure that that happens.
28

Finally, it’s important to note that the ethanol industry is indeed

working very closely with our refiner customers, gasoline marketers, terminal operators and the fuel distribution network, to secure

a successful transition. Over the past several years, the ethanol industry has worked hard to expand a virtual pipeline using rail,

barge and truck traffic. As a result, we can now move product

quickly to any area where it is needed. Many plants today have the

ability to load unit trains of ethanol to ship to terminals in key

markets.

I give great credit to the refiners and gasoline marketers that are

working with us to build that infrastructure. Working together, we

can make the transition from MTBE to ethanol in these areas as

successful as it was in California, New York and Connecticut.

Mr. Chairman, you were wise to hold this hearing and hold everyone’s feet to the fire. Clearly this transition presents challenges.

But the refiners have chosen to remove MTBE from gasoline. They

would not have done so if they didn’t think they could successfully

switch to ethanol. We are ready to work with them and this committee to ensure the continued supply of high quality clean burning

gasoline to the motoring public.

Thank you.

Senator INHOFE. Thank you very much.

We will confine our questions to 5 minutes and be rather rigid.

First of all, your last statement there I thought was very good.

There is a lot of discussion about whether or not an MTBE is actually mandated. In reality it is. I think that we, well, I have asked

you this question, to Mr. Douglass and Mr. Dinneen, if you do away

with the 2 percent oxygenate requirement, doesn’t that expose

them, if they continue to use MTBE, in terms of a court of law?

Mr. DOUGLASS. Mr. Chairman, my supplier has so indicated that

that’s their reason for withdrawing, the use of MTBE.

Senator INHOFE. Do you agree with that, Mr. Dinneen?

Mr. DINNEEN. I’m not hampered by a law degree, so I wouldn’t

want to state with any degree of confidence, but I will tell you that

the refiners themselves have stated for a long time that they could

produce reformulated gasoline in the absence of oxygen and as was

made pretty clear by the last panel, there is nothing in the Act that

requires the addition of MTBE.

Senator INHOFE. Thank you very much.

Mr. Douglass, Mr. Dinneen, you both testified that a tight capacity of fuel production side, both in traditional refining and biorefineries, are a problem because they raise prices for you and for your

consumers. That’s the consumer that we’re concerned about out

there. I’m encouraged that both industries are increasing capacity

as fast as possible, and that challenges do remain.

I had two pieces of legislation, one is the Gas PRICE Act and the

other was an amendment that we referred to as the Energy Price

Reduction Act. I would ask the two of you if you are familiar with

those two pieces of legislation that failed, and if that would have

helped, would you have been supportive of those bills, to increase

capacity?

Mr. DOUGLASS. Mr. Chairman yes, we are familiar with that.

NACS and SIGMA both wrote and supported this committee last
29

year when you proposed that Act, that those measures be incorporated in the bill.

Senator INHOFE. I appreciate that. It is a supply and demand

thing.

Mr. Early, I would like to ask you about——

Mr. DINNEEN. Mr. Chairman, I’m sorry, did you want an answer

from me?

Senator INHOFE. I thought you were nodding in agreement.

Mr. DINNEEN. Staff really wanted to get me on the record.

Senator INHOFE. Yes, please do. Real quick.

Mr. DINNEEN. As amended by Senator Thune, certainly we have

also supported that bill. Clearly we believe getting additional refinery capacity online is extraordinarily important, and that includes

biorefinery capacity.

Senator INHOFE. I thought it was done very well. I’m still just

pretty dismayed as to why it was defeated on a partisan vote. It

just is—here’s a way you could utilize some of the closed bases

from the BRAC process. You could have allowed cities and communities to apply for EDA grants to help them attract refineries. So

I regretted it did not pass.

Mr. Early, I would like to ask you about a document you submitted for the record and your reasons for doing so. I understand

the company which drafted the document, KOMEX, is a litigation

support company hired by the trial lawyers. In addition, their work

was thrown out of court by a California court as being too speculative and for double accounting of damages and other cases, and

that their cost estimates for MTBE are reportedly 25 times the actual cost.

I’d like to first of all ask you the question, what is your purpose

for submitting this report on the record? You’re the American Lung

Association. Do they endorse this report? Is this something that

they are requesting you to have as a part of the record? Are you

working in conjunction with the trial lawyers on this?

Mr. EARLY. The report, Mr. Chairman, was prepared by the

American Water Works Association. I submitted it simply to support the——

Senator INHOFE. Where’s KOMEX come in, then?

Mr. EARLY. I guess KOMEX was hired by the American Water

Works Association. American Water Works Association needs to

stand behind its report. I submitted the report in order to support

the contention that there’s upwards of a $25 billion potential cost.

This is in the public domain, obviously, and can be examined.

Senator INHOFE. The specific question is, KOMEX was used as

the foundation of this report, isn’t that correct?

Mr. EARLY. Yes.

Senator INHOFE. If you say no for the record, then I will submit

something to show that it was.

Mr. EARLY. No, I agree that Komex is cited.

Senator INHOFE. The question I had asked you also was, is the

American Lung Association supportive of the product of this case

of Komex?

Mr. EARLY. The American Lung Association takes the report on

its face value. I’m not aware of the information that you just mentioned, that it’s been challenged. We would certainly look at that.
30

Senator INHOFE. On their own Web site, ‘‘KOMEX is one of the

leading environmental consulting companies in California. Since

1992, we have been assisting California attorneys in environmental

related litigation by providing unparalleled technical, regulatory

and data management expertise.’’ That’s what they say about

themselves, and that’s what you’re using as a foundation for your

report.

My time has expired. Thank you very much.

Senator Jeffords.

Senator JEFFORDS. Mr. Early, who were the principal advocates

for the removal of the 2 percent oxygenate standard? Is it fair to

say that the repeal of the oxygenate mandate or the need to remove MTBE from gasoline due to either groundwater protection or

liability concerns comes as a surprise to the oil industry? How long

has the oil industry known it had a problem with MTBE?

Mr. EARLY. Well, of course the oil industry has known it had a

problem with MTBE from literally decades ago, they knew and did

not disclose some of the properties of MTBE that caused it to contaminate groundwater. But really going back to the blue ribbon

committee that Mr. Meyers mentioned, and on which the American

Lung Association served the blue ribbon committee looking at

oxygenates and gasoline, which recommended phasing out of the

use of MTBE, the signal was very clear that that was going to happen.

The industry has known obviously since EPACT was enacted last

August that the oxygen requirement was going to be eliminated

this May. They could have been planning to remove MTBE since

last August, but all of a sudden, they rushed to do it just this

spring. We think this is precipitous and unnecessary and simply

punishes the consumer for a decision that they are making voluntarily.

Senator JEFFORDS. As you stated in your written testimony, the

new energy law does provide EPA the authority to temporarily

waive a fuel or additive requirement under CAA in an extreme and

unusual supply circumstance. Do you foresee any legitimate claim

for a waiver under the current circumstances?

Mr. EARLY. I do not. As my testimony indicated, any shortages

that occur are a result really of bad planning that could have been

avoided. They certainly don’t qualify as any kind of extreme circumstance as occurred, for instance, with Hurricane Katrina,

where the Agency legitimately waived requirements, in the case of

a national need.

Senator JEFFORDS. Mr. Dinneen, several representatives of the

oil industry have recently stated that there will be enough ethanol

to meet increased demands during the transition away from

MTBE. This seems to be at odds with the findings of the EIA report.

What do you think is the cause of this discrepancy?

Mr. DINNEEN. I think what the EIA did was take a snapshot in

time a couple of months ago. I think at that time they were hearing

some things that gave them cause for concern. I think your question earlier to Mr. Caruso about whether or not his report had any

impact, I think his report may have had some impact. I think people may have taken a much more careful look at supply and de-
31

mand balances. Clearly, as that occurred, people have understood

that there is going to be enough ethanol supply and people have

gotten busy and the marketplace is responding.

I think if EIA were to redo their analysis today, they’d be a little

bit more hopeful about what the situation is actually going to be.

I think there is an increasing recognition that the marketers, the

refiners, the ethanol industry are working awfully hard to make

sure that there aren’t any consumer impacts.

Senator JEFFORDS. Some in the oil industry seem to be suggesting that EPA should issue a waiver of reformulated gasoline requirements in light of EIA’s February report. I am concerned that

though we have, say we want cleaner gasoline, if we keep waiving

the requirements to make it, at some point we affect the market’s

decisions about completing a transition getting MTBE out of gas

and finding substitutes, like ethanol.

Have the waivers issued after Hurricane Katrina or the prospects of future waivers affected plans for ethanol plant construction?

Mr. DINNEEN. Senator, we are moving forward in anticipation of

the demand that we know is going to be there. I do not believe that

any waivers will be necessary or will be granted. I’m confident the

marketplace is going to respond and have the product where it

needs to be.

Senator JEFFORDS. Thank you. Thank you, Mr. Chairman.

Senator INHOFE. Senator Warner.

Senator WARNER. Thank you, Mr. Chairman.

To you, Mr. Douglass, all these things you know, but I’d like to

recite them for the record and others who might be following it.

You can’t transplant or transport the ethanol in a pipeline, correct?

Mr. DOUGLASS. That’s correct.

Senator WARNER. You have to ship it in a truck?

Mr. DOUGLASS. Yes, sir, or a tank car or barge.

Senator WARNER. Train or likewise?

Mr. DOUGLASS. Yes, sir.

Senator WARNER. Furthermore, it has to be blended with the gas

at the wholesale terminals, correct?

Mr. DOUGLASS. Correct.

Senator WARNER. In your written testimony, you note storage capacity at the terminals is already stretched to the limit, so this is

another choke point?

Mr. DOUGLASS. Yes, sir.

Senator WARNER. Especially in Texas and the Mid-Atlantic regions. In your home State and my home State, there seems to be,

that’s Virginia, there seems to be a significant problem on the horizon because of this lack of our own infrastructure. What are you

and other distributors and marketers doing to overcome these hurdles?

Mr. DOUGLASS. You understand our interest in supply, and in

supply at a price the consumer will pay. We have moved in our

particular case to start cleaning our tanks and preparing very rapidly for the introduction of ethanol. But in the process of doing

that, we find that there are not enough contractors, because your

requirements are to flush out your tanks. The second thing is that

our suppliers are forcing us to different terminals, because they
32

don’t have enough storage in their base units in the Dallas-Fort

Worth area. So we’re having to hire people and get additional

trucks in order to make those longer runs.

Senator WARNER. Well, that’s the best you can do. But I just

think it’s important for the American public to be aware of this

thing and the difficulty of this proposed transition. Thank you, Mr.

Chairman.

Senator INHOFE. Thank you, Senator Warner.

Senator Boxer.

Senator BOXER. Thank you, Mr. Chairman.

Just for the record, I want it to be clear that this committee

voted in a bipartisan way against that special deal for the refineries. It was a bipartisan vote that brought it down. It was about

grants to refineries, it was about giving refineries access to Federal

lands and at a time when they’re making record profits. I feel like

sometimes——

Senator INHOFE. For clarification of the record, without taking

your time, it was, all the Democrats plus Senator Chafee.

Senator BOXER. Yes, I would call that bipartisan.

Senator INHOFE. That’s fine.

Senator BOXER. That’s all we need, is one of you——

[Laughter.]

Senator BOXER. We have it. OK, glad for that clarification.

Mr. Douglass, you are the second witness to make the case that

there should be a liability waiver for the oil companies for MTBE

and therefore, I think it’s very important for me to put a few things

on the record, because I think that’s what is coming at us maybe,

unless we can deter it. So in this whole issue I always ask myself,

why should the taxpayers have to step up to the plate and pay for

the mistakes of the oil companies? They didn’t have to choose

MTBE. We’ve had a Bush administration witness say clearly today

there was no mandate from the Congress.

So since there was no mandate and since this was a free choice,

as a matter of fact, I would ask unanimous consent to place into

the record a document from discovery on a court case in South

Lake Tahoe, in which the executives were bandying about with a

sense of humor what MTBE stands for. One of the things they suggested in this kind of joke-filled presentation was Menace Threatening our Bountiful Environment, MTBE. That’s what it could

stand for. Or Most Things Biodegrade Easier. Or Money To Be Extracted.

This is the truth, folks, about what was going on. So there was

a settlement in this case, because the drinking water, South Lake

Tahoe, was so tainted that they had to sue, as did the city of Santa

Monica. Now, the jury in that case found clear and convincing evidence that defendant Shell Oil acted with malice in selling gasoline

containing MTBE. So you bet your bottom dollar I am going to

fight against giving folks who knew better protection in court,

when they destroyed drinking water supplies, when there was

never any mandate. That was clearly stated here today.

Now, Mr. Douglass, in your testimony, you said that you were

very worried about price increases because of the transition.

Mr. DOUGLASS. Yes.
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Senator BOXER. But I want to ask you this. You have here put

out an eight point card that you said could be factors that could

affect the petroleum markets. This is your tool kit from your organization. You list eight reasons. You do not list the transition to

MTBE. And I wondered, if it’s such an important part of your testimony, why it’s not even listed in a group of eight reasons?

Mr. DOUGLASS. The transition to MTBE, as you probably know,

our concern is primarily supply. We are not particularly concerned

about the legalities of the issues in this thing, but its supply at retail. We are focused primarily on getting sufficient supplies. I hope

Mr. Dinneen is correct that there will be sufficient supplies.

Senator BOXER. Well, yes, I think he had some good news for

you, very good news for you.

Mr. DOUGLASS. Excuse me, Senator, but the only difference we

have here is the price of ethanol has doubled in the past year and

we have not yet had the ethanol put into the fuel. We will as of

April 1. But suffice to say when it doubles, we have a concern, and

our price at Dallas-Fort Worth is already in excess of what——

Senator BOXER. Well, sir, if I might, I asked you a very simple

question. Here you put out a tool kit. Here’s a look at some of the

factors that will affect what consumers pay at the pump in 2006:

elevated price of crude, impact of speculation, spring transition to

summer blends, and it goes on. No mention of MTBE.

My point is, it seems to me that this hearing, which my good

Chairman called and he has deep feelings on this, and I respect his

feelings on this, we just disagree on this, you seem to be creating

kind of what could be a false crisis here. You know, I know what

suffering from high gas prices means, because believe me, California has been the leader. I have done many things in an attempt

to shed light on that.

But MTBE transition wasn’t listed on your list as one of those

causes. I wanted to make that point, as well as how much I would

fight a waiver on liability for MTBE. Thank you.

Senator INHOFE. Thank you, Senator Boxer.

Senator Thune.

Senator THUNE. Thank you, Mr. Chairman. I do think that gas

prices where they are today, and if they do end up at the range

that some suspect they will before we get through the summer season is, creates an economic crisis, I think in a State like South Dakota, where we rely heavily, we have a lot of very fuel-intensive industries.

I want to follow up if I might with Mr. Dinneen. There’s been a

lot of discussion today about what is driving up the price of a gallon of gasoline. It seems to me at least that there are a lot of factors associated with that, and I would come back to a point that

was made earlier and that is that the bill that was reported out

of this committee did allow for a 4-year phase-out of MTBE that

would have smoothed the transition as ethanol production was

ramping up. I think that was the expectation that we would have

a bill that would accomplish that and enable us to get to a point

in terms of the capacity that this would be a very, hopefully much

smoother transition. As it is, we’re being asked to fill the demand

much more quickly I think than had been anticipated.
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But just a very simple question, Mr. Dinneen, do you believe that

ethanol is driving up the price of gasoline today?

Mr. DINNEEN. No, Senator, I don’t. There are lots of reasons why

gasoline prices are going up. It has to do with crude oil prices, it

has to do with the transition to summer grade gasoline, it has to

do with the rising demand as we move toward the summer season.

Ethanol is a very small component of the motor fuel market. Ethanol prices are indeed going up, they are. It’s still cheaper than

MTBE was a year ago, however. Those prices are going to come

down.

More importantly, what’s being looked at is the spot market

prices for ethanol. Eighty-five percent of the ethanol that’s sold is

sold under long-term contracts. Contract prices typically are much,

much lower. What’s happening is, those companies that planned for

the transition to MTBE and contracted their ethanol are set.

They’re looking at a pretty decent price. Ethanol, as it has in the

past, is likely to lower their gasoline costs.

For those companies that didn’t anticipate such a rapid transition to ethanol away from MTBE, and they’re having to scramble

to find product on the spot market or have to go to the import market or have to look to migrate product from the existing conventional gasoline market, those prices are going to be higher. That’s

just a fact of life. It’s going to be a short-term situation even for

them, however. I think overall, ethanol is going to continue to help

to lower consumer gasoline prices as it has throughout its history.

Senator THUNE. Well, I would make an observation about that,

because I think we use about 140 billion gallons of gasoline fuel in

the country today. We are right now producing about 41⁄2, slightly

higher than that, billions, billion gallons of ethanol. It seems to me

at least that given that proportion that the price of crude obviously

is driving a lot more than then price of ethanol the cost of gasoline

in this country.

But that being said, some in the past have suggested, in fact it

has been intimated today that the ethanol industry is highly concentrated, that a very few companies are in a position to manipulate prices. Testimony today has suggested that the ethanol industry ought to be investigated because of rising ethanol prices.

How do you respond to that?

Mr. DINNEEN. Senator, this committee last year had included a

provision in the Energy bill that required the FTC to look at that

very issue. The FTC released its report in December and found

that the ethanol industry is not at all concentrated. Indeed, that

reflects what we have known all along with as many ethanol companies that are coming into the business today and our industry is

highly competitive and will remain so.

Senator THUNE. I appreciate it. I know my experience with the

industry too is, you have a number of companies that are involved

in production, obviously a lot of investment by individuals like

farmers, many of them cooperatively owned. It seems to me at least

an industry that has tremendous up side potential in terms of addressing the energy needs we have in this country. We are in the

short term because of the phase-out, because of the oxygenate

standard, in a position where we need to have more ethanol sooner.
35

I know that folks are working very hard to meet the demand out

there, and I fully expect that they will be able to do that.

So I thank you, Mr. Chairman and yield back the balance of my

time.

Senator INHOFE. Thank you, Senator Thune.

Senator Obama.

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

I apologize, I missed the first panel, so some of this may be going

over new ground. I just want to make clear that I understand the

nature of the debate that’s taking place.

As I understand it, essentially, as a consequence of suppliers

eliminating MTBE quicker than I think many anticipated, there’s

now going to be an uptake in demand for ethanol as an additive.

Your argument, Mr. Douglass, as I best understand it, is that because of some of the distribution issues involved with ethanol that

that may contribute to a modest boost in gas prices this summer.

Is that basically the argument?

Mr. DOUGLASS. Yes, sir.

Senator OBAMA. OK. The assumption that I’m hearing from Mr.

Dinneen is that although you may see a little, a few bumps in the

road, that overall this is a process that ethanol producers will be

able to deal with adequately, that there may be a few difficulties

in terms of making sure supplies are sufficient, but that over the

course of 2, 3, 4, 5 years, this is not going to be a significant problem. Am I correct about that?

Mr. DINNEEN. Senator, I would say 2, 3, 4, 5 months.

Senator OBAMA. OK.

Mr. DOUGLASS. The marketplace is responding pretty effectively.

Senator OBAMA. So as far as you can tell, you would expect that

to the best of your knowledge, this is not going to be a major contributor to a spike in oil, gasoline prices at the pump this summer?

That’s your assessment?

Mr. DOUGLASS. Absolutely not, sir.

Senator OBAMA. OK. I guess I don’t have a lot of questions, I

would just make a simple point. MTBE appears to have the potential of causing health problems. Congress did not ban the use of

MTBE, it simply refused to protect MTBE suppliers from potential

liability. They made a decision that they did not want to expose

themselves to that liability and hence eliminated the use of this additive. It was a market decision.

I don’t see any reason why we would reverse our refusal to protect them from liability if in fact MTBE causes a serious health

concern. Now, if it doesn’t, presumably they will win in court. If it

does, then it’s something that we should not want out there affecting our kids.

Ethanol seems entirely extraneous to that debate. I think that

there is a legitimate concern as to whether we have the distribution mechanisms in place to get ethanol to market and people like

myself and Senator Thune have been working diligently to make

sure that happens. My expectation and my hope is that in the coming months and the coming years, you’re going to see the ethanol

market become extraordinarily robust.

I think that’s a good thing. I think we all should want to be encouraging biofuels as a means of weaning ourselves off dependence
36

on Middle Eastern oil. I think there are national security, economic

as well as environmental reasons for us hoping for that future.

So I would just end by saying that although none of us want to

see additional costs at the pump, and I recognize, Mr. Douglass,

from your perspective, you don’t want a bunch of irate customers

who are complaining and thinking that you’re the cause of it. I will

tell you that this is not, from my perspective, at least, based on testimony here, there is not much of a relation between the decline

in MTBE use and prices at the pump, at least not compared to potential disruptions in supply in Nigeria or Venezuela or Iran and

the world spot market.

So that’s my assessment, Mr. Chairman. I would yield back the

remainder of my time.

Senator INHOFE. Thank you, Senator Obama. My staff advises

me, Mr. Early, that I didn’t give you a chance to answer the question. Since I think you would like to think it over a little bit first,

you can do it for the record in writing. The question was, does the

American Lung Association embrace the methodologies of the trial

lawyers support group, KOMEX, which was part of the foundation

of your report. You can just submit that in writing.

I thank all the witnesses for coming, and we’re adjourned.

[Whereupon, at 11:32 a.m., the committee was adjourned.]

[Additional statements submitted for the record follow:]

STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM THE

STATE OF VERMONT

Mr. Chairman, thank you for holding this hearing. We will hear testimony today

on the effects of eliminating MTBE as a gasoline additive. I hope we will look carefully at this issue.

I do not believe that the elimination of MTBE will have a significant impact on

the gasoline market. I do believe it is the right thing to do for the environment.

MTBE is an additive that helps gasoline burn more cleanly. It has been used

since 1979. But we now know that MTBE is also a groundwater contaminant. Low

levels make water undrinkable due to offensive taste and odor. High levels are potentially cancer-causing in humans. Although the Clean Air Act does require the use

of re-formulated gasoline in areas with unhealthy levels of air pollution, it does not

specify that MTBE must be used. Refiners have the ability to use other additives

to clean up their gasoline, and many are using ethanol and other petroleum-derived

compounds.

The Energy Information Administration issued a report in February about the effect of our new energy law and market forces on the use of MTBE. Our hearing is

in response to this report. But the report is only one piece of information. It is not

really a price prediction. It is a snapshot of market conditions, and it is now more

than a month old.

My real concern is that we get a better understanding of how markets have responded to this report. Actions to eliminate MTBE from the marketplace are certainly not new. Twenty-five States now have full or partial bans on MTBE. The Environmental Protection Agency recommended that MTBE be banned in the late

1990s.

It is my view that we should have acted long ago to swiftly remove MTBE from

gasoline. Instead, this committee responded with legislation to phase out MTBE

over 4 years. Unfortunately, this phase-out was not included in the Energy bill that

became law last August. That was one of the reasons I voted against it.

I say this to highlight the fact that we routinely try to implement our environmental laws in a deliberate and measured way. The Clean Air Act’s compliant motor

fuels have been phased in over long time frames in consultation with industry. We

have done this specifically to try to avoid market shocks and price spikes. These are

not new requirements, they are not a surprise, and the costs associated with meeting them are known. The oil industry has had plenty of time to phase out MTBE

and has resisted doing so. But suddenly, after years of foot-dragging, it has decided

to stop using MTBE in gasoline in early May, in an abrupt and potentially disrup-
37

tive manner. The industry is now faced with a crisis of its own making, and I fear

it will use this as an excuse to hike prices at the pump.

I am sorry that there are no witnesses at this hearing today to represent the oil

industry so that we could better understand why they are responding to the new

energy law in this way. In the future, particularly as we examine issues related to

the new energy law’s fuels provisions, we should have them here.

Over the past year, we have seen record-breaking gas prices, the national average

exceeding $3 a gallon after Hurricane Katrina. This comes, perhaps not surprisingly, as oil companies continue to enjoy record profits. Exxon-Mobil announced a

record quarterly profit of $10.7 billion in the fourth quarter of 2005. Its annual profits increased to $36 billion, up 43 percent from 2004. Now, we are being told that

the elimination of MTBE will mean even higher prices and undoubtedly more profits. I believe what we should really be examining today is why these oil companies

are amassing record profits while Americans pay record prices for gas. It is time

for answers.

During this hearing, I will be listening closely for any documented, real evidence

to show that switching away from MTBE is contributing to increases in gasoline

prices in a significant way. What we do know is that our country still has much

to do to improve air and water quality, and it is this committee’s first and foremost

responsibility to assure that the Nation’s laws are protective of public health and

the environment.

Thank you again, Mr. Chairman for holding this hearing. I look forward to hearing from the witnesses.

STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR FROM THE STATE OF ALASKA

Thank you Mr. Chairman for holding this hearing on the problems we may well

be facing on the East Coast and in parts of the South later this spring and summer

because of the rapid discontinuation of use of the additive MTBE in gasoline.

Coming from a cold-weather state like Alaska, MTBE was certainly never popular. While it is easier to transport and cheaper to blend in gasoline than ethanol;

in the extreme cold, MTBE fumes caused skin rashes. To say my Fairbanks constituents do not miss MTBE is an understatement.

But reading the testimony before us this morning, East Coast, Northeast and

Texas motorists may well miss MTBE greatly since the phase out of MTBE appears

to be coming before the Ethanol industry, and the refinery industry, can be prepared to fully utilize ethanol in reformulated gasoline.

The predictions of ethanol shortages to put into gasoline and regional fuel shortages resulting from the blending characteristics of ethanol itself paint a pretty unpleasant forecast. A cloudy forecast of rising prices in the Northeast, almost guarantees that Congress is going to be hearing thunderous complaints from motorists before summer’s end. Given what may be happening to fuel prices already because of

the costs of producing ultra-clean diesel, the pressures of global demand increases

and any supply disruptions that result, mean it is going to be raining down complaints on Congress for the price of gasoline and diesel this summer.

I hope to hear more suggestions to mitigate fuel price problems during this hearing. The suggestion that we ask the Finance Committee to temporarily waive the

import tariff on ethanol to allow foreign imports probably from Brazil to lessen the

supply shortage was something. I hope the hearing will produce even more ideas

from the witnesses.

Greater reliance on ethanol will be good for our farmers and our energy security

in the future, but it may raise a bumper crop of complaints this summer if we can’t

relieve the additive shortages that the rapid phase out of MTBE is about to cause.

I await the testimony, thank you.

STATEMENT OF HON. BARACK OBAMA, U.S. SENATOR FROM THE STATE OF ILLINOIS

Mr. Chairman, thank you for holding this timely hearing today.

We’re here to examine the costs of eliminating MTBE as a fuel additive. But in

examining these costs, we need to look at more than just the price that consumers

pay at the pump. We need to look at the health impact of MTBE as a carcinogen

and its effect on drinking water. And we need to look at the costs of the alternative

additive, namely, ethanol.

Certainly, the production of ethanol isn’t where it should be. But lawmakers on

both sides of the aisle are working to change that. Last year, I was pleased to work

with a number of colleagues on this committee to create a renewable fuel standard.
38

And this year, I have introduced comprehensive legislation with Senator Lugar to

further stimulate the production of biofuels.

The challenge we face with ethanol—and biofuels in general—is getting them out

of the labs, out of the farms, and onto the wider commercial market. This is an issue

that politicians from both parties clamor about when gas prices are the headline of

the month, only to fall back into inaction once things calm down.

So, for me, the answer to insufficient ethanol supplies isn’t to delay the switchover

from MTBE; the answer is to pursue policies for greater expansion of ethanol, and

to strengthen the infrastructure to transport it.

In his State of the Union address, President Bush told us that it was time for

America to get serious about its addiction to foreign oil. A day or so later, Energy

Secretary Bodman assured the world that the President didn’t mean it literally.

Why? Well, apparently, the Saudi government wasn’t too happy with the President’s

statement. To me, that level of foreign influence over our domestic affairs is the

exact reason why we need to do more to increase our production of renewable fuels.

And, even if there would be some minimal price increases from replacing MTBE

with ethanol—and I know this assumption is disputed by the witnesses—we

shouldn’t lose sight of the larger reason for high gasoline prices—the tightfisted control that a handful of foreign governments have over the world’s oil supply.

Every single hour of every single day, we spend $18 million on foreign oil. It

doesn’t matter if these countries are budding democracies, despotic regimes, or havens for the madrassas that plant the seeds of terror in young minds—they get our

money because we need their oil. We have to start changing this now, and the way

to do to that is to encourage greater development of home-grown fuels.

I look forward to hearing today’s witnesses, and I thank the Chair.

STATEMENT OF HON. JOSEPH I. LIEBERMAN, U.S. SENATOR FROM THE

STATE OF CONNECTICUT

Thank you Mr. Chairman for calling this hearing to review Department of Energy

warnings that the oil industry’s abrupt decision to switch from MTBE to ethanol

as an oxygenate or octane enhancer could lead another summer of gasoline shortages and high prices.

I support the goal of phasing out MTBE—or methyl tertiary butyl ether—in favor

of ethanol. In fact, the bipartisan Vehicle and Fuel Choices for American Security

Act I have sponsored, along with Sen. Brownback and 10 other Senators, encourages

the development ethanol and other renewable fuels as a way of lowering our dependence on foreign oil.

My home state of Connecticut is one of seven states that have already banned the

use of MTBE as a gasoline additive because of the dangers it poses to public health

and environment as a possible carcinogen leaking into the ground water.

But I fear that the oil industry—already drowning in record profits—will use the

sudden switch from MTBE to ethanol as a backdoor means of raising prices if the

ethanol industry cannot deliver the quantities needed, as the Energy Information

Administration thinks likely, according to its recent report.

The oil industry says it was forced to switch from MTBE to ethanol because Congress did not provide a waiver of liability from damage caused by MTBE when it

dropped the oxygenate requirement in the 2005 Energy Policy Act. Unfortunately,

we do not have a representative of the oil industry at this hearing today, so we can

not explore more fully how they would defend their decisions.

As we consider the actions of the oil industry, we should remember several points.

First, the industry chose to use MTBE as an oxygenate to make gasoline burn cleaner in heavily polluted areas. MTBE was the industry’s choice, not a Congressional

mandate, and there is no reason to release the industry from liability for a choice

it made.

As stated succinctly by the representative of the Renewable Fuels Association

today, ‘‘Refiners are not compelled to use MTBE in [Reformulated Gasoline], nor are

they compelled to use ethanol once the oxygenate requirement is eliminated. The

decision to stop using MTBE is the refiners’ alone.’’

The industry knew the day would come that it would have to phase out MTBE

and has had plenty of time to plan for the transition and make sure there were adequate supplies of the ethanol or another alternative.

There is no excuse for unnecessary shortages and discretionary price increases.

That, if anything, should be the focus of Congressional investigation. Any resulting

price spikes and higher profits should be taxed as an undeserved windfall.

Legislation I introduced in December year would impose an excise tax on oil companies for 50 percent of their windfall profits. This one-time tax would provide a
39

one-time payment to partially offset increased home heating and energy costs, as

well as a portion of gasoline cost increases.

Thank you Mr. Chairman.

STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION

ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

Mr. Chairman, and members of the committee, I am pleased to be with you today

to testify on the effects of the removal of methyl tertiary-butyl ether (MTBE) from

gasoline.

The Energy Information Administration (EIA) is an independent statistical and

analytical agency within the Department of Energy. We are charged with providing

objective, timely, and relevant data, analysis, and projections for the use of the Congress, the Administration, and the public. We do not take positions on policy issues,

but we do produce data, analysis, and forecasts that are meant to assist policymakers in their energy policy deliberations. Because we have an element of statutory independence with respect to our analyses, our views are strictly those of EIA

and should not be construed as representing those of the Department of Energy or

the Administration.

I have been asked to focus my testimony on a recent analysis entitled, ‘‘Eliminating MTBE in Gasoline in 2006,’’ which EIA issued on February 22, 2006. A copy

of that analysis is attached and provides the substance of my written testimony.

Although EIA’s analysis is now approximately a month old, we feel that it still

provides a timely and pertinent description of our perspective on the market situation with regard to the widespread removal of MTBE from reformulated gasoline

and the significantly increased use of ethanol that is likely to occur as a result. I

will be providing an update of market conditions, based on information available in

the past few days, in my oral remarks.

Thank you for your consideration of the following analysis. I look forward to answering any questions you may have.
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RESPONSE BY GUY CARUSO TO AN ADDITIONAL QUESTION FROM SENATOR THUNE

Question. I want to thank you for participating in our recent hearing regarding

the impact refiners’ decision to eliminate methyl tertiary butyl ether (MTBE) will

have on U.S. gas markets and prices. As refiners switch to ethanol from MTBE, I

wanted to follow up with you concerning a question I asked during our hearing with

regard to the Energy Information Agency’s policy regarding the reporting of oxygenate data.

Given the growing importance ethanol is playing in America’s motor fuels market,

I am concerned by the fact EIA’s monthly oxygenate reports represent data that is

at least 60 days old. In this day and age, EIA should be able to compile and report

the data with the same frequency with which petroleum data is reported. Given how

closely both markets are tied to each other, a more recent and accurate accounting

of what is taking place in the ethanol industry would be of tremendous benefit to

both petroleum companies and ethanol producers.

During your testimony you cited budgetary restraints as the main reason for the

lack of real time reporting of oxygenate data. In particular, you estimated it would

take $2 million to get such a reporting system up and running and $800,000 a year

thereafter to maintain it.

Given that EIA already has staff committed to publishing oxygenate data and

much of the data is reported electronically, it would seem that more timely reporting could be done in coordination with EIA’s Weekly Petroleum Status Report within existing budget authority. If that is not the case, I am requesting a detailed accounting on what the additional $2 million and $800,000 annually thereafter would

be spent. It would seem to me that such an adjustment would not be a monumental

task for EIA to overcome.

I firmly believe that the petroleum industry and the ethanol industry should be

kept current on production and supply data concerning their products. Such timely

information would go a long way in reducing price volatility and provide the government and private companies more accurate information on which to base their short

and long term forecasts.

I want to formally express my appreciation for the work EIA does and assure that

I am committed to working with you and providing the resources required to provide

more current and relevant data concerning the oxygenate market.

Response. EIA works within a limited budget, prioritizing needed investments.

While EIA has undertaken activities to improve efficiency (e.g., increased collection

of information using the Internet), the efficiency savings have not completely offset

additional resources required to satisfy the increasing information demands on EIA.

As a result EIA identified selected surveys and programs that must be eliminated.

For example, after collection of data for July 2006, EIA will discontinue two petroleum surveys, Forms EIA–182 and EIA–856 (Federal Register/Vol. 71, No. 56/Thursday, March 23, 2006/Notices).

We agree that collecting weekly ethanol data would be beneficial, however there

are higher priority activities that we are funding. As indicated above and in our FY

2006 budget documents, we are not able to maintain our full petroleum data collection program, much less add to our forms and systems at this time.

Regarding your specific question on monthly ethanol data collection costs, we need

to clarify a misunderstanding. During the hearing, the $2 million one-time cost estimate and associated ongoing costs mentioned were budgetary requirements to comply with Section 1508 of the Energy Policy Act of 2005. This section directs EIA to

collect various renewable fuel data on a monthly basis. Data for a given month are

published about 2 months after the month ends to allow time for companies to assemble the data and submit it to EIA and for EIA to process the data. Attached

is a brief explanation of that requirement, and a breakdown of resources.

This attachment and its accompanying table illustrate the cost issues associated

with our data collection efforts. Data survey work goes beyond simply gathering

some forms and adding up the data. It must comply with the Information Quality

Guidelines of the Office of Management and Budget, the Department of Energy, and

the Energy Information Administration. These Guidelines are designed to ensure

the quality (i.e., objectivity, utility, and integrity) of information. The validation, statistical analysis, system design/changes, integration into existing production systems

and so forth are where much of the cost lies.
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STATEMENT OF ROBERT MEYERS, ASSOCIATE ASSISTANT ADMINISTRATOR, OFFICE OF

AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION AGENCY

Mr. Chairman, and members of the committee, I appreciate the opportunity to

come before you today to testify regarding ‘‘The Impact of Elimination of MTBE.’’

My testimony will address how recent amendments to fuel quality regulations and

ongoing implementation of the Energy Policy Act of 2005 affect existing U.S. fuel

programs, in particular the Reformulated Gasoline Program (RFG), which has historically utilized large quantities of methyl tertiary butyl ether (MTBE) in order to

meet requirements imposed by the 1990 Clean Air Act Amendments.

As the Associate Assistant Administrator for the Agency’s Office of Air and Radiation, my responsibilities include supporting the Assistant Administrator on all airrelated activities of the Environmental Protection Agency (EPA or Agency), including programs addressing industrial and vehicle pollution, acid rain, stratospheric

ozone depletion, radiation protection, indoor air quality and global climate change.

I am pleased to be here representing my colleagues at EPA who are responsible for

implementing the various laws and provisions that protect our Nation’s air quality.

An important element of this task is the successful development and implementation of programs affecting our Nation’s fuel supply.

Following passage of the Clean Air Act Amendments of 1990, EPA was tasked

with developing and implementing new motor vehicle emissions and motor vehicle

fuel quality programs to reduce harmful evaporative and exhaust emissions that

negatively impact our Nation’s environment and public health. Among many other

new provisions, the Clean Air Act required the implementation of several new fuel

quality programs with prescribed fuel parameters that supported attaining our Nation’s clean air standards. The Agency developed specific controls on fuel component

parameters, such as seasonal controls on Reid vapor pressure and the RFG oxygenate requirements. Where available under applicable legislative provisions, the Agency also utilized a performance based approach to afford fuel producers greater flexibility in bringing these new cleaner fuels to market.

In 1992, the Wintertime Oxygenated Fuels Program was implemented, requiring

more than thirty areas exceeding air quality standards for carbon monoxide to use

oxygenated fuels. This program, as specified in the 1990 Clean Air Act Amendments, required gasoline to contain 2.7 weight percent oxygen and the program has

been instrumental in bringing many of these areas into attainment of the national

standard for this pollutant. Both MTBE and ethanol were the primary products

used to meet these new quality standards.

Subsequently, following successful regulatory negotiations with the oil industry

stakeholders, oxygenate producers, states, and other interested parties, another

landmark fuel quality program was implemented the RFG program. The 1990 Clean

Air Act Amendments specifically required RFG to contain on average 2.0 weight

percent oxygen and established a two phase program designed to reduce vehicle

emissions that cause or contribute to ozone (smog) and toxic pollution in our cities.

The first phase of the RFG program introduced cleaner gasoline in January 1995,

followed by the more protective Phase 2 in January 2000. This program was required in the ten metropolitan areas with the most serious air pollution levels. Although not required to participate, some areas in the Northeast, Kentucky, Texas,

and Missouri elected to join, or ‘‘opt-in’’ to the RFG program as a cost-effective

measure to help combat air pollution problems. Today, roughly 35 percent of this

country’s gasoline consumption is cleaner-burning reformulated gasoline. The RFG

program has also often been referred to as one of the most successful air quality

programs implemented. As in the Wintertime Oxygenated Fuels Program, MTBE

and ethanol were again the primary products used to meet these new quality standards.

For more than a decade prior to the implementation of these fuel quality programs, refiners worldwide had been using MTBE, an oxygenated hydrocarbon derived from methanol and petroleum, to augment gasoline supplies and provide a

source of octane. Ethanol was also used in the Nation’s fuel supply for several decades. With the implementation of the RFG and the Wintertime Oxygenated Fuels

Program, however, the use of fuel oxygenates, almost exclusively MTBE and ethanol, increased dramatically. In meeting RFG requirements and other state-specific

requirements, ethanol was primarily utilized in the Midwest. MTBE is primarily

used elsewhere, including large areas of the Northeast, the State of California, and

metropolitan Philadelphia, Baltimore and Washington.

Over the last 6 to 7 years, however, concerns have arisen with respect to groundwater contamination from leaking underground storage tanks having gasoline containing MTBE. These concerns prompted some states to ban the use of MTBE in

gasoline, including large gasoline markets such as California, New York, and Con-
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necticut. This resulted in a significant reduction in the use of MTBE and a corresponding increase in the use of ethanol in these areas.

THE ENERGY POLICY ACT OF 2005

The Energy Policy Act of 2005 (Act) made several alterations to the RFG program,

including removal of the 2 percent oxygenate mandate for RFG. In response to the

law’s enactment in August of last year, EPA promulgated a direct final rule to

amend the RFG regulations in order to eliminate regulatory standards requiring the

use of oxygenates in RFG. The direct final rule provides that these regulatory standards will no longer apply nationwide, outside of California, as of May of this year.

Within California, the RFG oxygenate regulatory standards will no longer apply as

of April of this year. The rule also serves to implement provisions of the Energy Policy Act respecting the commingling of ethanol-blended and non-ethanol blended reformulated gasoline.

The Energy Policy Act of 2005 also set forth a new national renewable fuels program that established renewable fuel volume standards beginning in 2006. The renewable fuel standard, or RFS, requires an increasing volume of renewable fuel to

be utilized in the continental United States starting in 2006. In order to implement

this requirement, EPA published a direct final rule in December 2005. This ‘‘default’’ rule for RFS compliance applies only in 2006.

Under the RFS default rule, refiners, importers, and gasoline blenders will collectively be held responsible to meet a 2.78 percent nationwide renewable volume

standard. This equates to approximately 4.0 billion gallons toward which both ethanol and biodiesel can count. The Energy Policy Act specified 4.0 billion gallons as

the RFS level for 2006. This level increases year by year through 2012 under a specific statutory schedule and increases afterwards according other statutory provisions. If the 2.78 percent volume standard is not met, the default rule specifies that

this deficit would carry over to the RFS requirement for 2007. However, based on

data demonstrating ethanol use in 2005, and stakeholder projections for 2006, it is

expected that far greater than 4.0 billion gallons of renewable fuels will be used in

2006 in the United States.

As the Agency continues to address other provisions of the Energy Policy Act

which have the potential to impact the US gasoline market, we are paying close attention to the specific directions set forth in the Act in designing future programs

and making required revisions to existing ones. Recognizing that fuel oxygenates,

such as MTBE and ethanol, have played a significant role in these programs and

are a significant volume portion of the overall US gasoline market, the Agency will

continue to strive to maintain and advance the air quality protection gains through

these programs, while minimizing potential market impacts when possible.

Looking forward, it is the Agency’s understanding that as a result of changes

made by the Energy Policy Act of 2005, in particular the removal of the RFG oxygenate requirement, MTBE use in the RFG program will decline significantly. Some

fuel providers are already transitioning away from using MTBE with most moving

to blend ethanol in their RFG products. It is not anticipated that large volumes of

non-oxygenated RFG will be in the RFG market areas.

In order to accomplish this change in the RFG market, fuel producers will produce

reformulated gasoline blendstock for oxygenate blending (RBOB) that, compared

with MTBE RFG, may require adjustments to lower the Reid vapor pressure of the

RBOB in order to accommodate ethanol blending. In addition, some stakeholders

have indicated that the removal of MTBE from the RFG pool may also result in

some refiners using ethanol in order to meet the RFG toxics requirements.

Altogether then, RFG is likely to absorb a significant percentage of ethanol utilization in this country. The Northeast market alone, with areas in New Jersey,

Pennsylvania, Delaware, Maryland, the District of Columbia, Northern Virginia,

Richmond and Norfolk, may undergo a substantial conversion to ethanol RFG. The

Houston and Dallas markets are already experiencing a change over to ethanol

RFG.

While EPA would defer to the Energy Information Administration to make assessments concerning overall impact of this conversion on fuel price and supply, it is

likely that without a minimum oxygenate standard in place, traditional market supply, demand and economic behavior will have a greater role in determining the production and blending of compliant RFG. With the removal of the RFG oxygenate

standard, refiners will have greater flexibility as to when and where to blend ethanol or other oxygenates. As a result, refinery volumes may be affected since using

ethanol to support volume replacement is not a one to one equivalent with MTBE

blended RFG.
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Depending on decisions made in the private marketplace, there are also potential

upstream distribution impacts that may occur as a result of conversion from MTBE

to ethanol-based RFG. Responses may involve designated tanks, tank management

practices and terminal blending equipment. Retail facilities may also need to prepare for any switch to ethanol blended fuels, by emptying and cleaning their storage

tanks and removing any water.

There are also several other provisions of the Energy Policy Act which will affect

the fuel supply and potentially affect or mitigate supply issues. For example, unification of RFG northern and southern volatile organic compound (VOC) controls, as

required by section 1504(c) of the Act, will allow RFG product to move to markets

more freely. Further, the development of a boutique fuels limitation required under

section 1541 of the Act will affect EPA’s future consideration of state requests for

fuel controls or prohibitions.

EPA also recently proposed the Mobile Source Air Toxics (MSAT) rule. Pursuant

to section 1504(b) of the Energy Policy Act of 2005, EPA must adjust the toxics

emissions baselines for reformulated gasoline to reflect 2001-2002 fuel qualities.

However, this section also provides that this action becomes unnecessary if EPA

takes action which results in greater overall reductions of toxics emissions from vehicles in areas with reformulated gasoline. As proposed, EPA believes that the

MSAT rule would result in greater reductions than would be achieved through adjusting the baselines under section 1504(b). Accordingly, if the EPA were to finalize

an MSAT rule meeting the directives of this section, the need for readjusting baselines for reformulated gasolines would be obviated.

EPA will also be taking action this year to propose a rulemaking to implement

the RFS for 2007 and subsequent years. While this proposal is still under development, EPA is cognizant of the need to propose an RFS implementation plan that

maximizes existing fuel production and distribution market dynamics and minimizes impacts on production, supply, distribution and price. In general, the proposed rulemaking will define who the liable parties are for the RFS, establish a

credit trading program, assign appropriate credits for additional renewable fuel

products and establish compliance assurance provisions.

Altogether, through a combination of removal of the RFG oxygenate standard and

implementation of the new renewable fuels requirement, ethanol use in the U.S. will

undoubtedly increase and MTBE use will likely decrease by a substantial margin.

The precise impact of these events will depend on many different factors, including

the reaction of the private marketplace to the elimination of previous regulatory requirements. As indicated above, EPA is committed to helping ensure a successful

transition to greater use of renewable fuels and will work with other federal agencies and departments on issues affecting fuel supply and distribution.

Again, I want to thank you, Mr. Chairman and the members of the committee

for your attention to this important issue. This concludes my prepared statement.

I would be happy to answer any questions that you may have.

RESPONSES BY ROBERT MEYERS TO ADDITIONAL QUESTIONS FROM

SENATOR INHOFE

Question 1. Mr. Meyers, when you were before the committee, you were asked if

MTBE had not been available as an option at the outset, would that fact have made

the Federal fuel oxygen standard practically impossible to implement. In part, you

responded by directing the committee to the findings of the September 16, 1999 report of the EPA MTBE Blue Ribbon Panel created under a Charter from the EPA

Clean Air Act Advisory Committee. Upon review of that report, the committee finds

that the report states that the ‘‘infrastructure to support such [ethanol] blending on

a wide scale does not currently exist’’ (p. 65) and that, ‘‘The likely oxygenate replacement for MTBE is ethanol. Current and near future ethanol production (i.e., on-line

in less than 2 years), however, is not adequate to meet the volume of oxygenate required nationally.’’ (p.72).

Based upon this analysis, is it reasonable to conclude that implementation of the

Federal mandate would not have been possible if MTBE had been unavailable at

the time the program was required to go into effect?

Response. My testimony before the committee included reference to both the Blue

Ribbon Commission Report as well as efforts by EPA in 1994 to promulgate a Renewable Oxygenate Requirement (ROR) for the Reformulated Gasoline (RFG) program. Regarding the latter, this reference was made since the effort to promulgate

a ROR predated the first phase of the RFG program, which began in January 1995.

Therefore, the EPA rulemaking record for the ROR reflected conditions that existed
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after congressional enactment of the RFG program, but before its initial implementation.

In the development of the ROR, EPA conducted extensive analysis of the thencurrent ethanol supply and demand. Table 1–3 of the Regulatory Impact Statement

for the ROR summarized the ethanol supply/demand situation and indicated that

there was a potential shortfall (or displacement from existing markets already using

ethanol) of 320 million gallons just to satisfy a requirement that 30 percent of RFG

contain renewable oxygenates in 1995. The RIA further indicated that, even if implementation of the 30 percent ROR was delayed until 1996, there would be a potential shortfall (or displacement) of 160 million gallons of ethanol.

The RIA for the ROR additionally indicated that ‘‘in the early years of the program the renewable oxygenate requirement is expected to be met primarily with

ethanol blended into winter RFG.’’ This analysis flowed from assessments that renewable oxygenates, like ETBE, would not be expected to provide a significant contribution to the renewable requirement in 1995, although more capacity for ETBE

could come on line in 1996. Table 11–2, contained in page 59 of the RIA, addressed

total fossil energy consumption under a 30 percent renewable oxygenate requirement. The table addressed both a situation where the entire 30 percent ROR was

satisfied by utilization of ethanol in the wintertime and a situation where the requirement was satisfied by ethanol in the winter and ETBE in the summer. With

respect to the portion of RFG not affected by the ROR—the other 70 percent of the

oxygenate requirement—DOE’s analysis assumed that this RFG would contain

MTBE. While this RIA did not directly address the implementation of the RFG program that ultimately unfolded (i.e., since the ROR was later overturned in the

courts) it does represent a contemporaneous assessment of conditions in the renewable oxygenate market. Based on this analysis, it is logical to conclude that MTBE

was expected to be used in the RFG program in substantial quantities.

As your question also indicates, several years after the initial implementation of

the RFG program, the Blue Ribbon Panel Report indicated that ethanol alone could

not fully satisfy meeting the oxygenate requirements for the Federal Reformulated

Gasoline Program. As your citations to the report indicate, the Blue Ribbon Panel

report concluded that a lack of infrastructure existed, as of 1999, to support full replacement of MTBE with ethanol blending in the short term.

As you know, other oxygenate additives apart from MTBE and ethanol—such as

tertiary amyl methyl ether (TAME), diisopropyl ether (DIPE), and ethyl tertiary

butyl ether (ETBE)—have been developed for many years and have been available

during the entire course of the RFG program. EPA’s Final Regulatory Impact Analysis for Reformulated Gasoline (December 1993), however, indicated that, at that

time, technological and economic uncertainties existed regarding ETBE and that

ETBE was not cost-competitive with MTBE and ethanol (page 295 of RIA—

EPA420–R–93–017). The analysis indicated that ETBE had not been widely used in

the market to date (page 28 of RIA). EPA’s analysis in this regard is consistent with

other market data concerning oxygenate production. Information produced by the

Energy Information Administration in 1995 (Short-Term Energy Outlook Annual

Supplement 1995) indicated a sizable growth in MTBE production capacity between

1991 and 1995 and a more modest increase ethanol production capacity. Corresponding figures for TAME and ETBE production capacity indicated that such capacity combined constituted less than 10 percent of MTBE capacity. I have attached

a table containing this information that was published as part of another EIA publication (Oxygenate Supply/Demand Balances in the Short-Term Integrated Forecasting Model, March 6, 1998). Overall, MTBE was the primary oxygenate utilized

to blend into RFG to meet the 2 weight percent oxygenate requirement mandated

by the RFG program. MTBE is high in octane, has favorable distillation properties,

and can be blended and shipped through pipelines. These attributes, along with economic valuations of the product, were highly favorable in meeting the RFG oxygenate requirement.

Question 2. Mr. Meyers, in implementing the RFS, how will EPA guard against

supply disruptions and price impacts?

Response. As you know, EPA is in the process of developing a proposal to implement the Renewable Fuel Standard (RFS) which was established by the Energy Policy Act of 2005. While EPA is still in the pre-proposal stage for this rulemaking,

it would be the Agency’s general intent to design a program that allows renewable

fuel blending when, where and how it makes the most sense.

The RFS Program as prescribed by the Energy Policy Act of 2005 (EPAct) allows

industry flexibility in meeting the new standards. EPA considers that the legislative

flexibility is intended to mitigate, to the extent possible, adding any additional market constraints that could cause or contribute to supply or price volatility. That is,
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the RFS program does not require every gallon of gasoline to contain a renewable

fuel component. Therefore, industry can choose how best to comply based on a number of factors affecting supply, demand and blending economics including: seasonal

(with some limitations) and geographic system optimization, and the purchasing and

trading of excess blending credits. This flexibility supports greater market fluidity

thus enabling a more expeditious response to unusual supply, demand and other

unique situations that could adversely impact product availability and price.

Additionally, in accordance with other provisions contained in the EPAct, EPA

has proposed removal of the oxygenate standard in the RFG program areas. Removal of this standard allows stakeholders greater flexibility in when, where and

how they blend renewable fuel components. EPAct additionally granted EPA authority to waive fuel quality program requirements. EPA exercised such authority in

2005, when it became aware of potential fuel supply issues resulting from the fallout of the Hurricanes in the gulf region. In this effort, EPA worked closely with

other private and government stakeholders and responded quickly providing necessary short term relief, allowing the markets to adjust rapidly. This provision provides EPA with continuing legal authority to address fuel supply disruptions which

occur as a result of conditions specified in the waiver authority.

Finally, it is notable that over the last several years EPA has implemented a

number of actions and programs that significantly ease potential supply constraints

that may have occurred as a result of clean fuel requirements such as the on-road

and off-road diesel sulfur requirements. Programs such as market-based trading

systems, geographic phase in allowances, baseline adjustments, short term testing

tolerance modifications, as well as others, have provided the fuel supply and distribution industry increased flexibility to comply with the rules more cost-effectively,

and in some cases, to increase production, thus providing for a more reliable supply

of fuel. These have all contributed to ensuring smooth distribution and thus price

stability while maintaining the significant environmental benefits these programs

were designed to achieve.
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STATEMENT OF A. BLAKEMAN EARLY, AMERICAN LUNG ASSOCIATION

Mr. Chairman and members of the committee, I appreciate the opportunity to appear today on behalf of the American Lung Association to discuss the impact of

eliminating MTBE from gasoline.

THE AMERICAN LUNG ASSOCIATION SUPPORTS THE REMOVAL OF MTBE FROM GASOLINE

As you know MTBE has been found to contaminate ground or surface water in

nearly every state. MTBE has rendered thousands of public and private drinking

water sources unusable. Addressing the clean up or replacement of these sources

has been estimated in a study by the American Water Works Association to cost upwards of $25 billion dollars. These statistics, which may not include all MTBE contamination costs, provide reason enough to eliminate MTBE from the Nation’s fuel

supply. I have attached a summary of the AWWA report to my testimony.

The American Lung Association is particularly interested in eliminating MTBE

from reformulated gasoline (RFG) because the fear of MTBE contamination has reduced the public acceptance of RFG as a tool in fighting air pollution. Many areas

with unhealthy levels of ozone have avoided adopting RFG for fear of contaminating

local water supplies. Therefore, we see the recent trend of refiners choosing to eliminate MTBE from RFG as a welcome development which may facilitate the adoption

of RFG in more areas that need it. If so, the public will benefit from reduced exposure to ozone and toxic air pollutants. The elimination of the oxygen requirement

in RFG, in combination with the sulfur limit in all gasoline implemented as part

of the Tier II rules, and the limitations on boutique fuels adopted in the Environmental Policy Act of 2005 (EPACT) should eliminate the proliferation of boutique

fuels while providing clean fuels choices to areas that need them. We believe that

any additional limitations on states’ ability to select clean fuels would have adverse

air quality impacts and are unnecessary given all the changes I just described.

REFINERS ARE ELIMINATING MTBE FROM RFG THIS SPRING ENTIRELY VOLUNTARILY

The American Lung Association endorsed a ban of MTBE in fuel phased in over

4 years. This time frame was originally identified by the refining industry as the

necessary phase out period in testimony before this committee. The Congress chose

not to adopt such a measure during its consideration of EPACT. Congress did remove the oxygen requirement from RFG, enabling each refiner to use as much or

as little MTBE as it chose.

Now this spring, refiners are attempting to remove MTBE from RFG all at once

rather than pursuing a phased elimination. Although MTBE is already banned for

use in fuel in over 20 States, the current action to remove MTBE from the remaining RFG supply is voluntary, is not required to meet any law. We see no credible

basis for finding that the use of MTBE in RFG in 2006 gives rise to special liability

given the nature of MTBE groundwater contamination and the difficulty of distinguishing when contamination occurred. Whatever liability refiners may be subject

to will be based largely on past actions. The nature of that liability is well described

in testimony by Erik D. Olson of the Natural Resources Defense Council before the

House Energy and Commerce Committee (see http://energycommerce.house.gov/108/

Hearings/03132003hearing818/Olson1367.htm).

It has long been predicted that removal of MTBE from RFG would spike a demand for ethanol. I provided testimony before this committee in June 2000 that the

removal of MTBE would create a demand of 3.8 billion gallons a year just to provide

octane in RFG. My testimony was based on information obtained from the refining

industry itself. In fact ethanol is apparently being used today in amounts greater

than needed to provide octane in order to help refiners meet air toxics reduction requirements.

The fact that refiners are voluntarily and precipitously withdrawing MTBE from

use knowing that such action would cause a spike in RFG prices provides testament

to the indifference the industry has to the calls of consumers to restrain fuel prices.

SHORTAGES CREATED THROUGH VOLUNTARY OIL INDUSTRY DECISIONS ARE NOT A BASIS

FOR WAIVING FUEL REQUIREMENTS

As you know, in the Energy Policy Act of 2005 (EPACT) the Congress provided

EPA with the authority to temporarily waive a fuel or additive requirement under

the Clean Air Act in cases of an ‘‘extreme and unusual fuel or fuel additive supply

circumstance’’ (Section 1541(a)). The statute explicitly states that shortages that

reasonably could have been foreseen or derive from a lack of prudent planning do

not qualify for such waiver.
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We believe the ethanol and fuel shortage we are discussing today was foreseeable

and in fact is exactly the result of a failure of prudent planning. The American Lung

Association hopes no one will suggest the need for invoking the EPACT waiver authority.

SHORTAGES IN ETHANOL CAUSE THE SAME PRICE VOLATILITY AS GASOLINE SHORTAGES

The wholesale or ‘‘rack’’ price of ethanol is well over a dollar more than it was

a year ago. It should come as no surprise that ethanol producers will charge as

much as they can get on the market. However, it is worth noting that when ethanol

demand has surged in the past as with the phase out of MTBE in California and

in the New York/Connecticut RFG markets, the ethanol industry has responded to

such demand and provided the needed ethanol with modest impact on overall RFG

price. We operate on the assumption that the ethanol industry will respond similarly in the case of the current shortage over the longer term. However, we believe

the Department of Energy should be more proactive in alleviating ethanol shortages

by encouraging alternative sources of ethanol supply from off-shore sources such as

the Caribbean Basin and Brazil. Given that the expected shortage in ethanol supply

this spring is occurring in the Mid-Atlantic and Texas, it should not be difficult to

facilitate the location and shipment of foreign sources of ethanol to Hampton, Virginia and Houston, Texas to help meet unexpected demand.

EPA MUST ACT NOW TO MEET ANTI-BACKSLIDING REQUIREMENTS TO CURB

TOXIC AIR POLLUTANTS

Under EPACT, 9 months after enactment EPA is required to establish standard

for each refiner and importer designed to maintain the level of toxic air pollutant

reduction achieved on average during 2001 and 2002. (Section 1506(b)). This socalled ‘‘anti-backsliding’’ provision was enacted to ensure that as refiners reduced

the amount of MTBE they used in RFG, the level of toxic air pollution from the use

of such fuel did not increase. The dramatic shift away from MTBE use occurring

this spring well illustrates why this provision is needed. Yet to my knowledge EPA

has not instituted any effort to assemble the regulatory information or propose the

anti-backsliding requirements required by the law. We call on EPA to move expeditiously in light of the current circumstances.

Again, I appreciate the opportunity to appear before the committee on behalf of

the American Lung Association.
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STATEMENT OF BILL DOUGLASS, CHIEF EXECUTIVE OFFICER, DOUGLASS DISTRIBUTING

COMPANY, REPRESENTING THE NATIONAL ASSOCIATION OF CONVENIENCE STORES

AND THE SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA

Good morning, Mr. Chairman, Ranking Minority Member Jeffords, and members

of the committee. My name is Bill Douglass. I serve as the chief executive officer

of Douglass Distributing Company in Sherman, TX. My company owns and operates

14 motor fuel outlets in the Dallas-Fort Worth area and supplies gasoline and diesel

fuel to 165 additional retail outlets in that area under long-term supply contracts.

Thank you, Mr. Chairman, for calling this important hearing this morning. I appear before the committee representing the National Association of Convenience

Stores (NACS) and the Society of Independent Gasoline Marketers of America

(SIGMA). I am the former chairman of NACS’ Board of Directors and my company

also is an active member of SIGMA. Together, NACS and SIGMA members sell approximately 80 percent of the gasoline and diesel fuel purchased by motorists in the

United States each year. NACS and SIGMA appreciate the opportunity to present

testimony this morning on an issue of great importance to our industry and to the

entire Nation—the current turmoil and uncertainty in the nation’s gasoline markets

and the opportunity this uncertainty has to translate into supply shortages and

price volatility during the spring and summer of 2006.

NACS is an international trade association comprised of more than 2,200 retail

member companies operating more than 100,000 stores. The convenience store industry as a whole sold 143.5 billion gallons of motor fuel in 2005 and employs 1.5

million workers across the Nation. SIGMA is an association of more than 240 independent motor fuel marketers operating in all 50 States. Last year, SIGMA members sold more than 58 billion gallons of motor fuel, representing more than 30 percent of all motor fuels sold in the United States in 2005. SIGMA members supply

more than 35,000 retail outlets across the Nation and employ more than 350,000

workers nationwide.

Over the past 3 months, I have witnessed such a blizzard of announcements and

developments regarding gasoline production and distribution this Spring and Summer that even I, who study and participate in gasoline marketing every day, am

uncertain what to expect over the next 6 months. It would not surprise me if the

members of this committee, who wrestle daily with many issues of national importance far removed from motor fuel issues, are not sure what to make of these developments either. This hearing represents an attempt to sort through these announcements, rumors, and questions.

NACS and SIGMA believe it is a timely examination and we welcome this committee’s interest.

As an initial matter, I would like to review briefly what we know, rather than

what we don’t know:

• Methyl tertiary butyl ether (MTBE) has been used as an octane enhancer in

gasoline since the 1970’s when lead was removed from gasoline. Only in the 1990’s

did its use as an oxygenate in gasoline become common. As a result, when MTBE

is removed from gasoline, not only does the Nation’s gasoline pool lose substantial

volume which must be replaced by other products, but the octane MTBE adds to

gasoline must be replaced by other products to assure that fuel performance is not

degraded.

• In late 2005 and early 2006, several of the nation’s pipeline systems, which

transport gasoline from the major Gulf Coast refining complexes up the East Coast

and through the Mid-West, announced that they would stop accepting shipments of

reformulated gasoline (RFG) containing the oxygenate and octane additive methyl

tertiary butyl ether (MTBE).

• During the same time period, several major integrated oil refiners announced

that they would transition away from blending MTBE into RFG and conventional

gasoline early in 2006 due to the pipeline actions and ongoing concerns regarding

potential liability resulting from contamination of groundwater by MTBE.

• In late February, the Environmental Protection Agency (EPA) issued a final

rule, required by the Energy Policy Act of 2005 (EPAct 2005), to remove the RFG

oxygen mandate as of May 8, 2006, thereby permitting non-oxygenated RFG, or

clear RFG, to be sold as RFG as long as it met EPA clean fuel standards.

• Also in late February, the Department of Energy’s Energy Information Administration (EIA) released a report entitled ‘‘Eliminating MTBE in Gasoline in 2006’’

which raised concerns about shortages in both domestic gasoline and ethanol production capacity in the coming months if such a transition away from MTBE RFG

is pursued and concluded that ‘‘the complexity of the transition away from MTBEblended RFG may give rise to local imbalances between supply and demand and associated price surges during the change.’’
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• Earlier this month, the Renewable Fuels Association, the trade association representing domestic ethanol producers, responded to what it perceived to be inaccuracies in the EIA report, stating ‘‘. . . we have worked diligently with our customers—

the Nation’s gasoline refiners—to ensure that any consumer impact . . . will be

temporary.’’ • Most recently, the Federal Energy Regulatory Commission (FERC) denied a

request from Colonial Pipeline Company, which operates one of two major petroleum pipelines serving the East Coast, to amend immediately its tariff schedule to

delete MTBE RFG from the list of products it will accept on its pipeline after objections from several MTBE manufacturers.

As you may note, none of these announcements and developments involved gasoline retailers directly. There is a simple reason for this fact. Independent gasoline

marketers do not make gasoline or ethanol, we do not own pipelines, and we do not

have access to the type of data necessary to produce a report as authoritative as

that released by EIA. Instead, we purchase gasoline at wholesale and sell it to motorists at retail. All of these activities have. been taking place, so to speak, ‘‘far

above our pay grade’’ and their exact effect on independent gasoline marketers and

consumers will be known only as events develop over the next 6 months.

From all of these recent developments, gasoline marketers, and the members of

this committee, can glean several important facts (rather than arguments).

First, use of MTBE as a gasoline additive will decline in the future, whether precipitously as some have predicted this Spring and Summer, or more gradually. This

decline is a direct result of Congress’ failure to adopt liability reform provisions for

MTBE as part of the Energy Policy Act of 2005. Without such liability reform, refiners, pipelines, and marketers are disinclined to extend their potential liability for

use of this product in the future. I am not seeking to get into a debate as to whether

Congress should have adopted the so-called MTBE safe harbor last year. That debate is over.

must understand that the decisions you Rather, this committee, and Congress as

a whole, made, or chose not to make, last year, are having repercussions in the gasoline markets this year. Those repercussions were entirely predictable. Many in

Congress wanted to ban MTBE outright and immediately. NACS and SIGMA supported a gradual phase down of MTBE use over a number of years. Reality will fall

somewhere between these two positions. MTBE use will be reduced in the future.

The focus of this hearing, however, should be on the effect this reduction will have

on domestic gasoline supplies and prices.

Second, ethanol blended with gasoline is the most likely and immediate substitute

for MTBE in RFG. Ethanol contains some of the same characteristics that have

made MTBE an attractive blending component in the past—high octane content and

a blend rate that dilutes other gasoline properties. However, the use of ethanol in

RFG also increases volatility (thereby increasing VOC emissions, which lead to

ozone formation) and ethanol contains higher levels of toxics than MTBE—substances controlled under EPA’s mobile source air toxics program. To prepare for

blending ethanol with RFG and the resulting volatility surge, refiners must take

certain components out of gasoline intended for ethanol blending, reducing the gasoline yield from a barrel of crude oil. EIA has estimated that on average refiners lose

approximately 5 percent of their production capacity when making RFG for ethanol

blending when compared to RFG for MTBE blending. This is a significant reduction

in domestic gasoline production capacity that should be of concern to policymakers,

marketers, and consumers.

Third, in general the Nation’s refiners are not positioned to produce substantial

quantities of clear RFG—RFG that is not blended with either ethanol or MTBE.

Since the RFG program started in 1995, it has been unlawful for a refiner to

produce such clear RFG. In fact, it will not be lawful to produce clear RFG until

May 8, 2006—nine months after the President signed EPAct 2005 into law. It

should not be surprising that the nation’s refiners have not been able, during the

short period between EPAct’s enactment and now, to dramatically alter their production capabilities to produce clear RFG. While undoubtedly many refinery modifications projects are in the works to produce clear RFG from many domestic refineries, the timetable simply has been too short to expect these modifications to be

completed before this Spring.

Fourth, it is clear that the domestic ethanol production industry is doing its utmost to maximize the amount of ethanol it will produce and sell this year. Given

that prices for ethanol scheduled to be delivered in May and June in recent weeks

have fluctuated between $2.40 and $3 per gallon, they have every incentive to make

every gallon of ethanol they can. Depending on the producer, ethanol costs between

$1 and $1.50 per gallon to make, not taking into account the production tax credits

that these producers laws. That means their margins are somewhere over $1. per
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gallon—a margin that I as a gasoline marketer could never hope to achieve and one

that makes the ‘‘crack spreads’’ of the Nation’s integrated refiners look like an amateurish attempt to turn a profit.

The question is not whether the domestic ethanol industry is doing its best to

maximize production, but whether these best efforts will be sufficient to meet the

demand for ethanol in the next 6 months as the Nation transitions away from

MTBE as a fuel additive. Depending on the assumptions one makes as to the pace

and extent of MTBE de-selection as a blending component, as EIA’s report accurately points out, the domestic ethanol industry’s best efforts may fall far short of

supplying the amount of ethanol required to meet the demand of refiners and marketers. If this is the case, the primary source of additional ethanol supply will be

from foreign countries, including enjoy under many State and Federal Jamaica,

Mexico, and Brazil. As EIA’s report also notes, however, much of this foreign ethanol is subject to a $0.53 per gallon duty unless it has been processed in certain

Caribbean Basin Initiative (CBI) countries. Thus, the option to look toward foreign

ethanol to fill the shortfall in domestic production is limited by this tariff—unless

domestic ethanol prices rise to such high levels that importers are able to pay the

huge per gallon duty and still offer competitively priced ethanol to refiners and marketers. If such ethanol price spikes occur over the next 6 months, it will be interesting to see if the producers of ethanol will be called before congressional committees or placed under Federal investigation for collusion and price gouging and for

visiting on motorists hundreds of millions of dollars of increased prices at the gasoline pump.

Fifth, the continuing role of boutique fuels in complicating the supply and distribution of gasoline in 2006 must not be ignored. While it is true that Congress

took effective steps in EPAct to cap the number of boutique fuels across the Nation,

to date this cap has not had the desired effect of reducing the number of unique

gasoline and diesel fuel blends across the Nation and restoring fungibility to the

motor fuel supply and distribution industries. Thus, the problem of boutique fuels

and the price volatility they cause during short supply situations remains.

Of greater immediate importance relative to this issue, as noted in the EIA study,

is the lack of Federal legislative action to limit State boutique renewable fuel mandates. EIA noted that State ethanol mandates, such as the one currently in place

in Minnesota and those under consideration or being implemented for ethanol in

other States, constrain the ability of ethanol producers to respond to ethanol demand in other areas of the Nation. Congress enacted the Renewable Fuel Standard

(RFS) as part of EPAct last year to assure a minimum demand for ethanol and biodiesel in the coming years. At the same time, however, Congress built into the RFS

certain flexibilities to assure that renewable fuels would be used efficiently and economically under the RFS and would not be concentrated in any particular area of

the Nation. These State boutique renewable fuel mandates directly undercut the

EPAct RFS flexibility by preventing renewable fuels, including ethanol, from moving

to the areas of highest demand. NACS and SIGMA believe that this committee and

others must look into the role these boutique renewable fuel mandates play in decreasing the fungibility of product and increasing wholesale and retail price volatility for consumers—much the way Congress looked into the negative effect of State

boutique gasoline and diesel fuel blends on these factors under EPAct. If State boutique renewable fuels mandates are allowed to proliferate unchecked, then all of the

work Congress put into restoring fungibility in the gasoline and diesel fuel markets

will ultimately go for naught.

Sixth, the bulk gasoline storage and terminaling infrastructure in many parts of

the Nation is not prepared for a transition from MTBE to ethanol. Because ethanol

generally cannot be transported via pipelines, it must be trucked, barged, or shipped

via rail to wholesale gasoline terminals for blending into gasoline. These terminals’

storage capacity for different gasoline and diesel fuels already is stretched to the

limit. Many terminals in the mid-Atlantic States and Texas, where the potential effect of the transition from MTBE to ethanol will be the greatest, simply do not have

an ‘‘extra’’ storage tank in which to store ethanol. And it is not likely that they will

be able to obtain the permits and build additional storage capacity in a two or 3

month timeframe. As a result, gasoline suppliers and marketers seeking to blend

ethanol into gasoline this Spring—assuming they can locate the ethanol at a reasonable price—will be forced to scramble to find storage for this ethanol at bulk terminals or will locate separate and at times distant ethanol storage facilities at which

they will blend ethanol with gasoline. These bulk storage infrastructure constraints

will result in an added level of complexity in an already stressed gasoline supply

distribution system.

Seventh, this transition away from MTBE comes during the yearly transition from

winter to summer gasoline—a transition that has in past years repeatedly resulted
73

in supply shortages and wholesale and retail price spikes. In 2006, not only must

terminals and retailers complete the switch from winter to summer gasoline, but

they must also switch from MTBE RFG to ethanol RFG. This transition to ethanol

will require terminals and retailers to draw down their gasoline inventories aggressively to complete the transition as quickly as possible and to avoid offering gasoline

that does not comply with EPA’s clean gasoline programs. And as with any commodity, when inventories are low, the opportunities for supply shortages and price

volatility increases. Finally, the transition from MTBE additized gasoline to ethanol

additized gasoline will be problematic for motor fuel retailers like me. Due to

ethanol’s characteristics, many marketers will be forced to pump out their retail underground storage tans to convert to RFG with ethanol to prevent clogged fuel dispenser filters or clogged motor vehicle fuel filters. Retailers will be undertaking

these preparations at the same time that they are preparing to switch from winter

to summer gasoline blends.

Most marketers, myself included, are confused by the various announcements and

predictions being made about the transition from MTBE to ethanol in RFG and

have not been able to make concrete operational plans to carry one product or another.

NACS and SIGMA members have been selling gasoline blended with ethanol for

decades. The challenges of selling gasohol at retail are well-known: securing appropriate gasoline blendstock and ethanol supplies and the facilities to blend these

products; phase separation if any water makes its way into the blend; cleaning storage tanks before adding ethanol to prevent clogged fuel filters; and, educating consumers about gasohol in areas where it may never have been sold previously. As

a result, given sufficient time to effect this transition from MTBE to ethanol, such

a transition would be transparent to our customers. However, many retailers like

myself are making this transition for the first time and I can tell you that the conversion is rather daunting. For example, one of my gasoline suppliers provided me

a document to walk me through the conversion process—it is a 20-page document!

That is a lot of information for retailers to absorb and implement.

Unfortunately, this transition is happening on a much tighter timetable than any

previous transition from MTBE to ethanol. In California and New York, where

MTBE was banned several years ago, retailers in those States had 2 to 3 years to

plan for an orderly transition to ethanol. This is not the case with this transition.

In most cases, retailers began hearing about the planned transition in January and

only recently have received confirmation from their suppliers regarding the details

and timing of the transition.

In short, such transitions have been accomplished before with little disruption to

gasoline supplies or significant price volatility. But this transition is being undertaken much more quickly and in larger geographic areas.

This committee’s inquiry on this issue could not be more timely. The gasoline refining and distribution industry is in turmoil in many areas of the Nation as each

participant makes decisions concerning which products to offer, carry and sell. Suffice it to say that this turmoil will resolve itself in the near future. However, the

question for policymakers must be how high gasoline prices will have to rise before

sufficient quantities of gasoline blendstocks are attracted from foreign sources to

make up for shortfalls in domestic production? And what role will ethanol supply

and prices play in influencing retail gasoline prices in the next 6 months? Neither

of these questions can be answered authoritatively at this time. However, to quote

again from EIA’s recent report: ‘‘(T)he complexity of the transition away from

MTBE-blended RFG may give rise to local imbalances between supply and demand

and associated price surges during the change. As the summer progresses and demand grows, the right supply situation is not likely to ease significantly, leaving the

market exposed to the increased potential for price volatility in the East Coast and

Texas RFG regions.’’

Unfortunately, there are few public policy options open to Congress to mitigate

these potential supply shortages and price volatility in the short-term. NACS and

SIGMA propose the action that would have the most significant positive effect on

supply and dampening effect on price increases in the next 6 months would be the

temporary suspension of the tariff on imported ethanol. This suspension would be

adopted to ease the transition of the domestic ethanol industry through the period

of increased ethanol demand caused by decreased MTBE use and its inability, despite its best efforts, to totally fill the supply gap left by MTBE.

In the medium term, NACS and SIGMA suggest that Congress consider two additional actions. The first would be to extend the boutique fuels cap under EPAct to

limit State boutique renewable fuel mandates. Such an extension would prevent

such State mandates from undermining the policy goals and the flexibility of the
74

RFS in EPAct and would halt the renewed proliferation of unique fuel blends across

the Nation.

Second, NACS and SIGMA again urge Congress to pass legislation to encourage

the expansion of domestic refining capacity. Mr. Chairman, the legislation you introduced last year to encourage such expansions was a very good effort to achieve this

goal. Unfortunately, it was not approved by this committee. NACS and SIGMA urge

you and your colleagues to redouble your efforts to pass such legislation. Without

it, American motorists will continue to face the supply and price uncertainties that

are so widespread this spring and summer.

Last year, the subject of numerous congressional hearings was the destruction of

Hurricanes Katrina and Rita and their effect on gasoline and diesel fuel supplies

and prices. This year, the subject is the transition away from MTBE and the effect

this transition will have on gasoline supplies and prices. Next year, it may be a different set of developments, but the underlying issue will be the same. Until domestic refining capacity is increased in this Nation, gasoline and diesel fuel supply

shortages and price volatility will be the norm rather than the exception. I appreciate the opportunity to present NACS’ and SIGMA’s views at this hearing. I would

be pleased to answer any questions that my testimony may have raised.

RESPONSES BY BILL DOUGLASS TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. In your testimony, you urge Congress to suspend temporarily the duty

on imported ethanol. In your opinion, if Congress were to act on this recommendation, what would the short-term impact be on the prices you are paying for ethanol

and that American motorists are paying for gasoline?

Response. There is no question in my mind that suspending temporarily the duty

on imported ethanol would almost immediately reduce the price of ethanol, perhaps

significantly, because of the increased competition domestic ethanol manufacturers

would face from foreign ethanol producers. While there are many factors that are

contributing to the upward price pressures on gasoline, the increased price of ethanol is a significant one. By opening the U.S. market to foreign ethanol producers,

Congress will encourage the importation of substantial additional quantities of ethanol. This increase in overall ethanol supplies and increased competition among ethanol producers, will help satisfy the market demands for the product and place

downward pressure on ethanol and gasoline prices.

Supporters of domestic ethanol producers oppose the suspension of the ethanol

tariff because they believe that domestic producers must be protected from foreign

competition. Given the fact that ethanol prices have more than doubled over the

past year and domestic ethanol producers enjoy a 100 percent profit margin on

every gallon of ethanol they produce, NACS and SIGMA suggest that suspending

the tariff on imported ethanol is in the best interests of American consumers.

Question 2. EIA’s testimony highlighted how complex the fuels system really is.

Would you agree that increasing the complexity of the fuels system, such as requiring new fuels mandates, would increase prices for consumers?

Response. I would agree. The Energy Policy Act of 2005 sought to restore some

fungibility to the motor fuels supply and distribution system by stopping the spread

of additional boutique fuels and embarking on a process by which to responsibly reduce the number of fuels to a more manageable number. State fuels mandates serve

to further isolate markets and create distribution challenges within a system that

is already operating under a considerable strain.

In addition, the Energy Policy Act of 2005 included a ‘‘Renewable Fuels Standard’’

(RFS) designed to increase the use of alternative renewable fuels, such as ethanol

and biodiesel, as motor fuels. Incorporated into the RFS was substantial flexibility

to insure that the motor fuels markets could meet this mandate in the most costeffective and efficient manner possible. State ethanol or biodiesel mandates—in effect, State ‘‘boutique’’ renewable fuels—undermine the flexibility built into the RFS

by requiring minimum quantities of renewable fuels to be used in every gallon of

gasoline or diesel fuel sold in a State. These State renewable fuel mandates also

circumvent the Energy Policy Act’s boutique fuels cap and, if left unchecked, will

give rise to additional boutique fuels, further balkanization of the Nation’s motor

fuels markets, and more frequent supply disruptions and price volatility.

Question 3. What would you say to policymakers who would recommend such new

mandates?

Response. The RFS will increase, by mandate, the use of renewable fuels to a

minimum of 7.5 billion gallons by 2012. This was an historic provision designed to

move the Nation toward a greater reliance on renewable resources. However, the
75

1 Contribution of the Ethanol Industry to the Economy of the United States, Dr. John

Urbanchuk, Director, LECG, LLC, February 2006.

regulations implementing this program have not yet been drafted by the Environmental Protection Agency due to their complexity. NACS and SIGMA believe it

would be premature and inappropriate for Congress to consider yet another fuels

mandate before the Renewable Fuels Standard signed into law in August 2005 has

been fully implemented and its market affects have been appropriately analyzed

and understood. Since the RFS was enacted, domestic ethanol prices have doubled

and there have been widespread media reports that domestic ethanol supply will fall

short of demand in the coming years. Before increasing the RFS, NACS and SIGMA

urge Federal policymakers to permit the existing mandate to be implemented fully,

study its impact on gasoline prices, and only then consider an expansion once this

evidence has been gathered.

STATEMENT OF BOB DINNEEN, PRESIDENT, RENEWABLE FUELS ASSOCIATION

Good morning, Mr. Chairman and members of the committee. My name is Bob

Dinneen and I am president of the Renewable Fuels Association, the national trade

association representing the U.S. ethanol industry.

This is an important and timely oversight hearing, and I am pleased to be here

to discuss everything the ethanol industry is doing to mitigate any potential consumer impact resulting from refiner decisions to eliminate the use of MTBE. In

short, I can assure you the Nation’s ethanol producers are working closely with

their refiner customers to make the transition from MTBE to ethanol in those areas

not yet having made the switch as seamless as possible. I am confident the transition can, and will, go smoothly.

BACKGROUND

Today’s ethanol industry consists of 97 biorefineries located in 19 different States

with the capacity to process more than 1.7 billion bushels of grain into nearly 4.5

billion gallons of high octane, clean burning motor fuel and 9 million metric tons

of livestock and poultry feed. It is a dynamic and growing industry that is revitalizing rural America, reducing emissions in our Nation’s cities, and lowering our dependence on imported petroleum. Ethanol has become a ubiquitous component of

the U.S. motor fuel market today. Ethanol is blended in more than 30 percent of

the Nation’s fuel, and is sold virtually from coast to coast and border to border.

The 4 billion gallons of ethanol produced and sold in the U.S. last year contributed significantly to the Nation’s economic, environmental and energy security. According to an analysis completed for the RFA1, the 4 billion gallons of ethanol produced in 2005 resulted in the following impacts:

• Added $32 Billion to gross output;

• Created 153,725 jobs in all sectors of the economy;
76

2 Argonne National Laboratory, U.S. Department of Energy, GREET Model, February 2006.

3Twenty-six States have enacted legislation to prohibit the use of MTBE because of increasing

concerns related to MTBE water contamination. These States include the RFG areas of Cali-

• Increased economic activity and new jobs from ethanol increased household income by $5.7 Billion, money that flows directly into consumers’ pockets;

• Contributed $1.9 Billion of tax revenue for the Federal Government and $1.6

Billion for State and Local governments; and,

• Reduced oil imports by 170 million barrels of oil, valued at $8.7 Billion.

In addition, because the crops used in the production of ethanol absorb carbon dioxide, the 4 billion gallons of ethanol produced in 2005 reduced greenhouse gas

emissions by nearly 8 million tons.2 That’s the equivalent of taking well over a million vehicles off the road.

ENERGY POLICY ACT HAS STIMULATED SIGNIFICANT NEW ETHANOL PRODUCTION

Mr. Chairman, in large part because of the Energy Policy Act of 2005 (EPAct),

the U.S. ethanol industry is today the fastest growing energy resource in the world.

This committee should be proud of its role in getting the congressional debate regarding a robust Renewable Fuels Standard (RFS) started. With your leadership,

and the tremendous support of members of the committee, such as Senators John

Thune (R–SD) and Barack Obama (D–IL), the Congress last year enacted an RFS

requiring the use of at least 7.5 billion gallons of renewable fuels by 2012. That provision signaled a clarion call to the ethanol industry and the financial community

that demand for ethanol and biodiesel was no longer uncertain, allowing the renewable fuels industry to grow with confidence.

Indeed, there are currently 33 plants under construction. Eighteen of those have

broken ground just since last August when President Bush signed EPAct into law.

With existing biorefineries that are expanding, the industry expects more than 2 billion gallons of new production capacity to be in operation within the next 12 to 18

months. The following is our best estimate of when this new production will come

on stream.

This preceding chart reflects eight plants and three expansions we believe will be

complete before July, representing more than 500 million gallons of production capacity; and another 16 plants and 2 expansion that will be complete before the end

of the year, adding about 900 million gallons more. This new 1.4 billion gallons of

new capacity represents a 32 percent increase in production, a phenomenal rate of

growth, particularly when viewed in light of the 20-plus percent growth the industry

has already achieved in each of the past several years.

MTBE IS HEMORRHAGING THE MARKETPLACE

Another consequence of the Energy Policy Act appears to be a much more rapid

elimination of MTBE than analysts anticipated. Because Congress chose not to provide liability protection for refiners and producers of MTBE, virtually every major

refiner has decided to eliminate the use of MTBE by the time the Federal RFG oxygenate requirement is officially repealed (May 5, 2006). While State legislative actions to prohibit the sale of MTBE had already greatly reduced the volume of MTBE

used in reformulated gasoline (RFG),3 there is still approximately 2 billion gallons
77

fornia, Illinois, New York and Connecticut. Ethanol has already successfully replaced MTBE in

RFG sold in these areas. 4 Based on indications from the refining industry, the Colonial Pipeline had announced that

MTBE shipments would not be allowed after March. That decision has been re-evaluated, however, and the pipeline system will allow MTBE RFG to be shipped upon request. 5 It is important to note that lifting the secondary tariff on ethanol is not necessary to encourage additional imports. Under the Caribbean Basin Initiative, 270 million gallons can be imported duty-free. Moreover, the secondary tariff only exists to offset the tax benefit refiners receive for blending ethanol, regardless of its source. Eliminating the tariff, then, would result in

U.S. taxpayers subsidizing already highly subsidized Brazilian ethanol. That is particularly unnecessary as the marketplace is seeing ethanol imports increase under the existing tariff regime.

of MTBE sold in the Mid-Atlantic, Northeast and Texas. This volume will likely be

replaced by ethanol.

It is important to note, however, that no provision of the Energy Policy Act or

the Clean Air Act requires refiners to eliminate MTBE by this date. Refiners are

not compelled to use MTBE in RFG, nor are they compelled to use ethanol once the

oxygenate requirement is eliminated.4 The decision to stop using MTBE is the refiners’ alone.

THERE WILL BE ADEQUATE SUPPLIES OF ETHANOL TO MEET THE DEMAND CREATED BY

THE REMOVAL OF MTBE

U.S. ethanol supplies will be available to meet this new demand. First, as noted,

dramatically increased ethanol production capacity will satisfy much of the new demand. In addition to the new capacity previously discussed, several ethanol and gasoline marketers have been storing ethanol supplies at terminals in these new markets in anticipation of the transition from MTBE.

Second, several refiners have contracted with Brazilian and/or Caribbean ethanol

suppliers for product. Approximately 130 million gallons of ethanol were imported

last year. That figure is expected to increase in 2006.5

Third, the marketplace will migrate ethanol from existing conventional gasoline

areas where it is added for octane or as a gasoline extender to MTBE replacement

markets where it will be needed more. Indeed, many refiners and marketers are

today renegotiating existing contracts to effect a temporary re-allocation of product

and assure a smooth transition in new market areas.

As a result, virtually every refiner and gasoline analyst now acknowledges there

will be sufficient ethanol supplies to meet the demand created by MTBE replacement. Consider the following statements:

• ‘‘The United States will have enough ethanol to blend into gasoline during the

current spike in demand as companies transition away from the oxygenate MTBE.’’

Valero Energy CEO William Klesse.

• ‘‘We have enough ethanol to replace MTBE when the new ethanol mandate

takes effect in May.’’ ExxonMobil CEO Rex Tillerson.

THE TRANSPORTATION, DISTRIBUTION AND BLENDING INFRASTRUCTURE WILL BE READY

The ethanol industry is working diligently with our refiner customers, gasoline

marketers, terminal operators and the fuel distribution network to assure a successful transition from MTBE to ethanol in these areas. Over the past several years,

the ethanol industry has worked to expand a ‘‘Virtual Pipeline’’ through aggressive

use of the rail system, barge and truck traffic. As a result, we can move product

quickly to those areas where it is needed. Many ethanol plants have the capability

to load unit trains of ethanol for shipment to ethanol terminals in key markets. We

are also working closely with terminal operators and refiners to build ethanol storage facilities and blending equipment.

Great credit must be given to the petroleum industry for the effort that is being

made to assure success. Examples of some of the investments being made to accommodate the switch from MTBE to ethanol in key markets include the following:

• Sewaren, NJ is expected to be the primary gathering point for ethanol for East

Coast markets in 2006 because it has both unit rail car capacity and marine access.

Ethanol will be trucked to serve New York and New Jersey, and product will flow

out by barge to Providence, Boston and Baltimore.

• Unit Train unloading facilities are either being built or planned for Providence,

RI, Linden, NJ, Baltimore, MD, and Dallas, TX. Already, a unit train breakout facility is in operation in Albany, NY.

• Barge receiving capability is either in place or being built in Philadelphia, Baltimore and Houston.
78

6The Ethanol Monitor, published by Oil Intelligence Inc., Oceanport, NJ, Volume 2, No. 11,

March 27, 2006.

• Transloading (rail to truck) capability is being developed as a transitional step

for Richmond, Washington and Dallas. More permanent rail terminals are being developed for these areas.

There is no question that the dramatically accelerated removal of MTBE has challenged the marketplace. But the ethanol and petroleum industries have done this

successfully before in New York, California and Connecticut. We know we can do

it again. As one industry analyst observed recently, ‘‘The very fact that these companies are on the record as discontinuing MTBE and replacing it with ethanol tells

us one very important fact—they are prepared.’’6

CONCLUSION

In his State of the Union Address, President Bush acknowledged the Nation ‘‘is

addicted to oil’’ and pledged to greatly reduce our oil imports by increasing the production and use of domestic renewable fuels such as ethanol and biodiesel. The Energy Policy Act of 2005 clearly put this Nation on a new path toward greater energy

diversity and national security through the RFS. The unprecedented transition from

MTBE to ethanol may present short-term challenges that industry is working cooperatively and diligently to overcome, but it also presents a long-term benefit for the

Nation, by moving us one step closer to President Bush’s vision of a more energy

secure America. Thank you.

RESPONSES BY BOB DINNEEN TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. Mr. Dinneen the primary way to reduce ethanol prices would be to

increase supply, and one suggestion has been made that ethanol prices will fall if

the import duty on ethanol is suspended temporarily. I am not talking about repealing it entirely—your members clearly plan to have additional plants on line by next

year, according to the facts, domestic supplies of ethanol will be short. Do you agree

that suspending the duty will cause ethanol prices to drop?

Response. Mr. Chairman. The recent voluntary shift away from methyl tertiary

butyl ether (MTBE) to ethanol undertaken by U.S. gasoline refiners has put increased focus on America’s ethanol and gasoline supplies. Some have suggested that

the secondary tariff on imported ethanol should be removed, as least temporarily,

to augment domestic supplies. It is claimed this would lower prices at the pump.

This claim is flawed on a number of counts.

First, Ethanol supplies are sufficient. The Energy Information Administration

(EIA) estimates that 130,000 barrels per day (b/d) of ethanol will be needed to replace the volume of MTBE refiners have chosen to remove from the gasoline pool.

The most recent EIA report shows that U.S. ethanol production has soared to

302,000 b/d in February, clearly enough ethanol to meet the new MTBE replacement demand while continuing to supply existing markets. With 32 new ethanol biorefineries under construction, ethanol production capacity will only continue to increase.

In addition, EIA data shows a large increase in ethanol stocks. Because gasoline

marketers and ethanol producers have been building stocks over the past several

months in anticipation of the transition from MTBE, there is now nearly 29 days

of supply in working inventory. Additional data has shown that imports are rising

also, demonstrating the existing tariff structure is not a barrier to entry. Indeed,

more than 50 million gallons of ethanol have been imported this year. Moreover,

some 40 million gallons of the total has been imported duty free through the Caribbean Basin Initiative (CBI) as of May 1, 2006, with much of that being Brazilian

in origin. All of these numbers indicate that ethanol supplies are sufficient to meet

the new demand.

Second, repealing the tariff won’t lower gasoline prices. Gasoline prices will not

be affected by removing the secondary tariff on imported ethanol. Imported ethanol

represents just a fraction of the ethanol used to replace MTBE, and ethanol itself

represents just 3 percent of U.S. motor fuel supplies. The factors truly driving the

price of gasoline higher have nothing to do with ethanol supplies. Record crude oil

prices, tight refining capacity, lower gasoline production, lower gasoline imports and

limited expansion of domestic refining expansion all play a much greater role than

the supply of ethanol in today’s higher gasoline prices.

Furthermore, imported ethanol arrives in the United States at the same market

price as domestic ethanol. Ethanol from Brazil is in short supply and ethanol mar-
79

keters from Brazil do not discount the price of ethanol that is shipped to the United

States.

Third, removing the tariff means American taxpayers would be subsidizing Brazilian ethanol production. Removing the 54 cent secondary tariff would in essence

be asking American taxpayers to further subsidize already heavily subsidized ethanol and sugarcane production in countries like Brazil. U.S. gasoline refiners receive

a 51 cent tax incentive for every gallon of ethanol they blend into gasoline, regardless of the ethanol’s origin. So, imported ethanol from Brazil, for instance, qualifies

for the tax incentive. Brazil has built its ethanol industry through 35 years of tax

incentives, production subsidies, mandates, export enhancement, infrastructure development, debt forgiveness and currency devaluation. Brazil does not need U.S. tax

dollars to compete effectively, as evidenced by the fact 135 million gallons were imported last year and those volumes are increasing.

Question 2. Mr. Dinneen, the ethanol industry existed along with MTBE. In order

to help renewable fuels develop, ethanol benefited from State subsidies, Federal tax

credits, State mandates, and protectionist Federal tariffs. As you pointed out in the

RFA’s conference, ‘‘ethanol has arrived’’ with the passage of the 7.5 billion gallon

mandate. Since ethanol has arrived, isn’t it time to repeal government sanctioned

market interference and really let ethanol grow in a transparent and free marketplace?

Response. Ethanol has arrived, because under the Renewable Fuels Standard

(RFS), ethanol and biodiesel are now an official component of the transportation

fuels market program, albeit only 3 percent. Today, only 4.8 billion gallons of ethanol and biodiesel are blended into a 140 billion gallon gasoline market and a 45

billion gallon diesel market.

The energy sector worldwide is heavily subsidized, including oil, natural gas, coal,

wind, nuclear, hydrogen and biofuels. The current incentives for biofuels are necessary to continue to grow the industry.

According to The National Defense Council Foundation, which completed a comprehensive analysis of the external costs of imported oil in a report issued in 2003

entitled, ‘‘America’s Achilles Heel: The Hidden Costs of Imported Oil.’’ The study

analyzed three basic categories: Direct and Indirect economic costs, Oil Supply Disruption Impacts and Military Expenditures. Taken together, these costs totaled

$304.9 billion annually, the equivalent of adding $3.68 to the price of a gallon of

gasoline imported from the Persian Gulf. In 2006 numbers the annual cost is $825.1

billion.

In 2000, the Government Accounting Office analyzed specific incentives for the petroleum sector and concluded that in the last 25 years, well over $150 billion of annual revenue to the United States Treasury had been lost due to Federal tax incentives. Finally, according the Joint Committee on Taxation, the petroleum sector also

received well over $12 billion of additional tax benefits, under the Energy Policy Act

of 2005 (EPAct).

By comparison, the ethanol industry has gradually built a program that has benefited from government programs while at the same time providing a great deal of

benefit to the both the Government and Nation. As I stated in my testimony, in

2005, the 4 billion gallons of ethanol produced and sold last year, contributed significantly to the Nation’s economic, environmental and energy security. According

to an analysis completed for the RFA, the 4 billion gallons of ethanol produced in

2005 resulted in the following impacts:

• Reduced oil imports by 170 million barrels of oil, valued at $8.7 Billion.

• Added $32 Billion to gross output;

• Created 153,725 jobs in all sectors of the economy;

• Increased economic activity and new jobs from ethanol increased household income by $5.7 Billion, money that flows directly into consumers’ pockets; and,

• Contributed $1.9 Billion of tax revenue for the Federal Government and $1.6

Billion for State and Local governments.

Furthermore, according the U.S. Department of Agriculture in 2005, the ethanol

program reduced Federal farm program payments by nearly $5 billion.

Indeed, the targeted investment by the Federal Government in ethanol, has increased tax revenue and decreased Federal spending, while at the same time creating billions of dollars of private investment for new infrastructure across the

United States, adding jobs to the economy and decreasing the trade imbalance.

At this point, it is necessary to continue the ethanol program to grow the marketplace to its full potential which includes the realization of cellulosic ethanol.

Through the new research and development programs created in EPAct, the industry is on track to begin construction of new ethanol plants using feedstocks from
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cellulosic sources by 2013. Changes to the current program will hinder that process

significantly.

Question 3. Mr. Dinneen in light of your support for the RFS, would you agree

that the recent flurry of activity to adopt State ethanol and bio-diesel mandates actually undermines the RFS and its flexibility provisions? As EIA noted in its report,

Minnesota’s ethanol mandate actually harms the ability of ethanol to replace MTBE

in many markets by inflexibly requiring minimum ethanol content in every gallon

of gasoline sold in the State. If these State mandates expand, will they not continue

to act as obstacles to the national renewable fuels market envisioned in EPAct?

Response. I understand that some are concerned about the proliferation of State

biofuels programs because they believe these programs may undermine the flexibility intrinsic to the national renewable fuels standard (RFS) adopted as part of

last year’s Energy Policy Act (EPAct). I am sympathetic to that concern. The Renewable Fuels Association worked in good faith with the American Petroleum Institute

and others to pass a national RFS that gave refiners maximum flexibility to blend

ethanol and other biofuels wherever the market place determined. To an extent,

State biofuels mandates do chip away at that flexibility, which States should appropriately weigh when contemplating such programs.

Even from an RFS implementation standpoint, however, the concerns about State

biofuels programs might be overstated. First, only two State programs are currently

in place (Minnesota and Hawaii); and those areas where such programs have been

adopted or are proposed are largely in areas where refiners would be likely to utilize

biofuels to meet RFS requirements in any case, i.e., in States with significant existing or potential ethanol production capacity. Indeed, several of the proposed State

programs would not become effective until there is meaningful biofuels production

in the State.

Second, not all of the biofuels programs rely upon mandates. Iowa just enacted

a very aggressive 25 percent oil displacement program by 2019 that relies entirely

upon tax incentives to motivate gasoline marketers to install biofuels infrastructure

allowing for much greater ethanol, E–85 and biodiesel use. The Iowa legislation had

support from the local petroleum industry and it is likely to become a model for

other States to follow.

Mr. Chairman. I appreciated the opportunity of testifying before your committee

and to provide you with additional feedback on the additional questions. I look forward to working with you and your staff on the ongoing development of renewable

fuels, if you have additional comments or questions, please contact me.

STATEMENT OF AMERICAN PETROLEUM INSTITUTE

API is a national trade association representing more than 400 companies involved in all aspects of the oil and natural gas industry, including exploration and

production, refining, marketing and transportation, as well as the service companies

that support our industry. As a trade association, representing all members, API

does not collect information about company-specific plans.

We welcome this opportunity to provide our views on the fuels transitions and related issues involving the fuel needs of U.S. consumers.

The Energy Policy Act of 2005 eliminates the reformulated gasoline (RFG) oxygen

requirement in May, and also sets a new renewable fuel standard, requiring that

the industry use 4 billion gallons of renewable fuel in 2006—increasing to 7.5 billion

gallons in 2012 and increased amounts thereafter. In addition, ultra-low sulfur diesel will be introduced starting June 1. Eliminating the RFG oxygen requirement is

a change in the law that the industry has long supported as one that will add to

refiners’ flexibility to produce gasoline and allow those who so choose to eliminate

the use of MTBE in gasoline. Similarly, the introduction of ultra-low sulfur diesel,

despite the large costs incurred by the nation’s refiners, will have major benefits

and is strongly supported by the U.S. oil and natural gas industry. However, both

of these are major fuels changes and present significant challenges to fuel providers.

Despite this, we know that oil companies are dedicated to ensuring that these transitions go smoothly as possible.

API believes that, to be successful, fuel transitions should be based on the free

and unfettered functioning of fuel markets. Market mechanisms are most effective

in providing companies with appropriate indicators and in ensuring a rapid response to changes in market conditions or transitional problems that may occur.

Changes to these market indicators by government—such as calling for waivers

from clean fuel regulations in light of concerns about possible volatility in fuel

prices—will only cause market uncertainty and send confusing information to markets in transition. There are already mechanisms in place to deal with true market
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supply disruptions, and we urge the Government to use appropriate caution in exercising this existing authority.

There is very little literature available about a number of the impacts. The Blue

Ribbon Panel on Oxygenates in Gasoline noted in its report dated September 15,

1999, that it is important to explore ‘‘the potential for adverse effects . . . before

widespread introduction of any new, broadly-used product.’’ Further, the panel recommended that a full assessment be conducted ‘‘of any major new additive to gasoline prior to its introduction.’’

Operating in a free marketplace, the U.S. oil and natural gas industry has the

technical expertise and decades of experience in successfully handling fuel specification transitions. Our companies have repeatedly demonstrated their capability for

making these transitions on the national level in dealing with RFG, low-sulfur gasoline and diesel fuel and in meeting so-called ‘‘boutique fuels’’ requirements at the

State level. It has also successfully managed earlier phase-outs of MTBE from the

gasoline supply, including those in California, New York, and Connecticut where,

despite initial concerns, transitions to ethanol fuels went smoothly. Our companies

have not only committed their expertise, they are also making the substantial investments required to complete these transitions. And we note the ethanol industry’s statements that it is making a major effort to supply ethanol, as it did during

the smooth transitions in California, New York and Connecticut.

Since the Energy Policy Act of 2005 did not provide for a national, ordered phaseout of MTBE, individual companies are making individual decisions on how best to

deal with the end of the RFG oxygen mandate and the use of oxygenates. The elimination of the RFG oxygen mandate, the State MTBE bans (26 so far), and announcements by refiners, pipelines and marketers indicate a likely rapid reduction in the

use of MTBE. Companies are taking into account various factors such as customer

preference, State laws, pipeline decisions, distribution system capabilities, and information from government agencies such as the Energy Information Administration

(EIA).

Recent data indicate that there is about 158,000 b/d of MTBE being used today.

If ethanol were substituted for this amount, we would need roughly 225,000 b/d of

additional ethanol. However, some of the MTBE loss could and likely will be made

up through the use of different compounds and increased gasoline production. Moreover, the fuels market is worldwide, so we assume that increased reliance on imports is an option that some suppliers are also considering. We should keep in mind

that, while there is a substantial volume of MTBE, it is a small component of the

total reformulated gasoline market and an even smaller portion of the world fuels

market.

U.S. oil and natural gas companies have the expertise, experience, and resources

required to make the fuel transitions that are required—provided fuel markets are

allowed to function freely. We think a valuable role for the Government is to help

create as clear and transparent a picture as possible of what is occurring in the

marketplace during this summer’s upcoming transitions. In this vein, we strongly

support continued efforts by EIA to monitor the supply and demand dynamics of the

market, and provide timely updates to their initial study. API and its members are

happy to cooperate in any such effort. Clearly, the Nation needs to work together—

industrial and retail consumers, energy companies and government—to address the

energy challenges we all face.
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