~ J1,-, ~-f- ~ ?','`yk (~ c (v p. JaZtDST,~TFS ~,/' UNITEDSTATES ENVIRONMENTAL PROTECTIONAGENCY $Fti ~°~ NATIONAL VEHICLE AND FUEL EMISSIONS LABORATORY °~`° 2565 PLYMOUTH ROAD ANNARBOR, MICHIGAN 48105 MEMORANDUM 

## FEB 27 1991 SUBJECT: Cost of Phase II RFG NOx Control FROM : Lester Wyborny, Chemical Engineer ~./~,, Fuels Studies and Standards Group '~'~""- TO : Charles Freed, Director

Fuels and Energy Division Introduction and Background OFFICE OF AIRANDRADIATION

Recently, the American PetroleumInstitute petitioned The Environmental Protection Agency (EPA) to reviewthe RFG Phase II NOx standard. In part, this petition was based on an API reviewofseveral recent refinery model runs made by EPA/DOE in a study using the DOE contracted refinery model to estimate the cost of gasoline sulfur control . Fromthis review, API concluded that the refinery model, the same one used by DOE to evaluate the RFG programNOx standard in 1993,' does not represent theway refineries operate. To support their contention, they supplied 70 comments on how

the refinery model should be improved. API therefore concluded that the refinery model used by DOE in 1993and 1994 underestimated the cost ofthe NOx standard required by Phase II RFGprogram(sulfur control is expected to be the method ofchoice bythe refining industry to meet the RFG NOx control requirement) . They also concluded that because EPApartly based its cost-effectiveness evaluation on the 1993 DOE refinery model RFGcase runs, that the standard was set too stringent. EPA responded to API's concerns in twoways. First it asked DOE to upgrade its refinery model based on the comments submitted by API . DOE agreed and its refinery modeling contractorworked to improve the operating capabilities of the refinery model, consistentwith theAPI comments. DOE's contractor addressed the 70original API concerns, and then addressed additional concerns which arose during the improvement process. All together, over 200 improvements were made to the refinery model . EPA also responded to API by requesting DOE to initiate an estimate ofthe costeffectiveness of the Phase II NOx standard using the revised version of the DOE 'Estimating the Costs and Effects of Reformulated Gasolines, Department of Energy, Office of Policy, December 1994. Printedon Recycled Paperrefinery model which would then be compared to the previous cost-effectiveness

estimates made by the previous version of the DOE refinery model . Prior to beginning the Phase II RFG NOx review, the capability of the revised DOE refinery model to yield representative costswas assessed. This was done by forcing sulfur reductions with the revised PADD3 refinery model and comparing them with other refinery models that have also been used to estimate sulfur control . Figure 1 below summarizes the results ofthis analysis. Figure 1 - Cost Comparison ofVarious PADD 3 Refinery Model Runs for Gasoline Sulfur Reductions - Costs are in 1990 Dollars, capital costs are amortized at 10%ROI Refinery Model and Run Year Change in Percent of Fuel Cost (c/gal) Sulfur Conc. (ppm) Bonner/Moore for EPA 1992 440-160 55% 0 .45 (B3-BDD) Turner Mason forAuto/Oil 1991 340-160 100% 0 .42 (12-A12) Turner Mason forAPI 1993 300-150 63% 1 .3 (VAT-NT-NH) DOE : for EPA(improved 1996 320-150 81% 1 .6 model) (R7/S7) (July) These various costs must be considered with caution as different refinery modelers make different assumptions about rawmaterial and product prices and volumes, and refinery capabilities. These differing assumptions can lead to differences in cost estimates regardless ofsimilarities in the various refinery models. These differences remain regardless ofgeneral cost adjustments such as using the producer price index to adjust costs to the same base year. The percent of the gasoline pool treated can also be important when less than all of the gasoline pool is treated. The most important issue is ensuring that the sulfur content of the unaffected pool (the balance of the gasoline not treated) did not increase resulting in a "free" gasoline sulfur reduction (which could be brought about by gasoline blending modifications) . The studies with less than 100 percent gasoline treatmentwere reviewed to ensure that sulfur was not merely shifted to the nontreated pool, and in no case did that occur. However there still may be cost differences fromthis effect as lower percent reformulation is normally associated with lower costs. What is most striking aboutthe cost comparison is that the revised DOE-contracted refinery model costs are the highest relative tothe other studies. The costs

are even higher than the API-funded study, which employed some very conservative assumptions.' Even considering the likely variance in costs due to differing modeling assumptions, the DOE model costs seemed to be high. Based on this observation, another run was made with the revised DOE refinery model with some of the constraints removed. The removed constraints are ratio controls which serve as a control against the unrealistic splitting of intrarefinery streams. Although this change would arguably reducethe realistic nature of the refinery model, the resultant costwas 0.6cents per gallon which was in line with the lowercost studies. After analyzing the range in costs developed by the twoversions of the refinery model with and without ratio controls, DOE and its contractor made an important observation with respect tothe ratio controls. With the ratio controls in place the refinery model can underoptimize by not reflecting the blending flexibility normally present with different refineries. Without the ratio controls, however, the refinery model can overoptimize by representing too much flexibility in blending inter and intra refinery streams. The twoversions of the refinery model thus represented a range in possible costs within which the true costs most likely can be found. Refinery Modeling The cost-effectiveness of Phase II RFG NOx control was reviewed using refinery models representing PADDs 1 and 3. Although some RFG is produced in PADD2, this demand is relatively small (less than 20 percent of the total RFGdemand) compared to the PADDs modeled. In addition, theAuto-Oil refinery modeling studycompleted in 1992 showed that the cost offuel reformulation in PADD2falls somewhere between the costs in PADDs 1 and 3. Thus PADD2costs would be expected to have a very small impact on a cost analysis based only on PADD 1 and 3costs. The study used average 1995 RFG production rates in PADDs 1 and 3 as reported in the Motor Gasoline Watch, a DOE publication. These rates are 450,000 barrels of RFG per day by PADD1 refineries (which is 62 percent of its gasoline output), and 650,000barrels of RFG per day by PADD3 refineries (which is 18percent ofgasoline output) . The national cost of Phase II RFG NOx control was calculated byweighting the PADD1 and 2 TheAPI funded study forced extraneous constraints on the PADD 3refinery model . Surplus hydrotreating capacitywas used up byforcing the purchase of higher sulfur crudes. All refineries (including the high cost refineries) were required to produce RFGdespite the regional and partial nature of the RFG program . The PADD 1 refinery model also seemed to be overly constrained as the model chose to purchase sweet crude at about a 14 c/gal premium to gasoline costs ($3.30per barrel of crude oil) instead of choosing other lower cost means. 

# 33 cost-effectiveness values based on their relative volumetric contributions of RFG.

The base data used in the recent refinery model runs were obtained in a manner similar to how

the DOE collected data for the refinery model runs in 1993. The refinery rawmaterial inputs were based on the PetroleumSupply Annual, and extrapolated to the year 20023 using the Annual Energy Outlook. The crude oil costs, which are projected to the year 2002, were obtained fromthe PetroleumMarketing Monthly. Refinery capacity is based on reported capacity in the PetroleumSupply Annual for 1995. Thus, all investments made for Phase I RFGwould be indicated in these capacity statistics. All costs used are in 1995dollars. Only summertime runs are being made, thus operating costs or benefits which could occur in the wintertime with the availability ofsummertime capital will not be calculated. The NOx reduction case runs were similar to those used by DOE in 1993to model PADDs 1 and 3for the RFGprogram . The cases are summarized in Table 2 below . The basecase is Phase I RFGwith prices projected to the year 2000 (with no inflation adjustment) . The first case is run incremental to the basecase and imposes the Phase II RFGVOC and toxics reduction standards (27.4 percent and 20 percent reduction, respectively) . The second case is also run incremental to the basecase, however a NOx reduction of 6.3 or 6.4 percent is imposed, in addition tothe Phase II RFGVOC and toxics standards. Finally, the third case is run, also incremental tothe basecase, and it imposes a higher NOx reduction of 7.4 percent for PADD 1, and 7.2 or 8.4 percentfor PADD 3, in addition to the Phase II RFGVOCand toxics standards. All cases are run incremental to the basecase to permit the refinery model to pick the most cost-effectivewayto meet all the Phase II RFGstandards imposed for that case. Only the basecase investments are sunk. Table 2 - Refinery Model Case Runs for Phase II RFG NOx Review PADD# Basecase First case* Second case"` Third case* PADD1 Phase 1 RFG Basecase + Basecase + Basecase + Phase II VOC+ First case + First case + toxics stds. 6.3%NOx 7.4%NOx L reduction reduction

3Because the year 2000is the first year of the Phase II RFG program, the year 2002was chosen to be the base year forcalculating cost-effectiveness.PADD 3 Phase 1 RFG Basecase + Basecase + Basecase + Phase II VOC+ First case + First case + toxics stds. 6.3/6.4%NOx 7.2/8.4%NOx

reduction reduction * These investments are not sunk Refinery Modeling Calculations and Results The same method ofcalculating fuel programcost-effectiveness used by the Agency to calculate cost-effectiveness in the RFG rulemaking to establish the RFG standards is used here. This method facilitates the comparison of fuel programcosteffectiveness with other mobile source and stationary source programs. The method includes making an adjustment fromthe 15 percent return on investment (ROI) used by refiners to evaluate newinvestments, to 10percent, which was found to represent the rate at which the refining industry actually recoups its investments. The EPAmethod also amortizes the capital costs onlyover the summer gallons ofgasoline. This technique fully expresses the costs over the regulated gallons ofgasoline. To make the cost-effectiveness analysis comparable to othercost-effectiveness studies, the NOx benefits incurred over the summer months are assumed to occurover the whole year. This adjustment compensates for the conservative summertime amortization ofcapital . While mostcost-effectiveness studies only consider average cost-effectiveness, fuel programcost-effectiveness studies have been conducted as incremental analyses. This incremental method considers the proportional higher costs associated with higher levels offuel reformulation and emissions control . The individual PADDcontributions to cost in estimating an average cost-effectiveness is weighed by their respective production volumes of RFG. The series of calculations used to determine cost effectiveness in Tables 3 - 6 are described here in more detail . The cost in cents pergallon is first calculated by dividing the objective function, which is the net income of the group of refineries being modeled, by the gallons of reformulated gasoline. The portion of the cents per gallon cost which is capital costs is determined byamortizing the investment cost the same way used by the refinery model, which is to amortize the costs over the whole year based on a 15 percent rate of return. The cost amortization factor used bythe DOE refinery model for a 15 percent rate of return is 0.242, which is different fromthe 0.226 cost amortization factor used by Bonner and Moore for the RFG program . The capital costs are then recalculated based on a summer-only cost amortization scheme (168 days per year) and 10 percent rate of return, applying a 0.171 cost amortization factor. The difference between these two cents pergallon capital costs is subtracted fromthe previously calculated cents-per-gallon cost, to develop the adjusted cents-per-gallon cost based on a 10percent ROI and amortized over the summer months.The aggregate NOx reduction in tons is calculated fromthe NOx reduction in

milligrams per mite based the fuel qualities being modeled as analyzed by the Complex Model embedded in the refinery model . The first step in this calculation series is to calculate the difference in automobile NOx emissions in milligrams per mile between two refinery model runs. Next, since the refinery model bases its emission calculations on 1990vehicle NOx emission factors, the difference in NOx emissions must be adjusted to reflect reductions in NOx emissions fromyear 2002vehicles. This adjustment is made by applying a ratio of projected NOx baseline emissions in the year 2002 which is 938mg/mile, divided bythe estimated baseline emissions in 1990, which is 13,10 mg/mile.' The NOx emission reductions for the whole year arethen totaled. The emissions are first determined for the summer only which represents actual expected reductions for 168days. These reductions are then projected over the entire year using a ratio of 12 divided by 5.5, which is the total number of months divided by the number of months during the summer. This annualized NOx reduction is used to calculate cost-effectiveness to counter the inflated cost caused by the summertime amortization ofcosts. The cost-effectiveness is next determined using the annual NOx reduction in tons and the adjusted cost in cents per gallon. The cost in cents pergallon is changed to an aggregate, summertime cost using the summertime production of reformulated gasoline. The total cost in dollars is then divided bythe annual NOx reduction in tons to yield a dollar per ton cost-effectiveness value. The cost-effectiveness value applies to the end of a NOx reduction range since it reflects the cost and benefits which occurs over that level of NOx control . The cost-effectiveness is calculated over the NOx reduction range fromthe previous NOx control value, instead offrom the no NOx control case, which makes it an incremental cost-effectiveness calculation and not an averaged calculation. Cost-effectiveness was calculated differently for the unconstrained version of PADD 3's refinery model because the model did not project the need for any additional capital investments.s Since there are nowintertime capital costs to amortize over the 4These emission factorswere developed by running EPA's MOBILE5emission factor model on year 1990 and year 2002fleets ofvehicles. SAs discussed in more detail in the summary and analysis of comments section below, the projected lack of capital investment by PADD3 refineries, as determined by the version of the refinery model without ratio controls, is very possible considering that a substantial portion of PADD3 refineries are already producing gasoline which would likely meet the Phase 11 standards.summertime, which inflates summertime cost relative to otherstudies, itwould be

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.8 percent NOx reduction is calculated fromthe PADD-specificdata by weighting the NOx cost-effectiveness values for PADDs 1 and 3 by their respective RFG production levels (this provides an equivalent weighting of 0 .41 for PADD 1 and 0 .59for PADD 3) . The cost-effectiveness values of the version of the PADD 1 and 3 refinery modelswithout ratio controls areweighted together, as are the values of PADD 1 and 3 versions of the refinery model with ratio controls. Table 7 shows that the national average NOx reduction cost-effectiveness for the unconstrained and constrained versions of the refinery model are $2180and $6000per annual ton of NOx emissions reduction, respectively, at 6.8 percent NOx reduction. These costeffectiveness values are based on costs in year 1995 dollars. Because 1990was a relatively expensive year for producing petroleumproducts, no inflation adjustment was made to adjust these projected costs back to 1990, which is the year the other refinery modeling studies that this study will be compared with are based in.C 0 G C

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As stated above, the goal ofthis work is to determine if the revised version of DOE"s refinery model yields NOx reduction cost-effectiveness valueswhich are similar ordifferent fromthe previous version, then assess the similarity or difference. The Phase II RFG cost-effectiveness determined bythe 1993version of the DOE refinery model was calculated for each PADDindividually. Thus, for simplifying this comparison, those earlier DOE cost-effectiveness values will be combined together to forma single national cost-effectiveness value. The cost-effectiveness of Phase II NOx control projected by the earlierversion of the DOE refinery model was $2490and $1590per annual ton for PADDs 1 and 3, respectively (based on EPA's costeffectiveness calculation methodologys) . When these cost-effectiveness values are weighted by their respective RFGproduction volumes, the average cost-effectiveness for PADDs 1 and 3 is $1780 per annual ton. The $1780cost-effectiveness value is near the lower part of the range of $2180 - $6000per ton projected by the revised refinery model . The higher range ofcost-effectiveness values determined by the revised DOE refinery model, however, does not diminish the confidence in the $5000 per ton costeffectiveness determined bythe Bonner and Moore refinery model for EPA. This is because the revised DOE refinery model range ofcost-effectiveness is nowmuch more similar to the $5000 per ton value calculated by Bonner and Moore. In fact, the $5000 per ton cost-effectiveness value determined by Bonner and Moore, and similarvalues projected by other refinery modeling analyses which corroborated the Bonner and Moore cost-effectiveness, would likelydecrease if the refinery modelswere rerun with the same levels of RFGproduction as we are seeing today (these models generally assumed higher levels of RFG production) . This adjustment would make the revised DOE refinery model even more consistent with these other analyses, thus providing higher confidence in the cost-effectiveness at a value somewhere less than $5000 per ton. Figures #1 and #2showhow the unconstrained and constrained costeffectiveness (C/E) curves for each PADDof the DOE NOx study compare with the previous refinery modeling studies that EPAevaluated and considered when it set the RFGPhase II NOx standard. These plots are intended to clarify how this recent study by DOE compares with the other studies. For clarity and simplicity, the 1994 DOE C/E curves are not plotted. The DOE unconstrained refinery model C/E curves are lower, PADD 3is considerably so, than the other refinery model runs, and much lower than the API curves. The DOE constrained PADD3 refinery model C/E curve is similar to the Bonner and Moore curve and somewhat higher than the Auto-Oil curve and the 6DOE applies another cost-effectiveness calculation methodology which would, if not adjusted, preclude a fair comparison between studies. 14NPCdata point. The relatively close tracking of the DOE PADD 3 C/E curve to the

Bonner and Moore and Auto-Oil PADD3, considering the much lower reformulated gasolline production rate, suggests that the DOE model is more constrained. As stated above, the cost-effectiveness of these other studies would likely be lower if theywere rerun with 1995 reformulated gasoline production levels. The C/E curve of the DOE PADD1 curve is significantly higher that the Bonner and Moore curve which likely reflects the constrained nature of that version of the DOE refinery model . Although the DOE C/E curve is still lower than the API C/E curve.0 0 0 0 a~ °d

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N O c d m a c v a O zIt is also importantto review several of the premises which affect the cost and cost-effectiveness. Most of these would likely decrease costs and cost-effectiveness. The first issue is that two refining technologiesjust becoming available to the refining industryfordesulfurizing gasolinewere not inserted in the refinery model and thus couldl not be picked by the model to desulfurize gasoline. One process is called Octgain and it is licensed by Mobil Oil . The advantage of Octgain is that FCCgasoline can be desulfurized without losing much of the octane value of FCCgasoline, thus greatly improving the attractiveness of this desulfurization methodology. The second process is called Synsat which was developed by Criterion Catalyst. Synsat is an improved hydrotreating-cat cracking processwhich lowers gasoline and diesel sulfur concentration levels at a lower cost . Both of these process have become more acceptable to the refining industry and other interested entities after a Coordinated Research Council meeting in late 1996 on petroleumdesulfurization technologies. At that meeting the costs and benefits of these two technologies were presented and discussed at length, and the presentationswere well received. Another premise which likely caused costs and cost-effectiveness to be higher than ,actual is the assumption built into the refinery model that every refinery would participate in producing reformulated gasoline, thus in the refinery model the building of new refinery units to reformulate gasolinewould be forced to occur in every refinery. The assumed building of these new refinery units in all refineries ofa PADDtends to increase costs as the units builtwould have to be smaller and thus more expensive than the building offewer but larger units. This refinery participation assumption may be a -fair premise for PADD1 which, as a PADD, is mostly producing RFG. However, this would not seemto be a logical assumption for PADD 3which is only reformulating about 20percent of its gasoline pool . Arguably, many of the less complex refineries in PADD 3 are in a less favorable position to produce RFGand would likely not do so for economic reasons. Another assumption which may be conservative is that the 1995 Phase I RFG PADD-specific production levels (52 percent in PADD 1 and 19 percent in PADD 3) will still pertain in the year 2000. This assumes that PADDI refineries, which are expected to incur a greater per-unit-cost to reformulate gasoline than PADD3 refineries, will continue to produce the same share of RFG . Alternatively, PADD 3could produce more RFGat a lowercostwhich would relieve some of PADD 1's burden and result in a more favorable cost-effectiveness. Table #8 below contains a similar analysis to that in Table #7, except that the RFGproduction levels were changed in a sensitivity analysis to refNect an assumed 100,000barrels per day higher production in PADD3coupled with a similar assumed reduction in PADD 1 . This simple analysis does not consider the changes in cost-effectiveness which would occurwith changed RFG production levels. Most likely, the reduction in PADD 1 C/E would be greater than the increase in PADD3and further improve overall cost-effectiveness than that examined below . This 18analysis shows that the combined PADD 1 and 3unconstrained refinery model C/E

would decrease from$2180to $2040 perton NOx, and the constrained refinery model C/E would decrease from$6000to $5700perton NOx.4- O L (B L v/
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E Z r CV) 0 0 a aModeling the entire PADD 3for a partial fuel reformulation programsuch as RFG

likely introduces additional increased costs. Increased costs arise because PADD3 includes refineries of all capabilities, and the PADD-wide model averages all these capabilities for the cost analysis. However, the more "gifted" refineries will logically produce RFGbecause they can do so at a lower marginal cost. Thus if a subset of only the gifted refineries were modeled, the reformulated costs for these refineries is expected to be lower. In its submission of comments to the RFGprogram, API included a profile of gasoline sulfur levels for PADD 3. This profile showed that 20percent of PADD3gasoline contains 120 ppm sulfur or less. Additionally, with the need to meet the Phase I RFGrequirements, refiners are blending MTBE into gasoline which would dilute the gasoline sulfur levels even more (probably 12 percent) . As can be seen from the refinery model runs, this gasoline sulfur level is about the level needed to meet the Phase II RFGrequirements. Thus, it is likely that most or all participating PADD3 refineries would be able to meet the Phase II RFG NOx requirementwithout making any additional investment. The refinery model may also be inflating costs because there may be lower sulfur levels in all gasoline compared to what the refinery model predicts. Gasoline survey data collected in 1995for the RFG Programshowed that the RFGgasoline sulfur levels determined fromdatajust becoming available are lower now than what the refinery model estimates. Average RFGsulfur levels are about 230 ppmnow for reformulated gasoline which contrasts with the 330 ppmlevels projected exist bythe refinery model for 1995. Lower level is likely due to the implementation of the Phase I RFG Programregulations in 1995. This may mean that the refinery model is underestimating the ability for refinery units to produce lower sulfur gasoline, and likely overestimating desulfurization cost and cost-effectiveness. Another questionable premise is that the refinery model is programmed to ensurethat there is a 1 .5 volume percent butane minimumin gasoline blendstocks. This premise, which is discussed in more detail belowin the summary and analysis of comments, may have caused a cost-increasing effect on toxics and VOCcontrol, while slightly lowering NOx control costs. However, this cost-decreasing effect on NOx, ifit were decided to be inappropriate, would be more than offset bythe cost-increasing effects discussed above. Summary and Analysis of Comments on Cost-Effectiveness API and NPRAalong with a several refiners commented that the ratio-free model is flawed by not representing actual refinery blending operations, thus the refinery model is overoptimized and EPAshould rely on the version of the refinery model with ratio controls, or another version ofthe refinery model which better represents the refining industry. 21In its response to comments on this issue, DOE demonstrated how ratio controls can lead to underoptimization (costs which are too high) . This occurs when the ratio controls do not permit the refinery model to simulate the blending practices of multiple refineries that would occur in reality. While the ratio-free version of the refinery model may allowunrealistic blending practices that could lead to costs which are overoptimized, or too low, DOE concluded that the twoversions of the refinery model provide a rangewithin which the actual costs and cost-effectiveness is believed to lie. Acost comparison of gasoline sulfur control with both the ratio and ratio-free versions of the refinery model with other refinery modeling studies ofgasoline sulfurcontrol corroborate the use of these twoversions of the refinery model . One refiner commented thatalthough refinery models are lower cost estimates, the consumer will pay the cost at the margin based on simple economics. It may be true the highest cost producer will drive the final price, however, EPA does notjustify its programs on prices, only the cost of the programwhich would be reflected as the average cost for the refiners whowill produce Phase II RFG . The marginal difference between prices which may be higher than the average costs is not a cost but profits for the oil industry which reflects transfer payments fromthe consumer to the oil companies. API and a couple refiners stated that the ratio model does not reflectanticipated cost allocation between VOC, toxics and NOx. Based on a retrospective DOE analysis which showed that a 1 .5%minimumbutane constraint may have caused high VOC/toxics cost with countering decreases in NOx reduction cost, one refiner suggested that the refinery model should be operated without the 1 .5%butane requirement. One refiner commented that the 1 .5%butane constraint is reasonable if RVP removes butane, and that it increases the importance of reviewing VOC and NOx together. DOE believes that at least a significant reason for the higher than expected VOC/toxics cost is the 1 .5%minimumbutane requirement. The reasons why DOE used that minimum

is that it is consistent with previous industry studies. DOE's conclusion that the minimummay be at cause forthe cost is based on a couple of nonoptimized refinery modeling case runs in which the 1 .5%butane requirementwas not imposed. These runs showed the VOC/toxics costs to be much lower and the NOx costs to be slightly higher. In reality, the need forany toxics reduction can be questioned since AAMAsurvey data has shown Phase I RFGin the Northeastto already be meeting the Phase II toxics requirement. Furthermore, any associated increase in NOx control costwhich may be incurred by rerunning the refinery model withoutthe 1 .5%butane minimumis expected to be small and this cost is likely already reflected in the conservative aspects of the study. For example, as a leftover froma previous analysis, PADD3was forced to build new capital necessary to meet the NOx 22requirement in each refinery of the PADD . This is obviously a very conservative assumption in the case of PADD3as less than 20% ofthat PADD's gasoline output was assumed to be RFG . One refiner commented that the butane minimumis reasonable. In response to the commentthat EPAshould have reviewed the VOC requirement along with reviewing the NOx standard, theAgencyfelt that it is not necessary to meet the refiner's need for a decision. The RFG rulemaking process demonstrated that NOx cost-effectiveness can be evaluated separately fromVOC control . A number of commenters stated that the model pooled the grades and thus did not determine the average NOx reduction needed to meet the 3%minimumstandard, refiners will have to overachieve on the averaging standard and thus must incur much greater costs Oil industry comments point out that DOE's updated report states that its cost estimates do not includethe impact of the requirement that RFG achieve a three percent minimumNOx reduction per gallon, or the impact of any potential enforcement tolerance associated with that three percent minimumstandard. EPA believes that the minimumNOx reduction requirement and any associated enforcement tolerance compliance costs are separate costs associated with these provisions and do not change the cost-effectiveness analysis of the 6.8 percentstandard. While EPAis denying API's petition to reconsider the 6.8 percent average standard, itwill continue to evaluate and reach a decision on the separate issues associated with the three percent minimumper-gallon standard. The National PetroleumRefiners Association commented that single grade refinery modeling results do not account for the extra hardship involved in blending two or more streams ofdifferent octane values which must meet specific grade requirements. EPAagrees that the refinery modeling of single gasoline streams, as was done in this analysis, does not represent any additional costs associated with the modeling of separate grades. However, the purpose ofthis analysis was to determine the costeffectiveness of the Phase II NOx standard and compare it to the previous DOE analysis completed in 1993for the RFG rulemaking. Since the previous DOE analysis did not model separate grades, the comparison is facilitated by not modeling gasoline grades in this study. A refiner commented that a high cost spread was assumed between butane and isobutane (16.5 c/gallon in PADD 1, versus the actual of 3.5 c/gal in PADD3). As stated in DOE's response to this comment, the cost spread of 16.5 c/gal was suggested byAPI's consultant Turner, Mason and Co. 23One refiner commented that the PADD3 model blended poly gasoline into RFG

which is unrealistic, and failed to blend alkylate into the basecase RFG. Refinery models are programed to minimize costs when it models the blending of various blendstocks. When the cost optimizing aspect of the refinery model is coupled with lowrelative production levels, which is the case with PADD 3as less than 20 percent of the gasoline pool is reformulated, it may to pursue strategies which may differfromnormal refinery practices to realize a small cost advantage. This is a likely contributing factor to why the refinery model deviated fromnormal blending practices. Additionally, a check was made on the blending properties of poly gasoline and alkylate. In the case of poly gasoline, when the blending RVPwas compared to values actually reported, the values in the refinery model were lower. This difference also could contribute to the different blending practices. While alkylate was not blended into RFGin the basecase, it did showup in all the other cases, and since the NOx standard was evaluated using cases later than the basecase, it is doubtful that the alkylate blending anomaly would have any effect on the cost-effectiveness ofthis study. One refiner stated that the refinery model's basecase benzene and sulfur levels seemunreasonably high. In response to this comment, DOE made a comparison of its PADD1 and 3 basecase sulfur and benzene levels with NIPERgasoline survey data. While there is some deviation, the basecase levels are very close. In addition, the benzene levels shouNd not affect the cost nor cost-effectiveness of NOx control in anyway. While sulfur levels do have a direct impact on cost, there may be little or no impact on costeffectiveness as cost-effectiveness is determined by the slope of the cost curve at the control level . A refiner stated that the Phase II RFGVOCand NOx cost-effectiveness should be evaluated together, notjust the NOx standard alone, and that cost should not exceed 0.71 cents pergallon to stay under $5000/ton Because ofAPI's request in its petition, in which API only asked EPAto review the NOx standard, EPAdid not evaluate the VOCstandard. Also EPAset the NOx standard separately fromthe VOCstandard which can be done as the control strategies used to meet theVOCand NOx standards arevery different (RVPcontrol for VOC, and sulfur and olefin control for NOx) . Finally, the per-gallon cost and costeffectiveness, while they are related, are not directly linked. This is because the slope and length of the line at the initial point of sulfur control can vary quite dramatically without affecting the cost-effectiveness at the level at which the standard is set. One refiner stated that cost-effectiveness should be calculated based on the average cost of the version of the refinery model with ratio controls and challenged 24refineries. Another refiner stated that the most efficient refiners cannot be the only

ones which will produce RFG as it omits important considerations such as market location, logistics, distance issues and oxygenate portfolio. Athird refiner stated that all refineries will produce RFG in PADDs 1 and 2, but gifted refineries may produce RFG in PADD3 because oftheir greaterflexibility. AAMAcommented that the more capable refinerswill likely market Phase II RFGwhich would drive the costs toward the ratio-free version of the refinery model . Basic economic theory suggests that the most capable refineries will tend to produce RFG

. As pointed out in the comments, marketplaceforces which cause a shift fromthe most capable refiners theory include location ofthe refinery, logistics, and fuel reformulation capabilities such as oxygenate production capabilities. According to EIA, about 50%of PADD 1's current gasoline output is RFG. At that level, EPAfelt that all the refineries in the Northeast would produce some RFG and the cost would be driven bythe PADDaverage. By default froma previous analysis, all the refineries in PADD3 were assumed to also produce RFG . However, PADD 3's RFG output is only 20%of its gasoline pool . Considering the small output of RFGand the wide diversity of capabilities within the PADD, it is very unlikely that all the refineries in PADDwould produce RFG

. Based on that conclusion, the modeling of the entire PADDwould have to be considered conservative yielding both higher cost and cost-effectiveness. The comments fromthe one refiner supports this statement. One refiner suggested that modeling must include a reasonable operating cushion, e.g., 0.90%benzene. As responded to by DOE, the 0.95%benzene targetwas recommended to DOE''s consultant bythe oil industry consultant. One refiner commented that the PADD1 model should not include the ToscoTrainer refinery since it is shut down. As pointed out by DOE, the EIAcapacityvalues were used in this analysis which simplifies the analysis and avoids potential biases which could arise by adjusting refinery modeling inputs. One refiner asked for how cost of PADD2 refineries would compare with PADDs 1 and 3. Acomparison of the reformulation costs of PADDs 1, 2 and 3 can be made using the PADD by PADDanalysis of reformulation costs bythe Auto-Oil study. In that 1992 study, the relative costs of controlling the olefins, aromatics, T-90and adding oxygenate were determined for the entire gasoline pool for each PADD. Although sulfur control was not a part of thatstudy, the Auto-Oil analysis is likely representative 25of PADD-average refinery reformulation capability with a more capable PADDof

refineries being able to reformulate gasoline at a lower cost than a less capable PADD of refineries. The analysis showed that PADD 2 reformulation costs are between PADD 1 and 3 reformulation costs at a level about 20 percent lower than PADD1 costs relative to PADD 3 costs. Arguably, the RFG production cost of PADD 2 relative to those of PADDs 1 and 3would drop fairly significantly if the reformulation volume of PADD 2were considered, as PADD2's RFG production volume is less than 20percent of its gasoline production. Thus, PADD2cost and probably its cost-effectiveness would likely fall somewhere in the middle between PADDs 1 and 3 and thus have virtually no effect on this cost analysis which is based solely on PADDs 1 and 3. One refiner stated that EPAshould consider the increase in stationary source emissions associated with the anticipated building of new refinery processing units in addition to considering the emissions savings of requiring cleaner burning fuel . AAMA commented that the hydrocarbon, carbon monoxide, sulfur dioxide and toxics benefits of reducing sulfur should be accounted for. EPA's goal in responding to API's petition was to compare the Phase II NOx costs ofthis version of the DOE model with the previous version of the DOE refiner model considered by EPAin setting the RFG NOx standard to see if the more recent version of DOE's refinery model gives different costs. Since EPAdid not evaluate stationary source emissions in its previous analysis, then it did not make sense to do that here. Similarly, it did not evaluate the emission reductions ofsulfur dioxide and carbon dioxide in the previous analysis, however, the benefits ofassociated hydrocarbon and toxics reductions were accounted for bythe complex model . If the Agency were to expand its programcost-effectiveness assessment to consider other pollutants ordifferent sources of the same pollutants, it would then be important to evaluate both the increases and decreases of all the pollutants. Arefiner stated that a tabulation of incremental cost estimates of making RFG over CGwould be helpful . EPA nor DOE can provide such numbers with this recent refinery modeling study because it was not necessaryto evaluate the RFG/CG cost difference to determine NOx reduction cost-effectiveness, and itwas not asked for in the API petition. One refiner asked EPAto ensure that all capital and operating costs are amortized over summer gallons offuel . One refiner commented that EPA's capital amortization methodology is reasonable, and also that refineries have passed capital investment costs on to the shareholders because offoreign competition. Indeed, all the NOx control operating costs and capital costs are amortized over the summer gallons of RFG . This is the same procedure used by EPAto determine

26cost-effectiveness for the RFGrulemaking, and this procedure is spelled out in the

Regulatory ImpactAnalysis (RIA) of the RFGprogram . TheAgency appreciates the information of how

some refiners are being reimbursed for their costs. One refiner stated that DOE and EPAshould usethe PIMs refinery model to do these types ofanalyses since it is the industry accepted standard DOE performed the NOx cost-effectiveness analysis for EPAwith a refinery model highly scrutinized by oil industry representatives. While it may not be the industry standard, it is a verytight refinery model and because it is the property of the Oak Ridge National Laboratory, it is publicly available. One refiner commented that RFGstandards do not change emissionsvery much relative to automobile standards; and that actual Phase II standards are very expensive $49,000/ton NOx and $29,000/ton for VOC For the rulemaking process, theAgency evaluates pollution control programs based on their cost-effectiveness. Choosing programs to implement based on their cost-effectiveness makes sense in that the most efficient programs for reducing emissions of pollutants should be considered first. Through a review of a number of refinery modeling studies which it evaluated, including the Agency's Bonner and Moore study, the Auto-Oil study, DOE's study and the study by the National Petroleum Council, theAgency determined that Phase II RFGVOCcontrol is attained at about $500 per ton, and NOx control at about $5000per ton, and these values were considered appropriate. During the rulemaking process, the benefits were determined to be large and the cost-effectiveness sufficiently attractivewhich provided incentives to promulgate the program . This process is meant merely to serve as a check on the viability ofthe previous DOE study completed in 1994. The American PetroleumInstitute commented that PADD3sulfur and olefin reductions were realized with no capital expenditures. API data shared with EPAduring promulgation of the RFG rule showed that 20 percent of the gasoline fromPADD 3's gasoline output is at 120ppm or less. This low level ofgasoline sulfurwould likely allowthose refineries to meet PADD3's RFG NOx contribution with eithervery small or no new capital investment. The PADD3 refinery model without ratio controls recognized this capability to produce clean gasolinewithin the PADDand therefore did not make any new investments. The refinery model with ratio controls, however, built a lot of new facilities, despite the availability ofclean gasoline, which may indicate that it is overly constrained to not recognizethe PADD's capability to produce clean gasoline. One refiner stated that Mathpro, a contractor which did a NOx reduction study for 27OTAG (Ozone Transport and Assessment Group), showed that NOx control costs 96%

of the incremental cost of a 12%NOx reduction and VOC and Toxics control . Thus the cost ofVOC/toxics control determined by the DOE commissioned refinery model is too high. The results of the Mathpro study cannot be compared to the results ofthis analysis because the NOx reduction levels are much higher. At the high levels of NOx control reflected in the Mathpro study, which is most cost-effectively met by sulfur reductions, there are large associated VOCand toxics reductions. However, at the level of NOx control currently required by the RFGprogram, the lower level of sulfur control required does not deliver as much toxics reduction thus significantly more additional toxics reductions is required. Refinery models tend to overoptimize hydrogen availability since a portion is always sent to refineryfuel . According to DOE's response to this comment, both versions of the refinery model downgrade a significant portion of hydrogen to refinery fuel, and this portion was recommended to DOE by NPRA . NPRAand API commented that PADD1 conventional gasolinewas allowed to exceed the NOx maximum . This oversight likely had no effect on the NOx cost-effectiveness as this is an incremental analysis. The comment is noted, however, forfuture analyses. AAMAcommented that the costs may be biased high for sulfur reduction levels to 100- 150ppm

. Priorto beginning the Phase II RFG NOx cost-effectiveness analysis, EPAand DOE checked the cost-estimating performance of the refinery model by comparing the sulfur reduction cost ofthis model relative to other refinery models. When the costs, of thewhat is now

termed the ratio version model, came in higher than any otherstudy, another version of the refinery model was run without ratio controls. The costs ofthis other refinery model was significantly lower and it corresponded to the lowend of the range ofsulfurcontrol costs. EPAis confident that the range of costs represented by the two versions of the refinery models represent the range in costs within which the actual NOx reduction costs are found. EPAis considering the full range costeffectiveness generated by the costs fromthe twoversions of the refinery model . AAMAcommented that bracketing the costswith a range in NOx reduction on either side of the actual NOx control standard biases the cost on the high side due to nonlinearcost curves. 28There is a cost-increasing effect caused by interpolating between data points in

a cost or cost-effectiveness curve. Understanding that, EPAstill asked DOE to study a range in NOx control above and belowthe 6.8 %NOx reduction standard to understand the cost-effectiveness above and belowthe current standard. The actual standard of 6.8%NOx control was not included to minimize the time and cost of adding another data point. The cost-increasing effect of this method was minimized, to what is believed to be very lowlevels, by using a smaller change in NOx reduction for PADD1 than PADD3since the PADD1 cost curve is more nonlinear. AAMAcommented that only proven technologies are included in the refinery model which is different fromhow the automobile industry is treated, this approach leads to higher costs than otherwise. DOE did not include emerging refining technologies, such as Mobil Corporation's OCTGAIN, in the refinery model because of their uncertain applicability, use and benefits for the refining industry. To allow the refinery model to build such processes, DOE stated that itwould have to assign a heavy investment penalty to accountfor the uncertainty of in investment. To the extent that these potentially more effective processes eventually penetrate the refining industry, the cost and cost-effectiveness of this analysiswould likely be somewhat overstated. Based on recent increased acceptance of these technologies, incorporating such technologies into the refining model will be assessed forfuture refinery modeling studies. AAMAcommented that EPAdoes notweight the two PADDs when determining national costs. The two PADDs studied were weighted based on their RFGproduction volumes. AAMAcommented that a substantial cost increasing factor ofsulfurcontrol is maintaining octane which is largely a voluntary strategy by the oil industry; thus the cost of maintaining octane should not be included in these costs. When theAgency evaluates programcosts, a base presumption is that the business practices, other than the one(s) being targeted for change, do not change. This presumption was applied in this analysis, but it may lead to a conservative result. AAMAcommented that there is no flexibility in crude slate which constrains the refinery model and increases estimated costs. There are inherent inflexibilities in PADD-wide refinery modeling, such as a fixed crude slate, which have a cost increasing effect on costs and cost-effectiveness. For this reason, DOE, in consultation with EPA, created a version of the refinery model without ratio controls which therefore represents a version of the refinery model with 29increased flexibility to offset the cost-increasing tendencies of refinery modeling.

AAMAcommented that advanced technology vehicleswill be greatly affected by gasoNine sulfur and this impact is not accounted for bythe complex model . In addition, AAMAstated that OBDII will change the proportion of high versus lowemitters and thus ,affect emissions. The cost-effectiveness of the RFGprogramwas determined bythe emissions benefit described by the Complex Model . The Complex Model is based on the effects offuels on motor vehicle engines and emissions control technology ofcars and light trucks sold in 1990. As new cars with new

engine families and more advanced emission control hardware are introduced, and the effects offuels is tested on those newer vehicles, the data can be integrated into the complex model forfuels modeling. Atthis time, however, the affects offuels on the emissionsfromnewervehicle technology is not sufficiently understood. AAMAcommented that the emission benefit of Phase II RFGwithout the NOx standard is severely compromised because T50 and driveability index increases resulting in increased exhaust emissions and driveability problems. The refinery modeling work undertaken by EPAduring the RFG rulemaking did not show

a refinery associated impact between sulfur control, which is the likely method the refiners will use to control NOx to meet the Phase II NOx standard, and T-50 and driveability. This makes sense in that hydrotreating removes sulfur compounds and normally does not affect the mix of hydrocarbons which composes gasoline. EPAwill continue to evaluate this issue as more emissions data becomes available.