[Senate Hearing 106-954]
[From the U.S. Government Publishing Office]



.                                                       S. Hrg. 106-954
                 HIGHWAY DIESEL FUEL SULFUR REGULATIONS

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
        CLEAN AIR, WETLANDS, PRIVATE PROPERTY AND NUCLEAR SAFETY

                                AND THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 15, 2000

                               __________

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






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               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                       one hundred sixth congress
                             second session
                   BOB SMITH, New Hampshire, Chairman
JOHN W. WARNER, Virginia             MAX BAUCUS, Montana
JAMES M. INHOFE, Oklahoma            DANIEL PATRICK MOYNIHAN, New York
CRAIG THOMAS, Wyoming                FRANK R. LAUTENBERG, New Jersey
CHRISTOPHER S. BOND, Missouri        HARRY REID, Nevada
GEORGE V. VOINOVICH, Ohio            BOB GRAHAM, Florida
MICHAEL D. CRAPO, Idaho              JOSEPH I. LIEBERMAN, Connecticut
ROBERT F. BENNETT, Utah              BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas          RON WYDEN, Oregon
LINCOLN CHAFEE, Rhode Island
                      Dave Conover, Staff Director
                  Tom Sliter, Minority Staff Director
                                 ------                                

      Subcommittee on Clean Air, Wetlands, Private Property, and 
                             Nuclear Safety

                  JAMES M. INHOFE, Oklahoma, Chairman
GEORGE V. VOINOVICH, Ohio            BOB GRAHAM, Florida
ROBERT F. BENNETT, Utah              JOSEPH I. LIEBERMAN, Connecticut
KAY BAILEY HUTCHISON, Texas          BARBARA BOXER, California

                                  (ii)








                            C O N T E N T S

                              ----------                              
                                                                   Page

                             JUNE 15, 2000
                           OPENING STATEMENTS

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...     1
    Articles:
        Illinois Seeks Suspension of New EPA Gasoline Rules, 
          Washington Post........................................     3
        EPA Gouges Consumers, Washington Times...................     4
Lieberman, Hon. Joseph, U.S. Senator from the State of 
  Connecticut....................................................    29

                               WITNESSES

Addington, David S., senior vice president and general counsel, 
  American Trucking Associations, Inc............................    18
    Prepared statement...........................................    81
Bertelsen, Bruce, executive director, Manufacturers of Emission 
  Controls Association...........................................    20
    Prepared statement...........................................    82
Frank, J. Louis, president, Marathon Ashland Petroleum, LLC, on 
  behalf of the American Petroleum Institute.....................    13
    Prepared statement...........................................    40
Haslam, James A., chief executive officer, Pilot Oil Corporation.    22
    Prepared statement...........................................    83
Looney, Robert J., Government Affairs, Cenex Harvest States 
  Cooperative, on behalf of the National Council of Farmer 
  Cooperatives...................................................    16
    Statement, Curt Eischens, on behalf of the National Council 
      of Farmers Cooperatives....................................    75
Perciasepe, Robert, Assistant Administrator, Office of Air and 
  Radiation, Environmental Protection Agency.....................     5
    Prepared statement...........................................    32
Thompson, Jerry, senior vice president, Development and 
  Technological Excellence, Citgo Petroleum......................    14
    Prepared statement...........................................    36

                          ADDITIONAL MATERIAL

Food Security Act of 1985, Public Law 99-98--December 23, 1985...    80
Letters:
    American Petroleum Institute.................................    44
    Several agricultural organizations...........................    79
Statement, Glenn Keller, executive director, Engine Manufacturers 
  Association....................................................    85

                                 (iii)

  


                 HIGHWAY DIESEL FUEL SULFUR REGULATIONS

                              ----------                              


                        THURSDAY, JUNE 15, 2000

                                     U.S. Senate,  
             Committee on Environment and Public Works,    
             Subcommittee on Clean Air, Wetlands, Private  
                              Property, and Nuclear Safety,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 406, Senate Dirksen Building, Hon. James M. Inhofe 
(chairman of the subcommittee) presiding.

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

    Senator Inhofe. The meeting will come to order.
    With today's hearing, we will address the proposed sulfur 
and diesel regulations from EPA. Yesterday, I entered my 
opening statement by telling a little story which I am not 
going to repeat today.
    For some reason, the EPA is shocked and surprised that fuel 
prices are spiking in the Midwest because of the introduction 
of the new RFG Phase II regulations. Incidentally, there are 
some articles in today's paper that we'll be talking about in a 
few minutes that do relate to the cost of fuel that everyone is 
so concerned about today.
    The trouble is that EPA continues to roll out new 
restrictions in regulations on gasoline and gasoline formulas 
without any regard to what the consequences are to the 
consumer. I have a chart that shows just a few of the recent 
regulations such as the Tier II RFG and the Administration's 
ethanol proposal and many others. These regulations are some of 
the main reasons for the price spikes that we are seeing in 
fuel costs.


    I want to make sure Andy shows that one because he spent a 
lot of time working on it. Those are price spikes.
    Today's sulfur-diesel regulation is a perfect example of 
this regulation which will cause price spikes for fuel over the 
next 10 years. EPA has done a miserable job in predicting the 
consequences of this regulation. I believe there will be severe 
shortages of diesel fuel which will lead to higher prices for 
truckers, farmers and the home heating market. It is highly 
likely that instead of installing the expensive desulfurization 
equipment, many companies will choose to export their diesel 
instead of selling on the U.S. market and create great 
shortages or might even move to other areas such as Mexico.
    The real shame in this is that it could be avoided if EPA 
were more reasonable in their expectations. Instead of calling 
for a 97-percent reduction in sulfur, they could have taken a 
90-percent reduction in sulfur which would have produced the 
same benefits for particulate matter at half the cost.
    While it is true that NOX would only be reduced 
by 75 percent instead of 95 percent, I think we need to stop 
and look at the 75 percent reduction at half the cost which 
could be a bargain and I think it would be. Once again, the EPA 
appears bent on chasing pennies of benefits for dollars of 
cost.
    On a final note, last year during the sulfur and gasoline 
debate, the refiners were pretty much split on the issue. The 
large companies didn't mind and in fact, they may have seen a 
competitive advantage against the smaller companies. Today, 
almost without exception, all refiners are telling me that this 
proposed rule is just not feasible. I hope the EPA will be 
listening and that is the reason for our hearing today.
    In addition to today's hearing, over the next few months, 
my subcommittee will be looking even more closely at the cost 
of EPA's programs on our Nation's fuel supply. I really think 
the lasting legacy of Carol Browner might very well end up 
being these gasoline price spikes over the next 10 years unless 
something is done to restore some sanity to this process.
    In today's newspaper, we have seen a lot of concern about 
this and people are no longer taking the popular route and 
trying to blame the oil companies and the refiners for the 
problems. For example, in this morning's Washington Times, an 
editorial appears, ``EPA Gouges Consumers'' where the price of 
a gallon of unleaded regular has topped the $2 mark. The real 
crime is the way the EPA imposes multiple-tiered regulatory 
costs invisible to consumers on motor fuels. These costs are 
borne by consumers who blame the oil companies but they ought 
to be blaming the Federal regulators instead.
    It goes on to say, ``EPA, as pointed out on this page last 
week, is under no constraint to factor in the cost of the 
regulations it promulgates. It issues dictates that let the 
marketplace worry about who is going to pay for all this and 
how much it is going to cost.'' That is one of the things we 
have talked about for a long time, that we need to be looking 
at costs. That is what cost-benefit analysis is all about so at 
least the public knows what the cost is going to be for some of 
these regulations. Then they can make determinations as to 
whether or not it is going to be worth that cost.
    Governor George Ryan of Illinois yesterday had a news 
conference in which he called on the Federal Government to 
suspend environmental rules mandating cleaner burning gasoline 
which he blames for driving pump prices in parts of the Midwest 
above $2 a gallon, the highest in the United States.
    [The referenced articles follow:]
               [From the Washington Post, June 15, 2000]
        Illinois Seeks the Suspension of New EPA Gasoline Rules
          governor says standards driving pump prices too high
                         (By William Claiborne)
    CHICAGO, July 14--Illinois Governor George H. Ryan (R) today called 
on the Federal Government to suspend environmental rules mandating 
cleaner-burning gasoline, which he blamed for driving pump prices in 
parts of the Midwest above $2 a gallon, the highest in the United 
States. Ryan blamed the high Midwestern pump prices, particularly in 
Chicago and Milwaukee, on Environmental Protection Agency gasoline 
production rules that went into effect June 1 in scattered locations 
across the country. The regulations are aimed at curbing toxic 
emissions.
    Ryan said that while the EPA's anti-pollution goals were laudatory, 
the agency should delay mandating an improved version of so-called 
reformulated gasoline until governments in the region can study the 
impact on prices.
    Under the reformulated gasoline program, the base fuel is mixed 
with either ethanol or the chemical agent MTBE, an oil-based substance 
that has been found to pollute groundwater supplies. Most Midwestern 
States have opted to use ethanol. Ryan said he had talked with the 
Governors of Wisconsin, Indiana, Nebraska and Kansas, and that all of 
them support the rules suspension proposal.
    Ryan said refineries in the Midwest could revert to producing an 
earlier version of cleaner-burning reformulated gasoline, which he said 
could be sold more cheaply than the new version.
    ``This current craziness in prices doesn't make any sense,'' Ryan 
told a news conference here. ``I can't understand why we should pay 80 
cents a gallon more for gas than other parts of the country.''
    A Clinton Administration official said the waiver request is before 
the EPA and, for now, the White House has no comment.
    Last week, the average price of self-serve gasoline in Chicago was 
$2.13 a gallon, up from $1.37 a gallon in January. In contrast, prices 
averaged $1.56 a gallon in Los Angeles, $1.42 in Atlanta and $1.61 in 
Boston.
    Some downtown service stations here were charging $2.39 a gallon 
for regular gasoline and $2.59 a gallon for self-serve premium, meaning 
that filling a 44-gallon tank in a sport utility vehicle costs more 
than $114.
    Industry officials attributed the rising prices to market and 
regulatory forces that they say converged just as the start of the 
summer driving season began to put a strain on gasoline inventories.
    The officials said the most significant of these was the June 1 
implementation of a new Federal requirement for a cleaner-burning 
reformulated gasoline--called RFG-2--which in the Midwest entails the 
use of corn-based ethanol as an additive and is more difficult to blend 
than earlier versions of reformulated fuels. Urvan Sternfels, president 
of the National Petrochemical and Refiners Association, today said 
refiners had made the ``unpleasant discovery'' that because ethanol 
evaporates more quickly than other additives, the blending process 
required complicated--and costly--adjustments to a process with which 
the refiners had little experience.
    However, environmental groups such as the Clean Air Trust have 
demanded to know why the oil companies failed to provide for adequate 
supplies when they had known for 5 years they would have to make the 
cleaner-burning gasoline available to consumers by June 1.
    Sternfels also said the rupture of an oil pipeline near Dallas, a 
pipeline that Midwest refineries had used to buildup their inventories, 
had contributed to the price surge. ``It slowed down the system and put 
us behind the curve in terms of supply.'' Sternfels said.
    He also said that court decisions upholding patents awarded to 
California-based Unocal Corp. on reformulated fuel blending processes 
have had a ``chilling effect'' on many refineries, which are worried 
about having to pay royalties of as much as 7.5 cents a gallon if their 
processes are too similar to Unocal's.
    All of these factors have combined to tighten the supply of 
reformulated gasoline, making the market nervous and forcing prices 
upward, Sternfels said.
    However, Energy Department officials said that while stocks of 
reformulated gasoline were tight nationally 41.4 million barrels, or 
3.3 million barrels fewer than last June--Midwest stocks were at 2 
million barrels, slightly more than at this time last year.
    Robert Perciasepe, the EPA's assistant administrator for air and 
pollution programs, said this week after meeting with officials from 
eight major oil refineries that while gasoline supplies are lower than 
normal nationally, there is enough fuel to keep prices in check. He 
said reformulated gasoline costs only 5 to 8 cents a gallon more to 
produce than conventional gasoline.
                                 ______
                                 
               [From the Washington Times, June 15, 2000]
                          EPA gouges consumers
    The Environmental Protection Agency (EPA) is investigating possible 
``price gouging'' in the Midwest--where the price of a gallon of 
unleaded regular has topped the $2 mark. But the real crime is the way 
EPA imposes multitiered regulatory costs--invisible to consumers--on 
motor fuels. These costs are borne by consumers--who blame the oil 
companies. But they ought to be blaming Federal regulators instead.
    The recent spike in gasoline prices is to a great extent 
attributable to changes in the regulations governing the refining of 
gasoline from crude oil. The new process--by which supposedly 
``cleaner,'' ``reformulated'' gasoline is produced--have driven per-
gallon costs up by a dime or more during the past few weeks alone. That 
and pre-existing regulations governing the way motor fuels are produced 
have added 25-cents or more to the total per-gallon cost of regular 
unleaded. Throw in Federal and State taxes--ranging from 40 cents per 
gallon to more than 75 cents--and one quickly sees why gasoline is 
becoming so expensive. It has little to do with the oil companies--and 
a lot to do with government, at all levels.
    Ostensibly, we do get improvements to the roads from motor fuels 
taxes--so we won't quibble overmuch with them. However, ``environmental 
taxes,'' if you want to call them that, are another matter. These are 
often of dubious benefit--and frequently very expensive to boot. EPA, 
as was pointed out on this page last week, is under no constraint to 
factor in the costs of the regulations it promulgates; it simply issues 
diktats and lets the marketplace worry about how all this will be paid 
for.
    Worse, though, are the unforeseen side effects of EPA's regulatory 
polices. Until quite recently, for example, EPA required the use of so-
called ``oxygenated'' fuels in many areas, most of them heavily 
urbanized, as a means of controlling vehicle exhaust emissions and 
thereby improving air quality. However, one of the chief chemicals used 
to oxygenate the fuel--a compound called Methyl Tertiary Butyl Ether, 
or MTBE--has been identified as a health hazard and contaminant of 
drinking water. EPA had been warned of the potential risks of MTBE--
both before and during its introduction as a motor fuels additive. The 
warnings were ignored. Result? Motorists paid 5 to 10 cents more per 
gallon for oxygenated fuels that not only tainted their water supplies, 
but which did next to nothing to improve air quality. Studies found 
that MTBE/oxygenated fuels had little or no effect on the emissions 
output of late model cars; they simply got worse fuel economy than 
before--because the oxygenated fuels had diminished energy content as 
compared with non-MTBE/oxygenated fuels.
    This object lesson in the sagaciousness of EPA bureaucrats should 
be borne in mind as we contemplate rising gas prices and the 
introduction of the purportedly miraculous ``reformulated'' gasolines. 
The new witches' brew is costing us more at the pump--and may cost us 
something else, too. But we may not know about that until a few years 
have gone by--as happened with MTBE.
    These are things, Mr. Perciasepe, that people are now 
taking a little different attitude toward than they were just a 
month or two ago, and certainly a couple of years ago.
    With that as an opener, we will go ahead and recognize you 
for your opening statement. I think we will have a pretty good 
turnout. They are just not here yet. If you will go ahead and 
start?

STATEMENT OF ROBERT PERCIASEPE, ASSISTANT ADMINISTRATOR, OFFICE 
     OF AIR AND RADIATION, ENVIRONMENTAL PROTECTION AGENCY

    Mr. Perciasepe. Mr. Chairman, first of all, thank you very 
much for the invitation to be here today.
    May I ask one question of the chair, before I continue?
    Senator Inhofe. Yes, of course.
    Mr. Perciasepe. Could I have a few extra minutes, like 2 or 
3 extra minutes to do a little discussion on some of the points 
you made in your opening comments?
    Senator Inhofe. We were going to give you 5 minutes, so 8 
minutes. I appreciate that because I want you to address these.
    Mr. Perciasepe. Thank you, sir. I want to get to the diesel 
thing first and then I will address that.
    Senator Inhofe. When I talked about these, I recognize we 
are not necessarily talking about diesel and diesel is the 
subject for today's hearing but when you talk about MTBEs, 
sulfur and gasoline, which we have already dealt with in 
diesel, it is still all costs and it's all fuel and it's of 
equal concern to the public.
    Mr. Perciasepe. I understand why you are making that point. 
You pointed out one of the points I wanted to start with and 
that is that we have been working on automobile and gasoline 
regulations for many years. As you already pointed out, last 
December we finalized a rule on gasoline, sulfur and automobile 
emission standards to be implemented over the next decade. I 
felt very good about the process we went through and we worked 
very hard with both the automobile industry and the oil 
industry.
    While I don't think we have made everybody completely happy 
in the way that came out, I think we did a job there where we 
tried to recognize the majority of the issues that were brought 
to us. I want to assure the Chair we want to approach the 
diesel rule with that same kind of vigor.
    On a numeric level, we are actually starting closer than we 
did on gasoline. With gasoline, we started at 150 ppm to 30 
ppm, and here we are starting from 50 ppm to 15 ppm, but the 
gulf is bigger as you will hear today in terms of the views of 
this, and I recognize that.
    I need to always give the underlying reasons why we are 
doing this. First of all, from a public health perspective, we 
have 42 areas in the country with 123 million people that are 
at risk of violating the 1-hour ozone standard in 2007 and 
after, 10 areas with 27 million at risk of violating the 
PM10 standard and diesel exhaust is a likely human 
carcinogen at the environmental levels of exposure according to 
a draft assessment that is still going through review. Other 
organizations have made those findings as well.
    On the environmental health side, in the country we have 
broad areas in the West and the East that experience visibility 
impairment; we have forest and crop damage from air pollutants, 
acid rain, and eutrophication of water bodies.
    When we look specifically at the heavy duty fleet--and we 
talk about diesel and gasoline engines in the heavy duty fleet 
but it's well over 90-percent diesel engines--nationwide this 
fleet contributes the emissions about 29 percent of the 
NOX and about 14 percent of the PM in the local 
emissions inventory, but you can see in some cities like 
Albuquerque and Washington that it varies either up or down 
from the national average depending on the local conditions. In 
some cities on very local levels, on bus routes and on truck 
routes, you will find even higher levels of exposure.
    Before we leave that chart, I want to make a very important 
point. I think we try to make this point very clear in our 
proposal. When you look at the diesel engine part of the 
rulemaking that we are in the process of taking public comment 
on, diesel engines are extremely important to the American 
economy. These engines are durable and they are fuel efficient. 
EPA in no way wants to jeopardize the long term use of that 
kind of a power plant for commerce in the United States.
    What we want to do is add the term ``clean'' to that 
description of these engines and that is within our grasp as I 
think you will hear today from some of the witnesses.
    What will happen with our proposal? This is a chart that 
shows up to 2030, the national emission level in millions of 
tons a year of nitrogen oxide with and without the proposed 
standards. You have mentioned the 50 ppm and 75 percent instead 
of 90 percent. Our analysis shows that if we don't get to the 
levels we are talking about and have the kinds of pollution 
control equipment similar to what we have been doing to cars 
for the last 30 years applied to these kinds of engines, the 
technology is only going to get about a 20 percent reduction. 
So you are going to have a line that is up here, not almost 
down here. It is virtually on and off switch.
    So you will hear that a 90-percent reduction in sulfur is 
almost as good as a 97-percent reduction. That is not true, it 
is going to result in a 20-percent pollution reduction instead 
of over 90-percent pollution reduction. It is actually less 
cost effective for overall pollution reduction and it has a 
bigger fuel economy hit, the technologies that are involved 
with that.
    You will see the same kind of effect with PM emissions. I 
will just point out here that one of the things you will also 
hear today is that the equipment to do this isn't really 
available. Again, I don't think that is the case. Soot traps 
that would be able to achieve this are available, have been 
used and they are not used everywhere but with the proper fuel, 
they can achieve these standards.
    On the NOX numbers we saw earlier, the 
technology is now making very good strides in laboratories and 
field tests and also is used on stationary diesel sources.
    What we have in this proposal is a national program for 
heavy duty vehicles. It is a vehicle and fuel regulated as a 
system to optimize the cost-effective approach to reducing 
pollution from these sources. PM standards would apply in 2007 
and the NOX standards would phase in, just like we 
did with the cars, between 2007 and 2010. It has a 15 ppm 
sulfur cap for high weight diesel fuel by June 2006, with some 
implementation flexibilities.
    I want to add that we explore in our proposal many specific 
options for small refiner and farm co-op flexibility. We are 
dedicated to continue working with those groups. We started 
dialog. As we are putting the proposal together, we want to 
work with them through the comment period and afterward as we 
get to the end of the year and we plan to continue to do that 
and work on ideas. I can go into those in the questions and 
answers.
    We also know that now that Europe is looking at between 10 
and 15, Germany has already done that. We believe that the 
technology is enabled by these levels of fuel. You will hear 
that some people think it should be lower as well. Again, we 
are taking comment on all these issues.
    I would like to close here by simply saying, as I opened, 
like Tier II gasoline, sulfur and diesel, we want to work with 
all the stakeholders to build a program that is going to be 
implemented. We think there are ideas out there for additional 
flexibility on how it gets implemented but we want to do it 
right. Some of them could be problematic--we know that--and 
that is why we have yet to put them in the formal proposal but 
we want to work with everybody to work through that.
    I am going to stop there on the diesel. That is an outline 
of why we are doing it, what we think the effects are. If you 
might indulge me for 2 or 3 minutes on the RFG situation, I 
would appreciate it.
    We too are very concerned about the price of gasoline 
related to reformulated gasoline, but I want to give you some 
national statistics from the Energy Information Agency as of 
Monday of this week. I know prices are changing so fast that 
Monday is out of date but I will put it in context back to 
November of last year.
    Conventional gasoline in the United States in November last 
year averaged $1.25. The average across the country of 
conventional gasoline regular grade on June 12, Monday of this 
week, was $1.61, a 29-percent increase since last November.
    RFG was at $1.29 last November and on a national average is 
at $1.67 on Monday, a 29 percent increase. The differential 
increase in RFG average prices in the United States is no 
different than for conventional gasoline. Indeed the $1.67 to 
$1.61 is about what we would estimate the cost differential 
would be in Phase II, about 4 to 8 cents. This varies in 
different areas of the country.
    One last thing I want to point out is that if you look at 
100 percent of the gasoline in the United States on Monday, 70 
percent of it was conventional gasoline. At the regular grade, 
the price was between $1.61 and $1.67. If you take Chicago and 
Milwaukee, about 3.4 percent of the Nation's gasoline--out of 
the averaging system for RFG, RFG in the United States is not 
$1.67 but less than that because you take those two markets 
out. The average price for RFG comes down between $1.63 and 
$1.64 which includes some areas that are using ethanol like St. 
Louis and Louisville.
    We see the problem in Chicago and Milwaukee. We are trying 
to understand more completely why that cost differential 
exists. We still do not believe that it is the cost of 
producing RFG that is causing that differential. We think it is 
more related to other supply issues and preparation in advance 
of the rule implementation date to be prepared for the demand.
    We are going to continue working with the Department of 
Energy on that but I want to make it clear that the prices of 
gasoline rising in the United States are not because of the RFG 
implementation that started on June 1.
    I will stop there.
    Senator Inhofe. Mr. Perciasepe, we have a statement from 
the Coalition of Sixteen Refiners, led by Gary Williams, which 
is located in Oklahoma. I am entering their statement in the 
record and I will read part of it to you:
    ``We worked diligently with the SBRFA panel to outline the 
complex range of problems and circumstances facing the small 
refiner group and to underline as strongly as possible that 
there is no one solution that will enable all small refiners to 
survive.
    ``Although we appreciate EPA's discussion of small refiner 
issues in the preamble to the rulemaking, we are extremely 
disappointed and concerned that the proposed rule itself 
included no accommodations for those companies. It is mentioned 
in the preamble but not in the rule itself.
    ``We must have a menu of options which recognizes small 
business refiners' varying circumstances. Most importantly, we 
must have help in accessing the capital required to install 
this desulfurization equipment through tax credits, loan 
guarantees and other incentives.''
    They go on to say, ``The extraordinary costs involved will 
result in some refinery shutdowns, reduced domestic refining 
capability and less competition in the marketplace.''
    I guess I would ask what are your ideas within the rules 
that you are discussing right now, and what help is there for 
these people because what you just said talking about the 
effect of price, to me the greatest effect is going to be when 
we end up having to shutdown or move refineries elsewhere and 
so the supply drops and obviously the demand is still there and 
the price is going to go up very dramatically. What is your 
thinking?
    Mr. Perciasepe. We are as committed to small refinery 
flexibility as we were when we did the gasoline sulfur rule. It 
obviously is a more difficult challenge with the diesel 
desulfurization program.
    The rule does include a general hardship provision now 
which was something that was discussed in the SBRFA panel and 
something we did in the proposed rule and something we did on 
the gasoline sulfur rule. As that letter said, it was hard to 
coalesce around any set of silver bullets for the appropriate 
flexibility for small refiners and I want to throw farm co-ops 
into that also because we have had some unique discussions with 
them as well.
    Senator Inhofe. We will have them represented in the next 
panel.
    Mr. Perciasepe. So what we have done is we've tried to take 
the menu that was developed from that process of ideas and 
develop them further through the comment process. We are 
obviously going to have to get back and work on that.
    There was the general hardship provision that was included 
in the proposal but some of the ideas that are in the proposal 
include things and every one of these has problems, I don't 
want to say any of these are silver bullet, but some include 
voluntary phase-in ideas where you don't have to have 100 
percent of this fuel on day one.
    We didn't put that in the proposal and you are going to 
hear people worried about it today, but we didn't put that idea 
in the proposal because we think we need to do a lot more work 
to figure out how that would work and not create more problems 
than it solves.
    Senator Inhofe. But wouldn't it be a good idea to extend 
the comment period then. If more work needs to be done, you 
need to also have more input to assist you with that?
    Mr. Perciasepe. I think we have a pretty lengthy comment 
period and public hearings all around the country. The comment 
period is going to go well into August. We've developed these 
ideas pretty extensively in the preamble and laid out how they 
might work.
    Let me get to one of the other ideas which I think has some 
merit. Because of the nature of desulfurization of diesel fuel 
and the relationship to the control technologies on the 
compression-ignition-type engines, we are talking about the 
fuel specifications with respect to the control technologies. 
In gasoline, if there is a variability in the fuel, one can 
factor in a differential performance of the control 
technologies. For diesel, it is an ``on/off switch,'' and it 
could cause problems with the operation of the engine. We do 
not want to do something that is going to cause a durability or 
performance standard problem in the field. These vehicles have 
to perform.
    One of the ideas we are looking at is for certain 
categories of refiners perhaps to provide an additional 
flexibility on gasoline where a small volume of that being 
delayed even further might be able to provide the ability to 
sequence these more appropriately at that individual refinery. 
This is an idea we are also taking comment on. I am just trying 
to give you some of the ideas.
    Senator Inhofe. Yes, you have ideas of things you are 
working on right now but I guess my question would be, when you 
get all this figured out, why then wouldn't it be a good idea 
to go ahead and reissue and allow a comment period then because 
they would have a better idea of what to comment on when you 
develop this a bit further? You have decisions to make that 
aren't made yet.
    Mr. Perciasepe. We have made commitments to build 
flexibility into the rule. We have outlined the approaches that 
we think are worthy of continued work. We think we are going to 
get quality comments on those and whether or not there needs to 
be any kind of reproposal or supplemental proposal will be 
determined by the Administrative Procedures Act.
    Senator Inhofe. There are a couple of members that are not 
here. One was wanting to talk about the technology review. Let 
me kind of shift to that.
    In your testimony you mentioned that the 
NOX adsorbors ``have not yet developed to the point 
where they are being used in demonstration fleets.'' In fact, I 
understand you built into the rule a technology review in 2003 
to determine if the technology will be available at that time. 
Is that correct?
    Mr. Perciasepe. It is in the preamble. We don't have it in 
the proposed rule. We suggest in the preamble that this is an 
option that we might want to hear about in the comment period 
and we want to hear from the manufacturers of the equipment on 
what they think about this concept.
    We did the exact same thing in the desulfurization of 
gasoline and the control technologies for Tier II cars. We put 
in the preamble the idea of a technology review. We got lots of 
comment on it. At the end, there was an agreement that it 
wouldn't be worth doing. On this one, we are not at that point 
yet. There are good arguments for doing it and there are 
arguments for not doing it.
    Senator Inhofe. The refiners to manufacture the low sulfur 
diesel, they are going to need to start the process by 2003. If 
you determine that the technology would not be available for 
control devices, what happens to the costs that have already 
been incurred by those refiners starting in 2003?
    Mr. Perciasepe. You have raised a very important issue that 
is involved with the technology review. One of the reasons--not 
the only one--we ultimately did not do it in Tier II, is that 
when you start doing fuels and vehicles as a system, you sort 
of have to keep everybody on a schedule of working together. If 
there is to be a technology review, we would have to figure out 
how to make sure that the eventuality you raise is avoided.
    Senator Inhofe. Why wouldn't it be a good idea to develop 
the technology first and do the technology review first and 
then decide if the low sulfur regulations are needed? It seems 
to me like it's the cart before the horse. We have some 
uncertainties here and yet people are going to be preparing for 
these. Again, all these things that take place are going to be 
passed on to the public, to the consuming public. What is wrong 
with that idea, developing the technology first before coming 
to the conclusions?
    Mr. Perciasepe. We think these technologies are developed 
enough today that we are highly confident that they will be 
available in 7 years. We wouldn't propose it if we weren't 
confident they were. In fact, the Clean Air Act requires that 
we make a determination that these technologies will be 
available in the year that the implementation takes place.
    Senator Inhofe. But they are not now?
    Mr. Perciasepe. Will be available. You will hear testimony 
and probably have it that the people who make this equipment 
are confident as well.
    Senator Inhofe. We have written testimony. We have a little 
problem in Chicago and I don't have the list of who is not 
going to be here, but there are three or four who are not, some 
are replacements here but there is a weather problem 
apparently.
    One of the individuals who will not be here from the Farm 
Coops who I think will be represented by someone else has 
written testimony on the second panel wherein he said,

    It is important to understand that even though the proposal 
is for on-highway diesel, the rule also adversely impacts farm 
and other off-highway users of diesel fuel. It has been our 
experience that much of the petroleum storage system, 
particularly in the rural market served by our cooperatives is 
generally capable of handling only one grade of diesel, so they 
don't have the capacity to do the on-road and off-road diesel.

    It goes on to say, ``For these reasons, we strongly urge 
that the rule be withdrawn until serious unresolved issues can 
be addressed.'' That is a specific issue that he or his 
representative is going to be addressing.
    Have to ask again, why is there such a rush on this rule? 
We have a lot of agricultural concerns and concerns like this 
one that may be you have an answer to. How are you going to 
handle this? In those parts of the country--certainly we have 
probably an inordinate number of those areas in my State of 
Oklahoma--what are we going to tell these people?
    Mr. Perciasepe. We have spent time and we are going to 
spend more time on that specific issue. When the diesel on-road 
went from several thousands of parts per million down to 500 
ppm in the last decade, exactly what you outlined in that note 
occurred at these providers and producers. They took their off-
road and on-road and everything down to 500 ppm just by way of 
their product distribution and customer system.
    They have raised this issue with us and we have met with 
them several times. We have discussed some ideas and we are 
going to continue to work with them before we finalize the rule 
to try to work out a solution.
    Our objective here is not to find a way to reduce the 
production of diesel fuel that meets these specifications in 
the United States. If anything, we are going to need more of 
it. I think you pointed out that in your opening comments. 
There are going to be more trucks, more buses. We think these 
engines are fuel efficient and want more of them used. We may 
see more of them, at least from plans by some of the auto 
companies, in the light duty fleets.
    We want specifications that are going to enable these 
vehicles to be clean but what we don't want is refineries not 
making this product. So the demand is going to go up and we 
want to be able to make sure that demand is met by cleaner 
fuel.
    Senator Inhofe. However, you come to a resolution of the 
problem like the one we just brought out, don't you think we 
ought to then have another notice and comment period because 
they are dealing with new ideas and there is no way for them to 
anticipate right now what solutions to these problems you will 
have and how they might want to comment about these problems.
    Mr. Perciasepe. I guess all I can tell you is we don't 
anticipate that particular problem at this time.
    Senator Inhofe. I can remember when we were talking about 
the ambient air issues we discussed for a year-and-a-half, most 
of that I think was before you were in this position, but I was 
critical of the EPA for not using some of the facilities they 
have, some of the resources they have and specifically CASAC of 
some 21 scientists that at that time, as I recall, only two of 
them agreed with the ambient air proposed rule change. So they 
are pretty much ignored in the EPA's last draft of its health 
assessment document for diesel emissions dated November 1999.
    CASAC wrote,

    In a February 4, 2000 letter summarizing its concern with 
this assessment, CASAC cited the need for strengthening the 
linkages between diesel PM emissions and health hazards.

    How has the agency addressed CASAC's concern with this 
assessment?
    Mr. Perciasepe. We expect our Office of Research and 
Development to complete that work by the end of the year with 
CASAC.
    Senator Inhofe. By the end of the year?
    Mr. Perciasepe. I don't know the exact schedule.
    Senator Inhofe. I guess all my questions are getting around 
to why the rush. I know you are going to have to deal with or 
respond to CASAC's concerns.
    Mr. Perciasepe. And we will respond. CASAC raised a bunch 
of important issues. We are working on those issues, but it is 
not going to change the underlying--I have just been told that 
by June we expect to get a report to CASAC in June so I guess 
it is sooner than I thought. Obviously, they are going to have 
to review and there will be some process.
    We understand what their issues are and based on everything 
I know, I believe they will be addressed in the followup report 
that the Office of Research and Development is doing.
    I want to point out there are other organizations out there 
that are looking at this issue. It is not just EPA.
    Senator Inhofe. Right now you are talking about coming out 
in December, correct, when you want to get all this done?
    Mr. Perciasepe. Yes, that is our current schedule.
    Senator Inhofe. As it happens, there is going to be an 
election in November and it might very well be that there will 
be a change in administration in January. It would seem to me 
whoever is the next administration, they might have a different 
view on this and I can't see anything wrong with if there is a 
month delay, it won't bother me a bit.
    Mr. Perciasepe. I will only say I appreciate that thought 
but I plan to work full bore until January 20 whatever it is.
    Senator Inhofe. There are other questions that will be 
asked for the record. I think the committee members are waiting 
for this vote to take place before they come here from the 
Capitol.
    We will go ahead and dismiss the first panel. I appreciate 
very much the time you have given us here. I have enjoyed 
working with you.
    Mr. Perciasepe. Thank you very much for that.
    Let me just say to my colleagues in industry here, we plan 
to work pretty darned hard with them to try to find a way to do 
this. I know we have some bridges to cross.
    Senator Inhofe. My concern is it is a tough one to deal 
with and in my own mind, I know there are political 
considerations, not with you, but with others who are in a 
bigger hurry than I am to get some of these things done. So we 
will probably get some reaction from the next panel.
    If the next panel would come to the table. Panel II 
includes: Mr. J. Louis Frank, president, Marathon Ashland 
Petroleum; Mr. Jerry Thompson, senior vice-president, 
Development & Technological Excellence, CITGO Petroleum; Mr. 
Robert I. Looney, Government Affairs, Cenex Harvest States 
Cooperative on behalf of the National Council of Farmers 
Cooperatives; Mr. David Addington, senior vice-president and 
general counsel, American Trucking Association; Mr. Bruce 
Bertelsen, executive director, Manufacturers of Emission 
Controls Association; and Mr. James A. Haslam III, chief 
executive officer, Pilot Oil Corporation. The Engine 
Manufacturers could not be here so we have six instead of seven 
who are here today.
    Mr. Frank, if you would like to go ahead and give your 
testimony. Your entire testimony will be entered into the 
record as all of you know. Try to confine your remarks to 5 
minutes and it would make it much easier.

   STATEMENT OF J. LOUIS FRANK, PRESIDENT, MARATHON ASHLAND 
 PETROLEUM, LLC, ON BEHALF OF THE AMERICAN PETROLEUM INSTITUTE

    Mr. Frank. I am J. Louis Frank, president of Marathon 
Ashland Petroleum. I am here today to testify on behalf of the 
American Petroleum Institute.
    The energy industry asks that you carefully consider our 
views on the EPA's recently proposed diesel sulfur regulations. 
First, understand that we support reducing sulfur content in 
diesel fuel. This is an area where fuel producers can make a 
positive contribution.
    U.S. air quality has benefited because of and in proportion 
to the extent that we have formulated fuels to cut tailpipe and 
exhaust stack emissions. EPA's statistics prove that nearly 
two-thirds of America's air quality improvement is due to clean 
fuels and clean engine technology. Moreover, the improvement 
has been steady and is ongoing and I am proud of that result.
    Please note there was no magic involved, no instant 
alchemy. It was a painstaking process of finding what worked 
technically, economically and commercially. We do this for a 
living. We cannot afford to be wrong. Costs and benefits have 
to balance and that goes to the heart of the industry's 
contention that pushing beyond a 90-percent reduction in diesel 
fuel puts wishful thinking ahead of market reality.
    EPA's case is based on the use of fuel technology that 
still remains unproven. This is technology which EPA admits has 
not advanced from the chalkboard to the field trial stage. In 
preliminary tests, the EPA recommended technology that has 
failed to hit the target emission levels. Regardless of fuel 
sulfur content, industry knows how to hit the 15 ppm standard 
but we also know that volumes are cost constrained. Many 
refineries will choose not to produce this product.
    Any trucker or fleet operator can tell you what that will 
do to their business. Our estimate is that EPA's proposal would 
add about $2,500 to the cost of a trucker's annual operations 
just for the hardware and investment at the refinery alone. 
Fuel availability could shrink by as much as 20 percent.
    Real world constraints will also affect our ability to 
maintain the 15 ppm standard through thousands of miles of 
pipeline shipment. Terminal storage and station disposition, 15 
ppm is equivalent to less than a tablespoon of water in an 
olympic-size swimming pool.
    Contamination at the molecular level could endanger this 
fragile standard. The reality is that refiners would actually 
have to reduce levels below 15 ppm to have a reasonable 
assurance that product stayed on spec throughout the entire 
logistical system to the truckers fuel tank.
    EPA has raised the possibility of phasing in its sulfur 
requirements to mitigate their impact. This would necessitate 
purchasing additional tanks, piping and pumps to ensure 
separation throughout the entire distribution system and that 
the standard could be maintained.
    To accommodate the sale of these two varieties of diesel 
fuel rather than one, the bottom line is less efficiency and 
more costs. The question is, can it be justified.
    I am saying to you on behalf of America's energy industry, 
that we are prepared and have supported a 90-percent reduction 
in diesel fuel sulfur level knowing full well what that entails 
in terms of production costs, quality maintenance and capital 
investment. We support this reduction and we understand its 
potential health benefit.
    This is not a poker game. We are not arguing over table 
stakes. Anyone can demand too much, too soon. Setting an 
appropriate regulatory standard however, demands wisdom, 
courage, and care.
    Thank you very much for your consideration and letting me 
testify here today.
    Senator Inhofe. Thank you.
    Mr. Thompson, nice to have you here from Tulsa.

STATEMENT OF JERRY THOMPSON, SENIOR VICE PRESIDENT, DEVELOPMENT 
          & TECHNOLOGICAL EXCELLENCE, CITGO PETROLEUM

    Mr. Thompson. Thank you.
    My name is Jerry Thompson, senior vice president CITGO 
Petroleum Corporation, a major refiner and marketer of 
petroleum products in the United States. I am also chairman of 
the National Petrochemical Refiners Association, a trade 
association of virtually all large and small refiners and 
petrochemical producers.
    NPRA is deeply concerned about the impact of EPA's new 
diesel sulfur proposals. We do not believe it is possible to 
consistently maintain needed supplies of highway diesel with 
the 15 ppm sulfur cap. Although some refiners may be able to 
produce some amount of this diesel, many would be forced by its 
high cost to limit or forego participation in the highway 
diesel market. This would reduce supplies well below those 
available under a more realistic sulfur cap.
    In addition, it would be extremely difficult to deliver 
highway diesel with a 15 ppm sulfur cap to consumers. This 
highway diesel must share a distribution system with other 
products that have significantly higher sulfur levels.
    At the 15 ppm sulfur cap, there will be a significant 
amount of highway diesel that will have to be downgraded to a 
higher sulfur product due to product contamination at the 
interfaces. With the enforcement at retail as opposed to the 
refinery gate, refiners will be forced to target their 
production to 7 to 9 ppm sulfur to account for test tolerances 
and reproducibility.
    In short, NPRA views EPA's proposal as a blueprint for fuel 
shortages and severe economic impacts. It threatens to leave 
American consumers a legacy of scarce and unnecessarily costly 
energy supplies.
    Throughout protracted discussions with EPA, the refining 
industry suggested a more reasonable way to reduce diesel 
emissions. We favor lowering the current 500 ppm diesel sulfur 
cap to 50 ppm, a 90-percent reduction. This would enable diesel 
engines to meet the particulate matter standards sought by EPA 
and also achieve significant NOX reductions.
    Our plan is still expensive. We estimate it will cost the 
industry roughly $4 billion to implement, but unlike EPA's 
extreme and much more costly proposal, this level of sulfur 
reduction is sustainable. Most refiners would choose to make 
the more affordable investments needed to make a 50 ppm diesel.
    EPA's program offers sharp contrast. Some refiners would 
invest in the expensive new equipment necessary to produce 15 
ppm diesel. Many others would be unable to make these large 
investments necessary to produce this product. They would find 
other uses or markets for their current diesel output which 
will significantly reduce the supply of highway diesel fuel 
available and will create price volatility.
    Up to 30 percent of the current supply of highway diesel 
could be lost until additional investments are made and 
desulfurization capacity is built. This could take as long as 4 
years. Some refiners could likely go out of business.
    EPA's diesel proposal is estimated to cost somewhere 
between $8 and $10 billion. This amount comes on top of the $8 
million in cost the industry is already incurring to implement 
EPA's gasoline sulfur program in the very same timeframe.
    A study to be released next week by the National Petroleum 
Council concludes the industry will not have the capability to 
make these investments within this timeframe and that 
additional time is required for the low sulfur diesel 
investments.
    The industry's warnings about this rule are well founded. 
We, at CITGO, have some relevant real world experience. In the 
EPA's proposed rule, our facilities at the Lyondell CITGO 
Refinery are referenced as having a diesel desulfurization 
technology capable of producing the 15 ppm diesel fuel. We find 
based on our actual operating experience with the referenced 
technology, the capital and operating costs are much higher at 
the 15 ppm sulfur cap than has been implied in the proposal and 
the ability of this technology to consistently produce below 15 
ppm diesel is problematical.
    The feedstocks of this revamped facility are 30-percent 
straight run stocks from crude distillation and 70-percent 
crack stocks from conversion units. These crack stocks are 
significantly more difficult to treat to the 15 ppm level. Our 
operating data shows that to consistently desulfurize to 15 ppm 
or below, a significant portion of crack material must be 
removed from the feed thereby reducing our diesel production by 
this amount.
    We spent $86 million to revamp this existing 50,000-barrel-
a-day unit. This is significantly higher than the $30-million 
revamp cost that is in the EPA proposal for a typical refinery 
processing light cycle oil. The unit meets the 15 ppm sulfur 
cap at initial conditions at start of run, however, at the 
proposed 15 ppm sulfur cap with 70-percent crack material, the 
cycle life of the catalyst is greatly reduced from current 
operation of 24 months to 8 months.
    This significantly raises the operating cost by more 
frequent catalyst replacement and more frequent shutdown. It 
also results in a loss of diesel production. The more frequent 
catalyst change-outs to meet 15 ppm sulfur cap raises the cost 
of diesel production by as much as 7 cents per gallon on our 
existing unit. So you see, that which looks simple in theory 
doesn't always work in practice.
    EPA argues that its extreme proposal is needed to enable 
heavy duty engines to meet the stringent 
NOX standards in the 2007 timeframe. Of course that 
NOX standard was arbitrarily selected by EPA. It is 
considerably lower than NOX standards for the same 
period in Europe or Japan and is probably unrealistic. Still 
EPA's $10 billion plan for 15 ppm diesel is largely based upon 
this arbitrary and unobtainable target.
    NPRA is strongly urging EPA and this subcommittee to reject 
that approach and favor the more practical and sustainable 50 
ppm diesel sulfur cap which the refining industry advocates.
    Thank you for the opportunity to appear and I look forward 
to answering your questions.
    Senator Inhofe. Thank you, Mr. Thompson.
    Mr. Looney.

   STATEMENT OF ROBERT J. LOONEY, GOVERNMENT AFFAIRS, CENEX 
 HARVEST STATES COOPERATIVE, ON BEHALF OF THE NATIONAL COUNCIL 
                     OF FARMER COOPERATIVES

    Mr. Looney. Thank you.
    I am going to be speaking on behalf of Mr. Eischens who was 
unable to make it due to cancellation of his flights.
    Mr. Eischens is a fourth generation farmer from Mineota, 
MN, and he was going to be here today to speak on behalf of the 
National Council of Farmer Cooperatives but more importantly, 
he was going to speak as an elected director of Cenex Harvest 
States Cooperatives which is a regional cooperative in about 18 
States. He is also a member of a local cooperative and also a 
farmer. I would like to read his statement.
    Cenex Harvest States Cooperative is one of only four 
cooperatives in petroleum refining. We have a small refinery in 
Montana and majority ownership of a refinery in Kansas. 
Cooperatives are uniquely accountable in the petroleum business 
in that the customer is also the owner. Farmers have invested 
heavily in cooperative petroleum operations to help assure 
reliable and affordable fuel supplies. Cooperatives supply 
about 40 percent of on-farm fuel use and are the only remaining 
suppliers in many rural communities.
    Curt is also a local co-op member, one of our thousand co-
ops that own petroleum tankage that will have to bear the cost 
of any new tankage requirements. Curt is also a family farmer, 
one of 325,000 member owners in Cenex Harvest States 
Cooperatives who could bear the bulk of the costs imposed on 
our regional and local co-operatives and personal costs if 
increased tankage is required on the farm.
    One might wonder why a farmer was to be here today to 
express concerns with EPA's proposed rule for on-road diesel. 
Many, including key people in the Federal agencies, believed 
until recently that agriculture would not be affected by this 
on-road standard. The fact of the matter is, this on-road 
proposal adversely impacts agriculture in a number of ways.
    First, we are concerned that an ultra-low standard for 
sulfur and diesel fuel will increase the threat of supply 
disruptions in rural America. Agriculture's fuel supply cannot 
be placed at risk.
    Second, most of the off-highway diesel fuel in rural 
America will be forced to the new highway standard because much 
of the diesel storage system, particularly in rural markets 
served by our co-operatives, is capable of adequately handling 
only one sulfur level per grade of diesel fuel which will be 
determined by the new standard for highway diesel.
    Any mandate or option for two on-highway low sulfur diesel 
fuels could impose major and unacceptable costs on local co-
operatives or force local co-operatives to choose which 
customers to lose.
    Third, these distribution limitations mean that our farmer-
owned refineries will be forced to go to the ultra-low on-road 
standard even though most of our market is off-road for farm 
uses.
    Fourth, diesel fuel costs for farmers in rural America will 
increase 10 cents or more per gallon with higher price spikes 
in the event of tight supplies or disruptions.
    Fifth, co-operative investments involve farmers' money. We 
don't know how we will be able to afford it especially during 
difficult times like farmers are now experiencing. Any costs 
incurred by co-ops, especially regulatory requirements, are 
borne by the farmers as a heavy penalty. How? There are three.
    First, it is extremely difficult for us to generate the 
necessary capital for large expenditures like this rule would 
require. Co-ops are prohibited from issuing stock in the equity 
markets and during these difficult economic times, it is 
particularly difficult for us to borrow these funds.
    Second, farmers get no return on this investment and it 
consumes scarce funds desperately needed for investment in 
projects to improve farm income.
    Third, in the end, farmers bear the burden both through 
higher diesel fuel costs as customers and reduced patronage 
from their co-ops as owners.
    Agriculture's concern is widespread and growing as 
demonstrated by the Ag Coalition letter which is in the packet 
with the written testimony containing nearly 30 organizations 
representing many facets of agriculture that has been submitted 
for the record.
    Farmer co-operative representatives have been working with 
EPA quite extensively and we appreciate the agency's 
recognition of the unique structure and challenges for farmer-
owned co-operative refiners as well as possible compliance 
flexibility options.
    However, we believe that the proposal goes too far, too 
fast, and has failed to consider the major real world impacts 
on agriculture and rural America. This is why the National 
Council of Farmer Cooperatives recommends that the rule be 
withdrawn and reconsidered.
    We urge that Congress direct EPA and USDA to study and 
address the potential impacts of EPA's proposal on the 
availability and cost of diesel fuel for farmers in rural 
America as well as the effects on the performance of 
agricultural equipment. In 1985, Congress took similar action 
on unleaded gasoline. I have a copy of the section of the law 
that was passed by Congress in 1985, and would hope that 
Congress would do something similar in the next legislation for 
this rule.
    In closing, the National Council of Farmer Cooperatives 
recommends that any final rule include the following basic 
elements. We would like a sulfur cap of 50 ppm; no phase-in or 
requirement to low-sulfur diesel fuels and maximum compliance 
flexibility for co-operative refiners.
    Just as farmers need and want cleaner air, we also require 
reliable and affordable fuel supplies. On behalf of farmer co-
operatives, Curt Eischens' family farm in Minnesota and other 
farm families across rural America, I urge Congress to help 
ensure that EPA doesn't move too far too fast.
    Senator Inhofe. Thank you, Mr. Looney.
    You mentioned some 30 farm organizations and you made a 
recommendation. Are you speaking for any other than yours or 
are you speaking for all these organizations?
    Mr. Looney. The recommendations reference the study on 
agricultural machinery which is from the National Council of 
Farmer Cooperatives and its members. It is not necessarily from 
the list of 30 organizations.
    Senator Inhofe. Thank you.
    Mr. Addington.

  STATEMENT OF DAVID S. ADDINGTON, SENIOR VICE-PRESIDENT AND 
     GENERAL COUNSEL, AMERICAN TRUCKING ASSOCIATIONS, INC.

    Mr. Addington. Thank you.
    We appreciate the opportunity to appear before the 
subcommittee today to express our serious concerns with the new 
regulations on diesel engines and fuel proposed by the EPA on 
June 2, 2000. The membership of ATA, like other Americans, 
supports the objective of clean air.
    We believe the Government should base its efforts to 
achieve clean air on sound science, public safety and the needs 
of the American economy. I will describe the trucking industry 
and some key problems the EPA rule poses for our industry and 
for the American economy.
    The American Trucking Associations is the national trade 
association for the trucking industry with more than 2,500 
motor carrier companies who are our members and who operate in 
every State in the Union.
    Trucking is vital to the Nation's economy. Trucks move the 
majority of the freight that moves in America. Seventy percent 
of America's communities depend exclusively on trucks to 
receive freight. EPA regulations affecting trucking operations 
therefore have a direct impact on a huge segment of the 
American economy.
    Although some trucking companies are multibillion dollar 
companies whose names you know, most of the trucking industry 
is small business. According to the Department of 
Transportation, almost 50 percent of motor carriers have only 
one truck and a full 95 percent of motor carriers, almost 
395,000 of them, have 20 or fewer trucks.
    The EPA proposal has three major problems. It discriminates 
against on-road sources of diesel, that is vehicles on 
highways, in favor of off-road sources. It bets our future on 
unproven technologies. It forces substantial costs on the 
trucking industry and the economy as a whole.
    Regarding discrimination, the off-road sources of diesel 
emissions, such as locomotives, boats, utilities, and 
generators produce, emit more of the troublesome emissions than 
on-road sources. Yet, EPA has singled out with this rule the 
diesel fuel truck for tighter restrictions.
    EPA's decision to single out on-road diesel emission 
sources is unjustified. Indeed, EPA did not even try to justify 
it. EPA simply said they ``plan to initiate action in the 
future to formulate thoughtful proposals covering both non-road 
diesel fuel and engines.'' The EPA should initiate a thoughtful 
proposal now and cover non-road diesel emission sources.
    The trucking industry has contributed substantially to air 
quality improvements in the United States in the past decade. 
It is time for others to do as much as we have already done.
    On technology, EPA wants trucks to employ after-treatment 
methods to reduce emissions that employ technology that is not 
field tested and proven. EPA is placing a risky bet that 5 
years from now the technology will be ready to go. EPA should 
not impose radical changes in diesel engine and diesel fuel 
standards unless and until it knows the necessary technology 
works.
    On costs, the EPA's own estimates say the proposed rule 
will add $2,768 to the cost of a new heavy duty truck and over 
the life cycle of that truck, another $3,362, for a total of 
more than $6,000 per truck. EPA also says its rule will add 
about 4 cents to the cost of a gallon of highway diesel fuel. 
Even these EPA estimates of the increased truck costs and 
increased fuel costs would be difficult for many in the 
trucking industry to bear. The refining industry tells us that 
EPA actually has grossly under-estimated the increase in the 
price of diesel fuel that will result from this rule.
    Finally, the refining and distribution industries have told 
us that it will be extremely difficult to maintain the purity 
and distribution of the new on-road diesel fuel and that they 
cannot guarantee uniform, nationwide availability of the 
product. If the new fuel is not available everywhere like the 
old fuel, it will be a disaster for the trucking industry and 
the economy.
    The subcommittee asked me to address the EPA rules on 
diesel engines and fuels, and I am pleased we had that 
opportunity. But I would be remiss if I did not draw to the 
subcommittee's attention that this rule is only one front of 
the current three-front regulatory war that this Administration 
is waging on the trucking industry. Like the diesel rule, the 
rules on the other two fronts, the Department of 
Transportation's proposed rule on truck driver hours of service 
and OSHA's proposed rule on ergonomics, also are based on 
flawed science, flawed economics and unfair government 
favoritism toward our industry's competitors.
    On all three fronts, hours of service, ergonomics and 
diesel, the trucking industry faces extraordinary costs as a 
result of government mandates. I would point out they are the 
functional equivalent of taxes and nobody in Congress has voted 
on them; they are being imposed through the three 
bureaucracies.
    Because the economy has been so good to so many Americans 
in the past decade, and we are all thankful for that, many 
people overlook the fact that margins in the trucking industry 
have been extremely low. Trucking companies that already have a 
tough time meeting the payroll and making any money simply 
cannot bear the cost of new regulations that the Administration 
wants to impose, in its closing days, on our industry.
    We appreciate the opportunity to appear before you and 
would be pleased to answer questions.
    Senator Inhofe. Thank you.
    Mr. Bertelsen, you are kind of alone here and if this goes 
through, you may be the only beneficiary at this table. Since 
Mr. Keller, the engine manufacturer's witness could not come, 
feel free to take his time also if you need additional time.

STATEMENT OF BRUCE BERTELSEN, EXECUTIVE DIRECTOR, MANUFACTURERS 
                OF EMISSION CONTROLS ASSOCIATION

    Mr. Bertelsen. Thank you, Mr. Chairman.
    I think if the rule goes through, the real beneficiaries 
are going to be the American public.
    My name is Bruce Bertelsen and I am the executive director 
of the Manufacturers of Emission Controls Association. We are 
very pleased to have the opportunity to participate in today's 
hearings on the proposed sulfur diesel requirement and how it 
relates to the important issue of reducing emissions from 
diesel powered engines and vehicles.
    We believe an important opportunity exists to significantly 
further reduce emissions from highway, heavy duty diesel 
engines by using an engineered systems approach which 
incorporates and combines advanced engine designs, advanced 
emission control technology and very low sulfur diesel fuel.
    EPA's recently proposed regulatory initiative recognizes 
the importance of promoting the systems type approach and if it 
is finalized, we believe it will bring about the age of the 
truly clean diesel. That is my reference with regard to the 
benefit to the public because I think that is the objective 
that we all would like to achieve. We may disagree on what is 
necessary to be done but I think we all agree sitting at this 
table that it is important to achieve the goal of the truly 
clean diesel engine.
    I think achieving that goal fairly presents significant 
challenges to the engine manufacturers, to the emission control 
manufacturers and certainly to the oil industry. We believe if 
we work together these challenges can and will be met.
    MECA is a nonprofit association made up of the world's 
leading manufacturers of motor vehicle emission controls. Our 
membership has over 30 years of experience and a proven track 
record in developing and commercializing exhaust control 
technologies for motor vehicles.
    Our comments today are based on work being performed by our 
members, their extensive experience in the field of motor 
vehicle catalysis and a growing body of technical data that is 
beginning to emerge. We believe the emission standards of a .2 
NOX and 0.01 particulate matter or PM standard 
proposed for highway diesel powered, heavy duty engines can be 
achieved in a cost-effective manner within the lead time 
provided, if fuel with sulfur capped at 15 ppm is available.
    Sulfur in fuel adversely affects the performance of all 
catalyst-based emission control technologies. The impacts range 
from reducing the effectiveness of these controls to rendering 
certain catalyst-based controls ineffective.
    While we continue to recommend that EPA establish a sulfur 
cap of 5 ppm, our members believe that with a sulfur cap of 15 
ppm, emission control strategies can be developed to meet the 
proposed emission limits. Specifically, with a 15 ppm cap, our 
members are extremely confident that all catalyst-based filter 
technologies can be designed to help meet the 0.01 PM standard 
and that NOX adsorbor technology will be optimized 
to help meet the 0.2 NOX standard.
    To give a little background on the status of the technology 
because this is something that has been raised by several of 
the speakers and discussed, with regard to diesel particulate 
filters, they are commercially available today. The only 
remaining engineering effort is to optimize the filter system 
for the specific engine to which it will be applied. Worldwide, 
there are over 20,000 PM filters that have been equipped on 
diesel engines.
    The difficulty with sulfur is that it reduces the PM 
control efficiency of the filter because sulfur in the fuel is 
converted to SO3 over the catalyst and becomes a 
sulfate which is measured as a particulate. In addition to the 
increase in sulfate, the level of sulfur in diesel fuel 
adversely affects the temperature at which regeneration of the 
filter occurs. Regeneration is basically when the particulate 
which has been trapped in the filter is combusted or destroyed.
    Failure to achieve this proper regeneration can adversely 
affect the performance and durability of the filter system. 
Therefore, the impact of sulfur in raising the regeneration 
temperature is a significant issue.
    Operating experience with filter technology in Europe with 
less than a 10-ppm sulfur diesel fuel demonstrates that proper 
filter regeneration will occur even when these vehicles are 
operated in areas such as Sweden where there are low ambient 
temperatures. Some of these vehicles have achieved hundreds of 
thousands of miles equipped with filters and are getting very, 
very effective PM control.
    With regard to NOX adsorbor technology, the 
development and optimization work with NOX adsorbor 
technology is progressing at a rapid rate and our members 
believe that with the availability of very low sulfur diesel 
fuel, this technology will be commercialized in the 2007 
timeframe for diesel engines. While sulfur levels above 5 ppm 
present additional design challenges for 
NOX adsorbor technology, companies developing this 
technology believe that with the considerable R&D efforts 
already underway, NOX adsorbor technology will be 
optimized to operate with a cap of no higher than 15 ppm 
sulfur.
    Another NOX control technology is selective 
catalytic reduction for NOX control. This is another 
technology that is being developed and we expect that it will 
be commercialized in the near future.
    SCR technology that uses an oxidation catalyst to 
facilitate the NOX reduction component of the 
technology to achieve very, very high NOX control 
levels requires the same low sulfur levels as the 
NOX adsorbor. There are other SCR technology designs 
that are less sensitive to sulfur but even these technologies 
with the availability of very low sulfur fuel, are able to 
optimize these technologies to achieve the highest 
NOX reductions and allows for full optimization of 
the engine and exhaust control technology.
    In conclusion, again, we believe that working together in a 
true partnership, the objective of the truly clean diesel can 
be achieved. Our industry is prepared to make the necessary 
investments to help ensure that the desired emission reductions 
are achieved.
    Thank you and I would be happy to answer any questions.
    Senator Inhofe. Thank you.
    Mr. Haslam.

 STATEMENT OF JAMES A. HASLAM, CHIEF EXECUTIVE OFFICER, PILOT 
                        OIL CORPORATION

    Mr. Haslam. Thank you.
    I am CEO of Pilot Corporation, a family owned, private 
company headquartered in Knoxville, TN. Pilot does not make 
diesel fuel, we strictly sell diesel fuel. Our company owns and 
operates 180 travel centers and convenience stores in 37 States 
stretching from Connecticut to California, from Wisconsin, 
south to Florida and Texas.
    We sold, last year, approximately 10 percent of all diesel 
fuel, over the road diesel fuel in the United States. Pilot is 
the largest independent retailer of diesel fuel in the United 
States.
    I appear before this subcommittee today on behalf of the 
Society of Independent Gasoline Marketers of America. SIGMA is 
an association of 260 motor fuel marketers operating in all 50 
States. Collectively, SIGMA members sold over 13 billion 
gallons of on-road diesel fuel last year.
    My personal experience with Pilot and my representation of 
all SIGMA members at this hearing today combine to make me well 
qualified to speak about the EPA's diesel sulfur proposal, not 
just from the diesel marketers perspective but from the 
perspective of diesel fuel consumers as well. From this point 
of view, diesel fuel marketers and our customers, EPA's 
proposal will have dire consequences on not only our business 
but our customers and we believe on our national economy.
    SIGMA strongly opposes the proposal for one fundamental 
reason, it will reduce, perhaps substantially, the supplies of 
on-road diesel fuel. Diverse and plentiful sources of supply 
are the life blood of independent petroleum marketers like 
Pilot. Without adequate supplies of diesel fuel, independent 
marketers, the most competitive segment of the motor fuels 
marketing industry, will cease to exist as a force in diesel 
fuel retailing.
    EPA's diesel sulfur proposal will result in a substantial 
decrease in the overall supplies of on-road diesel fuel in this 
country. As EPA admits in its proposal, some refiners will not 
be able to make the capital investments necessary to produce 
ultra-low sulfur diesel fuel resulting in reduced diesel 
supplies. EPA also admits that desulfurization technology 
currently does not exist to remove sufficient sulfur from 
certain diesel fuel blend stocks further reducing supply.
    EPA further admits that our Nation's diesel fuel 
distribution system will be forced to downgrade an unspecified 
portion of our Nation's diesel fuel production because it will 
become contaminated with higher sulfur products during 
distribution, again reducing overall supply.
    EPA highlights the fact that under the proposal, domestic 
diesel fuel will have a substantially lower sulfur level than 
diesel fuel produced in most other industrialized countries 
which will prevent foreign supplies of diesel fuel from 
alleviating any shortage in domestic production.
    Independent marketers of diesel fuel will not be the only 
ones to suffer under EPA's proposal. Consumers of diesel fuel, 
including our Nation's trucking and agricultural industries, 
will pay for EPA's program at the pump. EPA predicts in its 
proposal that diesel sulfur reductions will cost approximately 
4.5 cents per gallon. That number is woefully low.
    As we witnessed last winter and this spring in the 
northeast and are now witnessing currently in the Midwest, even 
small supply shortages of motor fuels can cause dramatic 
increases in retail prices. If overall diesel fuel supplies are 
reduced by 10 percent as a result of EPA's proposal which I 
believe is not an unreasonable number and which you have heard 
some predict today it will reduce it by 20 percent, then the $2 
per gallon diesel fuel prices we saw in the northeast last 
winter will become the norm if not a bargain in the eyes of 
consumers.
    SIGMA would bring this subcommittee's attention to an issue 
contained in the preamble to EPA's proposal that is not 
currently a formal part of its draft regulations. In the 
preamble, EPA requests comments on adopting a regulatory scheme 
that would permit two on-road diesel fuels to exist for a short 
period of time. As the Nation's largest independent retailer of 
on-road diesel fuel, I must tell you this proposal would be 
disastrous for our industry and the Nation's motor fuel 
distribution system. It is simply not practical.
    At the vast majority of our companies' 180 locations, we 
have very limited storage for our diesel fuel. At most sites, 
our tanks hold less than 24 hours of supply. In many instances, 
we would not have room at our sites to install additional 
tankage even if we could get the permits to do so.
    As a result, I urge the members of this subcommittee to 
communicate to EPA your opposition to the agency's dual fuel 
approach. SIGMA would support a diesel desulfurization program 
that accomplishes three things.
    No. 1, takes effect in 2010 or later to permit adequate 
time for proposed, experimental emissions control and diesel 
desulfurization technologies to mature and develop and gives 
refiners additional time to install these new technologies.
    No. 2, sets a diesel cap 50 ppm rather than 15 ppm that 
EPA's proposal would mandate.
    No. 3, establishes a uniform transition to the new lower 
sulfur diesel fuel without a dual fuel approach.
    An EPA regulation that adheres to these three principles 
would have only a minimal impact on overall diesel fuel 
supplies while reducing diesel sulfur levels by 90 percent and 
achieving substantial reductions in emissions from heavy duty 
diesel engines. In addition, the longer implementation 
timeframe would permit the manufacturers of emissions control 
devices to develop their technology to a level at which a 50 
ppm sulfur level would not have a negative impact on emissions.
    I appreciate the opportunity to appear before you.
    Senator Inhofe. Thank you.
    I have a number of things I would like to go through, 
starting with Mr. Frank. First of all, you heard Mr. 
Perciasepe's statement and responses, do you believe there 
could be diesel supply problems if this rule went into effect 
in the anticipated time schedule of the EPA because of 
refineries closing or choosing to export or even moving? I am 
more concerned about the supply problem than I am the amount of 
money that can be calculated and expressed in an increased cost 
of diesel.
    Mr. Frank, in terms of the supply problem, do you think a 
supply problem would exist if this rule went into effect?
    Mr. Frank. Yes, I do. As I testified, I think the 
transportation fuel segment itself could see a 20-percent 
reduction in supply and could be larger and diesel fuel in 
general, by those elected not to manufacture the low-sulfur 
diesel, could be exported. That situation could exist, that 
there would be overcapacity in the high-sulfur diesel market.
    Mr. Thompson. Yes, I definitely do. Currently, 30 percent 
of the Nation's diesel pool is comprised of cracked material 
from the refining process. These cracked stocks are extremely 
difficult to desulfurize to these very low levels of 15 ppm. 
That is why I testified that up to 30 percent of the Nation's 
current diesel supply is at risk of going to other markets 
because of this rule.
    Mr. Looney. Yes, Mr. Chairman. Supply difficulties would 
occur in rural America and to many of the farm operations. Many 
of those areas are supplied by small refiners who will not only 
have to make those critical decisions of when to change but if 
they are going to change. That has an effect not only on the 
on-road but the off-road supplies. So there would be some 
supply problems probably in both categories.
    Mr. Addington. Yes, as I testified, the refining industry 
has told us that will occur. That is why I emphasized that 70 
percent of America's communities depend exclusively on truck 
for freight. You need to have that diesel fuel everywhere you 
need it, not just in the large cities that get better refinery 
service.
    Mr. Bertelsen. That is really outside our area of expertise 
but I think obviously any rule such as this needs to take into 
consideration possible impacts on fuel supplies.
    Mr. Haslam. Yes, I think we have seen the supply system in 
our country is extremely fragile. Even the smallest of 
interruptions like we have had this spring in gasoline in the 
Midwest causes tremendous price spikes. I think we would be 
much more subjected to those under EPA's current proposals than 
we are now.
    Senator Inhofe. Two or three of you referred to what you 
thought specifically would be the effect in terms of a price at 
the pump. I suspect in calculating that you are somehow 
prorating the cost of upgrading and buying new equipment and 
all that, as opposed to the supply and demand. I think the 
supply and demand effect on the price would be far greater than 
just upgrading equipment.
    Mr. Frank, we talked about this a year ago when you 
testified.
    Mr. Frank. Yes, sir.
    Senator Inhofe. I would like to go down the row and again 
particularly for those who gave the 4 cent figure, was that 
just in equipment upgrades or was that taking into 
consideration it would have to be a pretty in-depth study to 
look at the supply and demand and what effect that would have 
on the price?
    Mr. Frank.
    Mr. Frank. It is a bit more complicated than a yes or no 
answer.
    Senator Inhofe. I know that and I don't want people to feel 
uneasy because I certainly couldn't answer it. There is no way 
to anticipate what the supply and demand effect of this rule 
would be so you would have to make a judgment.
    Mr. Frank. I think the effect of cost would be in the 4 to 
11 cents a gallon range for the hardware at the refinery 
itself, depending on whether facilities can be modified or new 
facilities have to be built and I think that does not include 
the infrastructure adjustment if additional pipelines have to 
be made to keep the diesel fuel separated and additional 
tankage has to be installed at both the terminals in the 
service station level. It could be two and a half to three 
times that much.
    The real question I think you're asking is that impact on 
the supply situation, the cost will not be the determining 
factor at least for the first few years of what it cost to do 
it. It will be that there will be a shortage in the market and 
there will be a price response as the bids go up for supply to 
be able to keep truck fleets running or SUVs supplied or 
whatever the situation is because a 20-percent shortfall in the 
diesel fuel market will be much the same situation that we are 
seeing in the Midwest today. It is not the cost that is the 
factor, it is that there is a shortage of supply.
    Senator Inhofe. I think that is what the Governor of 
Illinois was saying in his press conference yesterday?
    Mr. Frank. Yes, sir.
    Senator Inhofe. Mr. Thompson.
    Mr. Thompson. You are correct, the figures we quote are the 
cost to manufacture figures. In an ideal world where supply 
equals demand, then that cost will translate into a price at 
the pump but in a situation where you do have a supply 
shortage, now supply is less than demand, prices have to 
increase to bring those two back into equilibrium. In a 
shortage situation, the price at the pump does not bear a 
direct relation to the cost to the manufacturer but it does 
have to increase to equalize the balance between supply and 
demand.
    So when we say the cost will be $4 billion or 6 to 11 cents 
per gallon with the industry's proposal of 50 ppm cap, that 
assumes a steady state situation where supply and demand are in 
balance. If we do have disruptions, then price spikes will 
necessarily follow.
    Because of this concern, as much as 30 percent of the pool 
could go to other markets, prices will increase and present an 
opportunity for other people to invest to take advantage of 
that opportunity. Because of the lead time required, we are 
talking as much as 4 years for the investment and construction 
of the desulfurization equipment. So we are not looking at a 2 
to 3 month phenomenon here, we could be looking at a shortage 
of up to 30 percent for as long as 4 years.
    Mr. Looney. I mentioned 10 cents and that is an estimate of 
refinery costs. One issue I would like to point out to farmers 
is the availability and very limited periods of time during the 
year, the seasonal aspect of the production of agricultural 
supplies, early spring and harvesting, needs availability of 
fuel and the right type of fuel for farmers and the machinery. 
It is very, very important. We have not been able to make any 
cost estimates on that. That is a very critical thing for 
agriculture. We must have it then.
    Mr. Addington. I cited three figures with regard to cost, 
all of which came directly from EPA's own estimates: the 
additional cost of buying a truck, the additional cost in the 
life cycle operation of the truck and the price of the diesel 
fuel.
    Senator Inhofe. You are prorating capital expenses.
    Mr. Addington. They broke them out separately. In any 
event, we consider the EPA's estimates underestimates which we 
only use because that is what they produce. The oil industry 
has told us the estimates on fuel are way too low on EPA's 
part.
    Senator Inhofe. Mr. Bertelsen.
    Mr. Bertelsen. I am not qualified to comment on that.
    Senator Inhofe. Two of you have said you would support the 
50 ppm sulfur level if it also met a 75-percent reduction. Do 
all of you agree with that?
    Mr. Frank. Yes, sir.
    Mr. Thompson. Yes.
    Mr. Addington. We would be very interested in that if, and 
it is an important if, the Federal Government set a standard 
that preempted the 50 States so that there was a single 
national diesel fuel standard rather than having a situation, 
as we do now, where California has a different standard and now 
parts of Arizona may adopt them and parts of Texas have adopted 
different standards.
    Mr. Frank. Between the industry's proposal of 50 ppm and 15 
ppm that doesn't sound like a lot but the costs go up 
exponentially. There is no basis for the 15 ppm level. Mr. 
Bertelsen testified that he thinks the NOX adsorbors 
could develop the technology to be effective at 15 ppm but the 
truth today is that they really have to have 0 ppm sulfur to be 
effective. The technology doesn't exist today for 15 ppm 
performance.
    What the EPA is asking the refining industry to do as well 
as the rest of the downstream industry is to invest billions of 
dollars based on the belief that the technology can be 
developed. We got in trouble before on the belief that 
something can be done. I know the oil industry takes a lot of 
heat because people criticize saying you told us it couldn't be 
done before but yet you did it. For instance, removing lead 
from gasoline, I think the industry has always taken a 
conservative approach to trying to guard the fuel supply for 
the American consumer so that they can be supplied fuel 
consistent with cost-benefit analysis.
    The place where that wasn't true was in the Clean Air Act 
where we made a mistake with the oxygenates requirements of 
putting MTBE in gasoline. That was done as a technology driver. 
It turns out that has created a lot of problems.
    Because things weren't tested to see that they could 
operate effectively before the regulations were implemented 
that required their use, this could turn out to be the same 
kind of disaster.
    Senator Inhofe. Prior to coming to the House, I spent over 
30 years in the real world going through exactly what the 
people you represent are going through today. That is one 
reason I ran for this office.
    I have one question. Mr. Haslam, you talked about having a 
dual fuel standard because of the distribution shortage 
problems. Expand on that a little bit and tell us if there are 
any particular regions of the country that would impose greater 
hardships on.
    Mr. Haslam. No, sir, it is no regions, it is site specific. 
For example, our typical travel center have two 20,000 gallon 
tanks, a total of 40,000 gallons of storage. The reality is 
that we turn our inventory in the diesel business which is such 
a high volume, low margin business that from a practical 
standpoint, we would have to spend substantial amounts of 
capital for only a minimal time period to be able to sell two 
different kinds of diesel. It is totally unpractical today.
    Senator Inhofe. Mr. Looney, from a co-op's perspective, 
were you satisfied with Mr. Perciasepe's answer to my question 
concerning the problems that would be created by dual fuel 
standards?
    Mr. Looney. I can speak personally to the fact that EPA has 
at least four levels been very active pursuing all aspects of 
the impact this rule will have on agriculture. We have talked 
to them on four different levels but that has been very 
recently in the last couple of weeks. I know they are very 
energized about making sure they understand the whole process. 
I think we are just beginning to raise the right questions and 
provide the right answers. I would say they have started the 
process to address those issues.
    Mr. Frank. From the refiner, transportation industry's 
perspective, the logistical system today within the confines of 
the way our system of pipelines and terminals are structured, 
we know how to transport and handle those fuels and keep the 
ultra low-sulfur level from getting contaminated in the 
pipeline or in the tankage. I think that is going to require 
substantial investment in pipelines and tanks to keep a clean 
fuel separated from higher sulfur fuels. For instance in the 
same pipeline, we ship various kinds of fuels all the time. 
Some have high sulfur, some have low sulfur. This would be an 
ultra low sulfur. The molecular transfer of sulfur just from 
what hangs onto the wall of the pipe would contaminate the low-
sulfur diesel fuel.
    In the transmix, the interface mixing between the two fuels 
and it would have to be rejected for ultra low-sulfur fuel, 
would have to go back to the refinery or else be downgraded to 
high-sulfur diesel. That is part of the shrinkage that would 
occur.
    Senator Inhofe. I am going to conclude this. I have some 
thoughts that concern me. One is, and I don't want this to be 
misunderstood, but we do have an election coming up and we're 
going to have a different administration. To me it is very 
disturbing when all of a sudden we have this December deadline 
and everything is going to have to be in place.
    The only encouraging thing I get out of that from the EPA 
is they must be concerned it is going to be a more dramatic 
change in the White House than they want. For that reason, I 
think it is all going to happen and regardless of where 
technology is, regardless of the concerns that are not 
answered.
    Mr. Addington, you gave me an idea during your testimony 
and reminded me of something I had forgotten. Four or 5 years 
ago, right after I came over from the House in 1995, I was 
instrumental with my partner, Don Nichols from the State of 
Oklahoma, in passing a bill that addresses the problem I know 
concerns you and you articulated. That is that you have a bunch 
of unelected bureaucrats not just in EPA but in other 
bureaucracies also who make decisions with no regard for how 
the public is going to be affected by them.
    I have said many times in the event we make that dramatic 
change in this Administration and this committee--and I speak 
for Bob Smith when I say this also--we are going to have sound 
science, we are going to use CASAC for the design purpose, we 
are going to have cost-benefit analysis and everything, 
including endangered species and how it affects what the cost 
is. Let the public be involved in this.
    Since the rush is on to make this happen in December, and 
since the objections that I raised have not yet been answered, 
I am going to supply the EPA with a list of my concerns I think 
should be met by the time this rule goes into effect. If not, I 
am going to take advantage of that law we passed in 1995, 
called the congressional Review Act. That addresses the very 
thing you bring up.
    In the event there is something that we, who are the 
elected officials who have to respond to an electorate, the 
people of America, believe that something is onerous and is not 
properly addressing the concerns that should be addressed, then 
we can effectively veto it with a simple vote by bringing this 
congressional Review action to this committee as well as the 
committee in the House, have it go directly there to the floor 
and by a simple vote, overturning this.
    If these objections I have to this rule are not met, I am 
going to put the EPA on notice that I will invoke the 
provisions of the congressional Review Act on this rule.
    With that, we have run out of time. We have a vote in 
progress, so we are adjourned.
    [Whereupon, at 11:06 a.m., the subcommittee was adjourned, 
to reconvene at the call of the chair.]
    [Additional statements submitted for the record follow:]
  Statement of Hon. Joseph Lieberman, U.S. Senator from the State of 
                              Connecticut
    Thank you, Mr. Chairman, for holding this hearing on a regulation 
that so directly affects the quality of our air. I would just like to 
make a few comments highlighting the reasons for my support of the 
action on diesel fuel sulfur that is proposed by the Environmental 
Protection Agency.
    My home State of Connecticut faces serious air quality challenges, 
as do many of the States in New England. Some Northeastern States need 
to make drastic reductions in both nitrogen oxides and volatile organic 
compounds in addition to those anticipated from current and planned 
stationary source and motor vehicle emission control programs in order 
to fulfill the requirements of their State implementation plans. There 
are also significant challenges for some northeastern States in 
attaining EPAs National Ambient Air Quality Standards for ozone. 
Ambient toxic pollutant concentrations are a further concern: measured 
annual average concentrations of benzene, formaldehyde, and other 
toxics have been shown to exceed cancer risk thresholds in all 
monitoring locations in this region.
    With challenges of this nature, the Northeast appreciates EPAs 
action on diesel sulfur. The proposed regulation on diesel sulfur will 
significantly reduce the cap on sulfur in diesel fuel. It is sorely 
needed, for heavy-duty vehicles are significant contributors to 
elevated levels of ozone, fine particulate matter (PM), and the primary 
emissions of several key toxic air pollutants of concern in the region. 
Together, highway and non-road heavy-duty engines are responsible for 
roughly 33 percent of all nitrogen oxide (NOX) emissions, 75 
percent of motor vehicle related PM, and 60 percent of aldehyde 
emissions in the northeast corridor. Diesel exhaust has also been 
classified as a probable human carcinogen by the National Institute for 
Occupational Safety and Health (NIOSH) in 1988, the International 
Agency for Research of Cancer (IARC, 1989) and the U.S. EPA (U.S. EPA 
draft, 1994).
    For these reasons, I feel that this proposed regulation is a 
beneficial one. I realize, however, that there are concerns about the 
implementation of the regulation, and I am interested in finding out 
more about these concerns. I look forward to hearing from the 
witnesses.






Statement of Robert Perciasepe, Assistant Administrator, Office of Air 
             and Radiation, Environmental Protection Agency
    Thank you, Mr. Chairman and members of the subcommittee, for the 
invitation to appear here today to discuss our proposed program that 
addresses emission standards for heavy-duty trucks and buses and the 
accompanying low sulfur requirement for diesel fuel.
    As you know, last year we established a new program to dramatically 
reduce emissions from cars and light-duty trucks. That program, often 
called the ``Tier 2'' program, will help to improve the nation's air 
quality by phasing in both cleaner engines and cleaner burning gasoline 
over the next decade, using flexible, market-driven mechanisms that 
minimize consumer costs while preserving vehicle choice.
    We are now focusing much-needed attention on heavy-duty highway 
vehicles, applying the same general principles of addressing the 
vehicles and the fuel as a single system, and incorporating flexible 
compliance mechanisms for the affected industries.
    This proposed program would protect the public health and the 
environment of all Americans by reducing the sulfur content in highway 
diesel fuel by 97 percent to provide for dramatically cleaner heavy-
duty trucks and buses. By addressing diesel fuel and vehicles together 
as a single system, harmful emissions from heavy trucks and buses would 
be reduced up to 95 percent from today's levels--the clean-air 
equivalent of eliminating the air pollution from 13 million of today's 
trucks.
                        justification for action
    Heavy-duty trucks and buses are largely powered by diesel engines, 
and the importance of diesel continues to grow with the steady increase 
in truck traffic on our roads, the continuing trend toward replacing 
heavy-duty gasoline-powered trucks with diesels, and the prospects for 
a resurgence in light-duty diesel vehicle sales, as evidenced by auto 
manufacturers' ambitious plans and investments in this area. Diesel 
engines are more durable and get higher fuel economy than gasoline 
engines, but they also pollute significantly more. Harmful emissions 
from these engines contribute greatly to a number of serious air 
pollution problems, and will continue to do so into the future absent 
further controls to reduce these emissions. The program we proposed 
would finally bring diesel emissions on par with those of new, cleaner 
cars.
    In our proposal, published on June 2, we assessed the need for 
further reductions in emissions from heavy-duty trucks and buses beyond 
the reductions that will result from new diesel standards set to take 
effect in 2004. We based this assessment on projections of air quality 
trends in the U.S. and on the expected contribution of heavy-duty 
vehicles to these trends. Our conclusion is that if we do not act soon, 
despite several years of progress in reducing diesel emissions, 
pollution from heavy-duty trucks and buses will rise in the next 15 
years, with serious repercussions for the nation's air quality.
    Heavy-duty vehicles contribute to the health and welfare effects of 
ozone, as well as particulate matter (or ``PM''), oxides of nitrogen 
(or ``NOX''), oxides of sulfur, and volatile organic 
compounds that include toxic compounds such as formaldehyde. These 
adverse effects include premature mortality, aggravation of respiratory 
and cardiovascular disease, chronic bronchitis, and decreased lung 
function. Pollutants from these vehicles also contribute to crop and 
forestry losses; they contribute to visibility impairment in many parts 
of the U.S.; and to the acidification, nutrification and eutrophication 
of bodies of water.
    Millions of Americans live in areas with unhealthy air quality that 
endangers public health and welfare. Forty-two metropolitan areas with 
a total population of 123 million people have recently violated or are 
close to violating the 1-hour ozone national ambient air quality 
standard (or ``NAAQS''), and have ozone modeling or other factors which 
indicate a risk of future NAAQS violations. The emission reductions 
that would come from the proposed standards will reduce the number of 
future violations of the ozone NAAQS in these areas. Furthermore, our 
analysis shows that PM-10 concentrations in 10 areas with a 
combined population of 27 million people face a significant risk of 
exceeding the PM-10 NAAQS without significant additional 
controls in 2007 or thereafter. PM-10 is particulate matter 
that is 10 microns or less in size. Under the mandates of the Clean Air 
Act, government agencies at the Federal, State, and local levels are 
working to bring pollutant levels into compliance with the 1-hour ozone 
and PM-10 NAAQS through their State Implementation Plans, 
and to ensure that future air quality continues to maintain these 
health-based standards. The reductions proposed in this rulemaking 
would play a critical part in these important efforts.
    In addition to its contribution to PM-10 inventories, 
diesel exhaust particulate matter is of special concern because it has 
been implicated in increasing the risk of lung cancer and respiratory 
disease in human studies. The current EPA position is that diesel 
exhaust is a likely human carcinogen and that this cancer hazard 
applies to environmental levels of exposure.
    Emissions from heavy-duty vehicles account for substantial portions 
of the country's ambient PM and NOX levels. 
NOX is a key precursor to ozone formation. By 2007, we 
estimate that heavy-duty vehicles will account for 29 percent of mobile 
source NOX emissions and 14 percent of mobile source PM 
emissions. These proportions are even higher in some urban areas, such 
as in Albuquerque, where heavy-duty vehicles contribute 38 percent of 
the mobile source NOX emissions and 21 percent of the mobile 
source PM emissions. A number of urban areas have begun to examine the 
potential for even greater emission ``hot spots'' caused by such 
factors as frequent bus and truck routes.
    The proposed program would have a substantial impact on these 
emissions. By 2030, NOX emissions from heavy-duty vehicles 
under the proposed program would be reduced by 2.8 million tons, and PM 
emissions would decline by about 110,000 tons, dramatically reducing 
this source of NOX and PM emissions. Urban areas, which 
include many poorer neighborhoods, can be disproportionately impacted 
by diesel emissions, and these neighborhoods would thus receive a 
relatively larger portion of the benefits expected from new emissions 
controls.
                                process
    Our proposal is the culmination of a year-and-half long 
deliberative process during which we worked closely with a wide range 
of stakeholders. Following a number of meetings with the manufacturers 
of engines and emissions controls, the oil refining industry, States, 
public health and environmental organizations, we published an advance 
notice of our intent to propose this program in May of last year. That 
notice defined the challenges and opportunities involved, and yielded 
further helpful information and discussion during a public comment 
period that in turn informed a new round of stakeholder meetings over 
the past year. These meetings included extensive discussions with small 
refiners and small businesses that market and distribute diesel fuel, 
under the process created by the Small Business Regulatory Enforcement 
Fairness Act (SBREFA). EPA has spent many hours in meetings with 
individual companies, trade associations, State organizations, 
environmental groups, and other parts of the Federal Government, to 
understand their issues and ensure that they are fairly addressed in 
the proposal.
    In the end, we believe we developed a proposal that addresses the 
many issues people raised with us, and that can achieve dramatic 
emission reductions in a cost effective manner, without placing large 
burdens on small businesses and consumers. On the few issues for which 
a clear answer did not emerge at this stage, the proposal contains 
detailed discussion of viable solutions that have been put forward and 
asks for comment to help us determine the best approach.
                               principles
    There are a number of overarching principles reflected in the 
proposal that we feel will make this an effective program:
     First, address the heavy-duty vehicle and its fuel as a 
single system to achieve cost-effective emissions control that is 
dramatically better than what we could get with separate fuel and 
vehicle programs;
     Second, set consistent standards for vehicles and fuel 
that apply nationwide;
     Third, set performance standards and provide flexible 
provisions for engine designers and diesel fuel refiners, including 
small refiners, to demonstrate compliance;
     Fourth, minimize costly requirements for people who sell 
and distribute diesel fuel; and
     Fifth, design the clean highway diesel fuel program to 
also enable the use of advanced emission controls for all on-highway 
diesel vehicles.
                            vehicle program
    In the past, diesel manufacturers primarily controlled emissions 
through the design of the engine itself, rather than relying on exhaust 
emission control devices like the catalytic converter used in 
automobiles. However, new advanced technologies for diesel exhaust 
treatment are now being developed and tested and they are proving to be 
extremely effective. Particulate matter traps, or ``soot filters,'' 
that replace a truck's muffler, are already used in several thousand 
heavy-duty vehicles in Europe where the right fuel is available, and 
they work very well, achieving reductions in soot and toxic 
hydrocarbons of 95 percent and better.
    Emissions of the other major diesel pollutant, NOX, can 
be dramatically reduced by putting devices called 
NOX adsorbers in the exhaust system. 
NOX adsorbers have proven effective in stationary source 
applications in making dramatic reductions in emissions. Although, in 
mobile sources adsorbers have not yet developed to the point where they 
are being used in demonstration fleets, NOX adsorbers have 
proven control efficiencies of 90 percent and better in laboratory 
testing, and rapid progress continues to be made in improving this 
technology.
    These soot filters and NOX adsorbers can be designed 
into a new diesel vehicle at a total projected cost of $1,000 to $1,600 
in the long term, depending on the size of the engine. For comparison, 
new vehicle prices today can range up to $250,000 for larger heavy duty 
vehicles. With the use of these new technologies, and by optimizing 
existing engine controls, these standards can be met without increasing 
fuel consumption beyond today's levels.
    Our proposed emission standards envision the use of these or 
similar technologies beginning in the 2007 model year, although we are 
proposing to phase in the NOX standard over 4 years, from 
2007 to 2010, to provide flexibility in introducing the newly developed 
NOX adsorbers. We are not proposing to retrofit older 
engines.
    Specifically, the standards we are proposing are 0.2 grams per 
brake horsepower-hour for NOX, and 0.01 grams per brake 
horsepower-hour for particulate matter. These levels are an order of 
magnitude lower than the standards set to take effect in 2004, which 
are based only on engine technologies. In addition, because soot 
filters are extremely effective at removing emissions of toxic 
hydrocarbons, these emissions will be likewise reduced to a tiny 
fraction of current levels.
    Heavy-duty gasoline vehicles would also be required to meet 
stringent standards, and would likely meet these standards through use 
of control technologies similar to those being developed for cars and 
light-duty trucks under the Tier 2 standards. We are also proposing to 
cut evaporative emissions from gasoline-powered trucks by half through 
improvements in vehicle design.
                          diesel fuel program
    There is one major technical barrier to the introduction of the new 
diesel exhaust emission control technologies, which brings me to why we 
are proposing to address diesel engines and diesel fuel as a single 
system. Soot filters and NOX adsorbers are very sensitive to 
sulfur in the fuel, even more so than gasoline engine catalytic 
converters. Sulfur ruins these devices by poisoning catalyst sites 
within them; it also causes the devices to emit harmful sulfate 
emissions; further, it causes greater fuel consumption. This situation 
is not unlike the move to catalytic converters on cars in the 1970's. 
Those were also revolutionary technologies that required a change in 
the fuel, in that case taking the lead out of gasoline, to achieve 
their remarkable emissions reduction potential. To make the new diesel 
technologies work we are proposing to take most of the sulfur out of 
highway diesel fuel, by mid-2006 when the cleaner, model year 2007 
trucks will begin showing up on our nation's roadways.
    Specifically, we are proposing that sulfur levels in diesel fuel 
produced and sold for use in highway vehicles be limited to 15 parts 
per million. This is a 97 percent cut from the current highway diesel 
fuel sulfur limit of 500 parts per million, set by EPA 10 years ago. 
Our analyses show that the 15 parts per million level is sufficiently 
low to enable the high-efficiency exhaust emissions control 
technologies, and still feasible to produce with existing refinery 
technologies.
    In our proposal, we also analyze the cost and feasibility of 
requiring a larger sulfur reduction of 99 percent, sought by some 
engine manufacturers, and a smaller reduction of 90 percent sought by 
some refiners. Our analysis results show that a larger sulfur reduction 
would cost significantly more and does not appear to be needed to make 
the exhaust emissions control technologies work, and that smaller 
reductions in sulfur, although cheaper, would likely cause these 
devices to fail on the road, thus enabling only ``next best'' 
technologies with 20 percent reduction efficiencies and sizable fuel 
economy losses. Although we believe that we have proposed the right 
sulfur level, we have asked for comment on these higher and lower 
levels, and also on levels in between.
    It is interesting to note that diesel fuel with sulfur levels below 
this level has been in widespread production in Sweden for many years, 
and ARCO is producing diesel fuel in California with sulfur levels well 
below the proposed level.
    The investments that the oil industry will need to make to support 
this proposed program, and the resulting costs to consumers, have been, 
and will continue to be, a major focus of the rulemaking process. We 
estimated that the cost to produce and distribute the low sulfur diesel 
fuel would typically be about four and a half cents per gallon. We 
estimate that this cost would be offset by a penny or so per gallon 
savings because the cleaner fuel makes a diesel engine run better, 
reducing oil change intervals and the like. This maintenance benefit 
would occur not just for the new model trucks and buses equipped with 
the new technology emissions controls, but for the existing fleet as 
well.
    We designed this proposed program to include significant lead time 
for the introduction of new cleaner fuel into the marketplace. The 
proposal also discusses various flexible phase-in approaches for the 
diesel fuel industry to facilitate the complete transition to new clean 
diesel fuel and to reduce costs further. We explored a number of 
concepts aimed at providing voluntary compliance flexibility for 
refiners while still meeting our primary goal of widespread 
availability of low-sulfur diesel fuel when needed by the new 
technology trucks. These concepts recognize the fact that many older 
trucks that do not need the lower sulfur fuel will be on the road for 
several years into the proposed program. One such concept would allow 
each refiner to produce some highway diesel fuel at the current 500 
parts per million sulfur limit, with provisions to bank and trade these 
allowances for greater flexibility.
    The ability of small refiners and farmers' cooperative refiners to 
comply with the proposed program has been of special concern through 
the process to develop this proposal, and several added flexibility 
concepts that were developed by the SBREFA Small Business Advocacy 
Review Panel are discussed in the proposal, with the goal of designing 
a workable program for them in the final regulation.
                            public hearings
    To gather reaction to our proposal, we are holding five public 
hearings over the next 2 weeks: In New York, Chicago, Atlanta, Los 
Angeles, and Denver. We expect that all of the hearings will be well-
attended and many people and groups representing a variety of 
viewpoints have already told us that they plan to testify. We will be 
accepting written comments through August 14th. We are also continuing 
to meet with stakeholders on an individual basis to better understand 
their concerns and suggested solutions. Our plan is to complete this 
process and issue final requirements by the end of this year.
                               conclusion
    In conclusion, I would like to say that this historic proposal 
would be a major milestone in our nation's drive toward clean air, 
comparable to the advent of catalytic converters on cars in the 70's. 
Diesel trucks would be 95 percent cleaner than today's cleanest models, 
cleaner even than today's natural gas vehicles. This proposal has 
received support across the country from people in various sectors 
affected by it. This support has given us confidence that we are on the 
right track in developing a nationwide program that is sensible, 
balanced, and cost-effective.
    Thank you again for giving me this opportunity to discuss our 
program with you. I would be happy to answer any questions that you may 
have.
                               __________
Statement of Jerry Thompson, Citgo Petroleum Company, on Behalf of the 
        National Petrochemical & Refiners Association, Tulsa, OK
                                overview
    The National Petrochemical & Refiners Association (NPRA) represents 
almost all of the refining industry including large, independent and 
small refiners as well as petrochemical producers. NPRA supports a 90-
percent reduction in the sulfur content of highway diesel fuel to a 50-
ppm sulfur cap. In contrast, we are deeply concerned about the impact 
EPA's new diesel sulfur program will have on the industry's ability to 
provide a steady and reliable source of diesel fuel to its customers.
    NPRA does not believe that it is possible to consistently maintain 
needed supplies of highway diesel within the 15 ppm sulfur cap level 
sought by EPA. Although refineries may be able to produce some amount 
of this diesel, many would be forced by its high costs to limit or 
forego participation in the highway diesel market. This would reduce 
supplies well below those available under a more realistic sulfur cap. 
In addition, with the current logistics infrastructure, it will be 
extremely difficult to deliver highway diesel with a 15 ppm sulfur cap 
to consumers and maintain the integrity of the sulfur level of the 
product. This highway diesel must share a distribution system with 
other products that have significantly higher sulfur levels. At the 
EPA's proposed sulfur levels, a significant amount of highway diesel 
will have to be downgraded to a higher sulfur product due to product 
contamination in the pipeline.
    The diesel plan announced on May 17th by the EPA is extreme, a 
blueprint for fuel shortages and future supply problems, and will pose 
severe economic impacts. It threatens to leave American consumers a 
legacy of scarce and costly energy supplies.
                     role of diesel in u.s. economy
    The trucking industry, America's motoring public, farm communities, 
commercial vehicle operators and others must all be assured a 
consistent and reliable source of supply. These vital industries may be 
severely impacted by reduced supplies and increased costs resulting 
from this rulemaking, and the consequent effect on the economy will be 
widespread.
    Vehicles powered by heavy duty diesel are an essential element in 
the commercial distribution of goods and services in the United States. 
The EPA regulators must assess the decisions they are making and weigh 
the risks which new, costly and unrealistic standards could have on the 
country's ability to move goods and services. A reliable source of 
diesel supply for these customers could be threatened if the EPA 
proposal becomes final.
          refiners offered a reasonable plan to reduce sulfur
    The refining industry agrees that the sulfur levels in diesel must 
be reduced, but the program must be reasonable. The industry proposed a 
plan to EPA that would lower the current limit of 500 ppm of sulfur in 
diesel fuel to a limit of 50 ppm--a 90 percent reduction. This is a 
very significant step. It will enable diesel engines to meet the 
particulate matter standards sought by EPA and also achieve significant 
NOX reductions. Our plan can yield a 90 percent reduction in 
particulate matter and a 75 percent reduction in 
NOX emissions from new heavy-duty diesel engines. Industry's 
plan is still expensive--we estimate it will cost the industry roughly 
$4 billion to implement. But, unlike EPA's extreme and much more costly 
proposal, the level of sulfur reduction proposed by industry is 
attainable and sustainable. Most refiners would choose to make the 
investments needed to meet a 50 ppm sulfur limit. Most refineries will 
be able to comply with this 90 percent reduction by making capital 
investments to upgrade existing facilities or by building new capacity.
    The industry has shared this proposal with regulators. NPRA and its 
members have had protracted discussions with EPA and have tried to 
suggest reasonable ways to reduce diesel emissions. Unfortunately, 
industry's plan has been rejected and ignored by EPA.
                       overlapping fuel standards
    Implementing gasoline and highway diesel sulfur reduction and MTBE 
reduction concurrently will tax resources of the engineering and 
construction industries, as well as State permitting agencies. 
Implementation of a new 50 ppm low sulfur cap diesel program in a more 
reasonable timeframe (after gasoline sulfur reductions) would reduce 
the peak demands on the engineering and construction industry or State 
permitting agencies. EPA's proposed overlap--with gasoline sulfur 
reduction phased-in between 2004 and 2007 and extreme highway diesel 
sulfur reduction completed in 2006--jeopardizes both programs.
    This subcommittee may recall that the refining industry is already 
implementing an $8 billion (6-7 cents per gallon) program to reduce 
sulfur in gasoline in the same timeframe. There are few synergies in 
the gasoline and diesel sulfur reduction strategies so there is no 
justification for doing both concurrently.
               epa's plan will jeopardize diesel supplies
    EPA's plan will not maintain adequate diesel supplies. NPRA does 
not believe that it is possible to produce needed supplies of highway 
diesel nationwide within the 15 ppm sulfur cap level. Although refiners 
may be able to produce some amount of this diesel, many would be forced 
by its high costs to limit or forego participation in the highway 
diesel market. EPA's plan would reduce supplies well below those 
available under a more realistic sulfur cap.
    While some refiners would invest in the expensive new equipment 
necessary to meet the 15 ppm limit, many others may not make the large 
investments necessary to produce it, especially at the same time that 
sulfur levels in gasoline must be greatly reduced. Since highway diesel 
is only about 10 percent of the average refinery's output, refiners 
could find other uses or markets for their current diesel output. More 
than 30 percent of the current supply of highway diesel could be lost 
until additional investments are made and new desulfurization capacity 
is built. This could take as long as 4 years. Also, some refineries 
will probably go out of business. When a refinery closes, we lose its 
entire output--gasoline, diesel, jet fuel, home heating oil. With the 
demand for petroleum products projected to increase, we cannot afford 
to lose any refineries. This is a very strong argument for a more 
reasonable program.
    It will be extremely difficult to deliver highway diesel with a 15 
ppm sulfur cap to consumers and almost impossible to maintain the 
integrity of the sulfur level of the product. These products must be 
delivered though common carrier pipelines. Recent studies concluded 
that it would probably not be feasible for the distribution system to 
maintain low sulfur diesel fuel supplies in all areas. Spot outages 
will probably occur and there will be reduced flexibility to deal with 
unusual market conditions.
                   technical decisions refiners face
    Today's highway diesel is produced from blendstocks containing 
several thousand ppm sulfur. Currently, sulfur is reduced by 
hydrotreating. The typical existing diesel hydrotreater at a refinery 
can be modified to produce a product meeting industry's proposed 50 ppm 
sulfur limit.
    Some existing units that are more constrained than average may not 
be suitable for modification to produce this lower sulfur product. The 
existing hydrotreater may have a lower than average operating pressure 
or hydrogen recycle rate, or the refinery may use a mix of blendstocks 
that may be harder to desulfurize. A new hydrotreater would be required 
at some refineries because retrofitting an existing hydrotreater alone 
would not be an option for every refinery. Even with industry's 
proposed 50 ppm sulfur cap, there could be more limited supply impacts 
if necessary investments are not made. Most refiners, though, would 
choose to make the more affordable retrofit investments needed for a 50 
ppm sulfur cap.
    A diesel sulfur standard at a 15 ppm sulfur cap would make 
modification of a typical, existing unit uneconomical. It would require 
such a large increase in reactor volume that a new, high pressure unit 
would make more sense. This new hydrotreater would require additional 
hydrogen compression and a thick-walled pressure vessel. The worldwide 
manufacturing capability for high pressure vessels is limited to a 
handful of suppliers and could be a significant constraint on providing 
adequate supplies of ultra low sulfur diesel in the proposed timeframe.
    Thus, a 15 ppm sulfur limit would require a decision to invest in 
an expensive new high pressure desulfurization unit or retrofit an 
existing unit to process only the lower sulfur blendstocks. If several 
refineries choose the latter option, supplies of highway diesel would 
decline from current levels. It would take some time to correct this 
supply/demand imbalance.
    Even with investment in a new hydrotreater, compliance with a 15 
ppm sulfur limit would not be guaranteed at today's highway diesel 
production volumes. Currently, vendors do not have commercial 
experience treating feeds containing a significant amount of cracked 
material to meet a 15 ppm sulfur cap. Therefore, the capital-intensive 
option will not necessarily satisfy domestic demand because some of the 
current feedstocks are very difficult to desulfurize at the greater 
than 99 percent reduction levels required by a 15 ppm sulfur limit. In 
summary, although it is possible to produce some highway diesel under 
15 ppm sulfur, it is not technically possible to produce 15 ppm sulfur 
highway diesel at current volumes on a continuous basis.
    distribution of ultra low sulfur highway diesel is not feasible
    The distribution system will not be able to provide ultra low 
sulfur highway diesel supplies at all times. It will be very difficult 
to maintain the integrity of a 15 ppm sulfur cap when diesel is 
distributed in pipelines, barges and trucks which also carry gasoline 
with a cap of 80 ppm sulfur in 2006 and high (greater than 2,000 ppm) 
sulfur jet fuel, home heating oil and off-highway diesel.
    Spot outages will occur if a product terminal discovers that the 
ultra low sulfur diesel is out of compliance for whatever reason. 
Nearly all or all of the non-compliant product would have to be removed 
(and perhaps the terminal tank cleaned) before new product could be 
brought in. In the past, a product at was slightly out of compliance 
could be blended with complying product; however, at ultra low sulfur 
levels, this will not be an option.
             npra supports only one grade of highway diesel
    EPA is considering a phase-in program with two types of highway 
diesel available for a few years: current diesel (500 ppm cap) and 
ultra low sulfur diesel (15 ppm cap). Phase-in would create its own 
distribution and enforcement problems with significant potential of 
misfueling by new trucks. This alternative would not effectively 
address NPRA's concerns about technical producibility and maintaining 
product quality. The short period while two products would be in the 
marketplace guarantees that investments to distribute and segregate 
them will be stranded when the temporary program expires. The market 
may not be stable and balanced throughout the program as the existing 
fleet of trucks tries to chase dwindling supplies of the higher sulfur, 
lower cost highway diesel.
                       lyondell/citgo experience
    Industry's repeated warnings about this rule are well-founded. Our 
company, CITGO, has some relevant real-world experience: in the EPA's 
proposed rule, our facilities at the Lyondell-CITGO Refinery (Houston) 
were referenced as having a diesel desulfurization technology capable 
of producing the 15 ppm sulfur cap diesel fuel. Based on our actual 
operating experience with this referenced technology, we find the 
capital and operating costs are much higher at the 15 ppm sulfur cap. 
The ability of the technology to consistently produce below 15 ppm 
diesel is problematic. The feedstocks to this revamped facility are 30 
percent straight run stocks from the crude distillation unit and 70 
percent heavy cracked stocks from conversion units. These heavy cracked 
stocks are significantly more difficult to treat to the 15 ppm level. 
Our operating data shows that to consistently desulfurize to 15 ppm or 
below, a significant portion of the cracked material must be removed 
from the feed, thereby reducing our diesel production by this amount.
    Our first cost consideration is the use of capital. The Lyondell-
CITGO project to improve our diesel quality was completed in late 1996 
and included the installation of the world's largest free-standing 
reactor. We increased catalyst volume in the unit from 40 thousand 
pounds to 1.7 million pounds. The capital cost for conversion of this 
existing 50,000 BPSD Unit was $86 million dollars. This includes $69 
million dollars for the process unit and $17 million dollars for 
supporting facilities. This is much higher than the $30 million revamp 
cost for a typical refinery processing light cycle oil as stated by the 
EPA. Also, a simple retrofit is not possible on many units because most 
older, smaller units do not have sufficient reactor design pressures, 
the requisite high purity hydrogen supply, a suitable fractionation 
system, or other hardware.
    The second cost consideration is operating costs. The diesel sulfur 
level produced in the unit meets the 15 ppm sulfur cap at initial 
conditions at start of run. However, as the desulfurization catalyst 
ages, the reactor temperatures must be raised to achieve targeted 
sulfur levels. There are limits to raising temperature--equipment and 
product quality limits--such as color. These limits establish the cycle 
life of the catalyst.
    At the proposed 15 ppm sulfur cap with 70 percent heavy cracked 
diesel stocks, the cycle life will be greatly reduced from current 
operation. This significantly raises the operating cost because of more 
frequent catalyst replacement and more frequent shutdowns. This also 
results in a loss of diesel production. Under the current mode of 
operation, the frequency of catalyst change-out is managed by reducing 
the cracked stocks in the feed to this unit. More frequent catalyst 
change-out to meet a 15 ppm sulfur cap raises the cost of diesel 
production by as much 7 cents/gallon on our existing unit.
    What looks simple in theory doesn't always work in practice. I hope 
that the entire refining industry doesn't have to spend billions of 
dollars just to prove that our concerns about this rule are valid. This 
will happen, however, if we ignore the warning signs of an already 
stressed supply system, and rush to implement a plan based upon little 
more than wishful thinking. We can't make enough diesel at the 15 ppm 
level and what we can produce will cost much more than EPA represented.
              availability of aftertreatment technologies
    The proposed heavy-duty diesel engine emissions standards for 
particulate matter (PM) and nitrogen oxides (NOX) will 
require the use of advanced aftertreatment equipment on new trucks. The 
PM control technology is more developed than the 
NOX technology, and it can meet the proposed 90 percent 
reduction in the emissions standard using a diesel fuel that is limited 
to 50 ppm sulfur. The PM standard chosen by EPA appears to be 
technically feasible with refining and emissions control technologies 
that are ready for commercialization. So EPA's PM standard is 
achievable using the industry's recommended 50 ppm fuel.
    However, the various NOX control technologies being 
considered by vehicle manufacturers are much less developed. EPA's 
decision to reduce the NOX standard by 90 percent is likely 
to focus development efforts on an emerging technology that is the most 
delicate of those being considered. EPA's choice of this 
NOX standard is purely arbitrary. It is unrealistic and 
considerably more stringent than the NOX standard for the 
same period in Europe and Japan. Even with a sulfur limit of 15 ppm, 
this technology may not meet the durability requirements of the 
proposed standard. NPRA recommends that EPA set a more realistic 
NOX emissions standard, one that would rely on more 
developed and more robust emissions control technologies and a 
technically feasible diesel fuel with a sulfur limit of 50 ppm.
       fuels transportation systems can become severely stressed
    The ``regulatory blizzard'' chart attached to our testimony shows 
14 major regulatory actions which the refining industry will be 
required to comply with over the next 10 years. The cost of these 
programs, which are largely uncoordinated, is astronomical. Gasoline 
sulfur reduction, diesel sulfur reduction and MTBE reduction alone will 
probably cost the industry a combined total of $20 billion.
    During the 1990's the refining industry was also called on to make 
massive environmentally related investments, totaling more than the 
actual book value of the entire industry, according to one study. At 
the same time, the average rate of return on capital in the industry 
was just 2 percent, which is less than banks pay on a passbook savings 
account.
    As a result of this crushing burden on refiners and fuel 
distributors, we are starting to see signs of stress in the system. 
Increasing stringency of fuel specifications makes them more difficult 
to produce and harder to distribute. And the impact of unforeseen 
situations, such as a refinery outage, a pipeline malfunction or even 
the weather, is magnified under such conditions.
    We experienced disruptions in the supply of home heating oil and 
diesel in the Northeast just last winter. Currently, logistical and 
supply problems in the Midwest, especially in the RFG markets of St. 
Louis, Chicago and Milwaukee, have resulted in increased gasoline 
costs. This situation occurs just as the industry is implementing 
changes to a new grade of reformulated gasoline, with more stringent 
requirements. These occurrences are usually temporary, but they will 
probably occur with increasing frequency as we produce ever-cleaner 
fuels. Policymakers can help to reduce the frequency of these 
situations by insisting that environmental programs be both reasonable 
and well-coordinated. The proposed diesel sulfur regulation fails on 
both counts. This is another reason why it should be rejected in favor 
of a more reasonable and timely approach, such as the industry has 
recommended.
                              conclusions
    EPA should not adopt a regulation that puts the nation's energy 
supply at risk. Fuel and engine emissions standards must be based on 
developed technologies and cost-effectiveness. An adequate supply of 15 
ppm sulfur diesel cannot be assured and distribution of 15 ppm sulfur 
fuel is probably also not feasible. There has been no demonstration--
technological or otherwise--that the 15 ppm sulfur level advocated by 
EPA is achievable or sustainable across the current diesel pool for 
most refineries.
    NPRA hopes that the entire refining industry does not have to spend 
billions of dollars just to prove that our concerns about this rule are 
valid. This will happen, however, if we ignore the warning signs of an 
already stressed supply system and rush to implement a plan based upon 
little more than wishful thinking. EPA argues its extreme proposal is 
needed to enable heavy-duty engines to meet stringent 
NOX standards in the 2007-10 timeframe. Of course, that 
NOX standard was arbitrarily selected by EPA. It is 
considerably lower than NOX standards for the same period in 
Europe and Japan, and is probably unrealistic. Thus, EPA's $10 billion 
plan for 15 ppm diesel is largely based upon an arbitrary and 
unattainable target.
    NPRA wants to work with other stakeholders to achieve reasonable, 
cost-effective reductions in highway diesel emissions. Our industry 
wants to maintain the right balance between environmental goals and 
energy supply so we can implement fuel and emissions standards. This 
way, both the fuel and engine industries can comply with costs that 
consumers can afford.
                               __________
        Statement of J. Louis Frank, Marathon Ashland Petroleum
    The American Petroleum Institute (API) is pleased to have the 
opportunity to present written testimony on the U.S. Environmental 
Protection Agency's (EPA's) Highway Diesel Sulfur Proposal. API 
represents nearly 500 companies engaged in all aspects of the U.S. oil 
and natural gas industry, including exploration, production, refining, 
distribution and marketing.
Background
    EPA has proposed a rule to reduce highway sulfur in diesel fuel to 
unnecessarily low levels beginning in 2006. API supports the clean air 
benefits of lower sulfur levels and proposes a 90-percent reduction. 
Lower sulfur means cleaner air. However, EPA's proposal goes beyond 
what is practical, necessary or affordable--and would not produce 
significantly greater air quality improvements than API's proposal (see 
Attachment I). It could depress diesel fuel production and 
unnecessarily harm those who rely on diesel fuels: truckers, 
distributors of goods and services and farmers as well as those in the 
fuel industry: refiners, fuel distributors and fuel retailers. Because 
diesel fuel and the trucks and buses that use it are the lifeblood of 
American commerce, the new rule could also harm consumers, jobs and the 
economy.
What the proposal says
    EPA's proposal would require that highway diesel fuel sulfur 
content be reduced from the current level of 500 parts per million 
(ppm) maximum to a 15 ppm maximum in 2006. API has recommended a 90-
percent reduction to a cap of 50 ppm (approximately what EPA also 
recommended more than a year ago). A reduction to this level would 
reduce diesel emissions nearly as much as EPA's proposal at a more 
reasonable cost and would enable vehicle emission reduction equipment 
that is tested and proven.
    EPA also suggested that the new fuel might be phased in. Under a 
phase-in, two highway diesel fuels would have to be made and provided 
to retail outlets.
    Additional air quality benefits minimal
    The additional air quality benefits produced by EPA's proposal 
compared with API's proposal would be very small. That's because the 
industry's proposal would cut sulfur nearly as much.
    In fact, EPA's proposal may not reduce emissions any more. EPA 
assumes its fuel will work with a new kind of vehicle emission 
reduction technology, but it has presented no evidence that this 
unproven technology will cut emissions to the desired level no matter 
how low sulfur content is set.
    EPA's lack of confidence in its own technical assessment is 
unmasked by its proposal to phase in the new nitrogen oxide tailpipe 
standard over a period of time. The agency wanted to give engine 
manufacturers an opportunity to "gain valuable experience" with the new 
technology, which EPA acknowledges has not advanced to the "field trial 
stage." However, this approach is unfair to truckers and other diesel 
fuel users who should not have to pay for changes in the fuels they use 
when there is no promise that the vehicles they drive will perform as 
intended.
Not a solution to diesel smoke
    While EPA's proposal will reduce vehicle emissions, it is not a 
solution to the diesel smoke problem. A reduction in sulfur in any 
amount will have little impact on this. Modern diesel engines are 
virtually smokeless even on current fuels. The vast majority of smoking 
trucks on the road today are older and poorly maintained. Improved 
vehicle maintenance is the key to solving the smoke problem.
Costs of the EPA proposal would be excessive
    As a result of EPA's proposal, diesel manufacturing costs would 
increase about 12 cents per gallon ($8 billion in capital investments 
to modify refineries). These costs would far exceed the capital 
investments needed for API's proposal of a 90-percent reduction. A 90-
percent reduction would add about 6 cents per gallon ($4 billion in 
capital investments).
    These added manufacturing costs do not include higher costs for 
distribution, stemming from the need for companies to avoid or address 
contamination problems resulting from moving ultra-low sulfur diesel 
fuel through common pipelines and storage facilities with other 
products. The added distribution costs for a 15 ppm fuel would increase 
costs by about 2 cents per gallon.
    According to a February 2000 study by Turner, Mason & Company 
titled Costs/Impacts of Distributing Potential Ultra Low Sulfur Diesel" 
(see Attachment II for Executive Summary), a phase-in of ultra-low 
sulfur diesel could increase costs by about four cents per gallon, or 
as high as 13 cents per gallon, depending on how the phase-in works. A 
phase-in would require companies to manufacture, handle and segregate 
two separate varieties of highway diesel in addition to off-road diesel 
fuel. This would require installation of additional underground tanks, 
piping and pumps. Some distributors may not be able to make the 
required investments--or may not have space to accommodate the changes 
at some of their retail stations.
Proposal could affect supplies
    Some refiners may be unable to make the huge investments needed to 
make 15 ppm sulfur diesel, especially in light of other investments 
necessary to reduce sulfur in gasoline and to address oxygenates. As a 
result, some, including small farmer-owned refineries, may not be able 
to stay in business. They would join more than 25 other U.S. refineries 
that have closed over the past decade, owing in part to the high costs 
of regulations and rates of return averaging about three percent, less 
than a passbook savings account.
    Among refineries that stay in business, some could reduce the 
amount of highway diesel fuel they manufacture. Ultimately, less diesel 
fuel would be produced in the United States, which would tend to push 
up prices. It is questionable whether shortfalls could be made up with 
imports given the stringency of EPA's 15 ppm proposal compared to the 
rest of the world.
    The Turner Mason study also concluded that it would probably not be 
feasible for the distribution system to maintain continuously available 
supplies of extremely low sulfur diesel in all areas. Spot outages 
could occur for up to a week or longer in some less populated regions 
that are remote from source refineries.
Diesel users and consumers would be harmed
    EPA's proposal could add about $2,500 to the cost of a trucker's 
annual operations in higher diesel fuel costs and reduced fuel economy 
(see Figure 1). A phase-in could drive those additional costs even 
higher. This assumes a truck is driven 100,000 miles annually at six 
miles per gallon. These new cost burdens do not include the higher cost 
of new trucks with required emission reduction equipment, which would 
be several thousand dollars more ($4,000 to $8,000 according to some 
automotive engineering experts).
    All owners of truck fleets, including small businesses, could see 
their cost of doing business increase substantially as a result of 
higher fuel costs. The higher costs would also adversely impact 
businesses such as bakeries, nurseries and others that operate small 
fleets of diesel vehicles. Since the cost of moving goods would 
increase, consumers would pay more for food, clothing, and other 
products.
    If there are fewer refiners and suppliers of fuels, this could 
increase the potential for supply disruptions, particularly to more 
remote rural markets that serve the farm sector, thus affecting 
supplies of highway and off-road diesel fuel. EPA claims that new 
diesel trucks and buses could be permanently damaged if any fuel other 
than EPA's 15 ppm is used. Thus, owners and operators of new trucks 
would have to shut down their operations if 15 ppm fuel supplies were 
disrupted for any reason, including natural disasters or unexpected 
physical interruptions.
    Since this proposal, in combination with all the other EPA controls 
on transportation fuels and refineries, could reduce the number of 
suppliers of fuels, it could impact the home heating oil and other 
specialty fuels markets, including aviation fuels. The U.S. Department 
of Defense has raised concerns about possible impacts on military 
fuels.
Other groups have expressed concerns about EPA's proposal
    The negative impacts of EPA's proposal are not just an issue for 
API and the refining industry. Many groups, including farmer 
cooperatives, fuel distributors, truckers, and others have expressed 
serious concerns about EPA's proposal in public forums and directly to 
EPA and the U.S. Department of Energy (see Attachments III, IV and V).
    API appreciates the opportunity to provide testimony on this 
important issue, and we look forward to working closely with the 
federal government to address the nation's air quality and energy 
needs.


















































































   Statement of Curt Eischens, on Behalf of the National Council of 
                          Farmers Cooperatives
                              introduction
    Good morning, Mr. Chairman, my name is Curt Eischens, and I am a 
fourth generation farmer from Minneota, Minnesota.
    I am here today as a representative of the National Council of 
Farmer Cooperatives (NCFC) to speak to you about EPA's proposed rule to 
reduce the sulfur levels in on-road diesel fuel. But more importantly, 
I will speak as (1) a director of a regional co-op, Cenex Harvest 
States Cooperatives; (2) a member of a local co-op; and (3) a family 
farmer and citizen of rural America.
    American agriculture is vitally dependent upon a reliable and 
affordable supply of diesel fuel in carrying out its food, natural 
fiber, renewable energy, conservation and other missions. Through their 
cooperatives, farmers have invested heavily in a petroleum refining and 
distribution system to help assure a reliable and affordable supply of 
this vital input. Though less than 2 percent of the petroleum refining 
industry, farmer cooperatives account for about 40 percent of all the 
on-farm fuel use in the United States and are unique in that the 
customer is also the owner. Farmer cooperatives also supply much of the 
highway diesel and home heating oil needs in rural America.
    First, let me say that farmer cooperative representatives have been 
working with EPA, and we appreciate the agency's recognition of the 
unique structure and challenges of farmer-owned cooperative refiners, 
as well as possible compliance flexibility options identified in the 
proposed rule. However, we remain deeply concerned that the proposed 
sulfur diesel standard is overly stringent and could have adverse 
unintended consequences for American agriculture and rural America, 
particularly during a time of continuing economic hardship that 
threatens the survival of many farmers and ranchers.
                           executive summary
    If implemented as currently drafted, the EPA proposal could: (1) 
increase the threat of supply disruptions, particularly in rural 
America, by effectively reducing diesel production capacity; (2) force 
cooperative and other refiners to produce more costly ultra-low sulfur 
diesel fuel for farm and other off-highway uses due to distribution 
limitations, especially in the agricultural heartland; (3) jeopardize 
the economic viability of farmer-owned refineries, leading to further 
concentration in the petroleum industry serving rural America; and (4) 
impose major costs on farmers directly, with no return on investment, 
and take away scarce resources desperately needed for investments in 
projects to improve farm income. Diesel fuel costs for farmers and 
other rural consumers could be 10 cents or more at 15 ppm, with much 
higher price spikes in the event of supply disruptions.
    It is important to understand that even though the EPA proposal is 
for on-highway diesel, the rule will also adversely impact farm and 
other off-highway uses of diesel fuel. It has been our experience that 
much of the petroleum storage system, particularly in the rural markets 
served by our cooperatives, is generally capable of handling only one 
grade of diesel fuel. This was certainly the case when the existing 500 
ppm standard for highway diesel was implemented. Thus, our farmer-owned 
refineries will be forced to go to the ultra-low standard even though 
much of our market is for farm uses.
    We are deeply concerned about several key elements of EPA's 
proposed rule. For example, we have great concerns about going lower 
than a 50 ppm cap. We believe a level as low as 15 ppm at the pump puts 
diesel fuel supplies at risk, particularly in rural America. We know 
that any phase-in with a fuel requirement for two on-road diesels would 
be extremely costly.
    For these reasons, we strongly urge that the rule be withdrawn 
until serious unresolved issues can be addressed. We further recommend 
that any final rule should include the following: (1) set an on-road 
diesel fuel sulfur cap of about 50 ppm, which would be a 90 percent 
reduction from the current level; (2) provide refiners maximum 
flexibility to meet the new standards, including the ability to choose 
which fuel standard to meet first, by 2010--the new gasoline rule or 
any on-road diesel rule; and (3) not require a phase-in or two low 
sulfur diesel fuels.
                       farmer cooperative system
    But before I address these concerns and recommendations more 
specifically, I believe it is important that you understand and 
appreciate the farmer cooperative system from the bottom up, so you can 
better understand the adverse impacts this rule could have on 
agriculture and rural America. There are approximately 1.8 million farm 
families in the United States today. There are over 3,500 farmer-owned 
local co-ops, and many of these locals belong to larger regional co-ops 
such as mine--Cenex Harvest States Cooperatives. At the national level, 
we are represented by the National Council of Farmer Cooperatives.
    In rural America, bulk fuel terminals and service stations are 
often many miles apart. These 3,500 local co-ops sell farmers all the 
inputs necessary for their production needs, including fuels for 
powering their equipment and vehicles, drying their crops, heating 
their livestock enclosures, and heating their homes. Many of these 
local co-ops depend heavily on petroleum sales to farmers for the 
majority of their sales income and their livelihood. To properly supply 
farmers, local co-ops maintain fuel tanks and pumps, and in turn, 
farmers maintain their own fuel tanks on their farms.
    Adequate and affordable fuel supplies have always been very 
important to agriculture and rural America. Because of the special 
needs of agriculture and problems with relying on existing petroleum 
refiners, farmers in the early 1900's chose to pool their resources and 
invest in refineries. In 1979, there were eight refiner co-ops. Today 
there are only four refiner co-ops that supply much of the needs of 
Midwest farmers. They are (1) Cenex Harvest States Cooperatives' 
refinery in Laurel, Montana; (2) Farmland Industries' refinery in 
Coffeyville, Kansas; (3) the National Cooperative Refiners Association 
in McPherson, Kansas; and (4) Countrymark Cooperative's refinery in Mt. 
Vernon, Indiana. These cooperatives are owned by approximately one 
million farm families--over half of all the farmers in the United 
States--in some 28 States.
    My regional cooperative, on which I am an elected Board Director, 
is Cenex Harvest States. We are headquartered in St. Paul, Minnesota 
and are comprised of over 1,000 local co-ops, in 18 States. We are 
owned by over 325,000 farmers, or nearly 20 percent of all farmers in 
the United States.
                                concerns
    Why am I as a farmer and cooperative leader concerned about the 
proposed rule?
    First, As a representative of NCFC, I stress the need to consider 
all of agriculture, not just the four farmer-owned cooperative 
refineries. Agriculture is the backbone of the United States economy 
from the ``Back 40 on the farm to Aisle 40 in the grocery store'' and 
contributes approximately 16 percent of the Gross National Product. In 
performing this vital role, we are heavily dependent upon diesel fuel. 
We believe EPA is moving ``too far, too fast,'' with a rule that will 
directly cost the farmer money, with no return on investment and taking 
away scarce resources desperately needed for investments in projects to 
improve farm income. I have a letter for the record to EPA 
Administrator Browner with signatures of nearly 30 organizations 
representing all aspects of agriculture. The letter raises serious 
concerns about EPA's proposal.
    Second, As an elected Director of Cenex Harvest States Cooperatives 
and one who will have to vote to approve spending farmers' money to 
make these expenditures, I have to look at the costs of this rule. We 
own refineries, pipelines, terminals, tankage, truck stops, local town 
convenience stores, and fuel delivery trucks--all will be adversely 
affected by the rule.
    For example, the rule will directly affect our refineries. How will 
we finance the capital expenditures? There are many air quality rules 
going into effect in the near future with which we will have to comply 
as well, such as--ozone, PM2.5, regional haze, maximum 
achievable control technology, new gasoline specifications by 2003, and 
now, proposed on-road diesel fuel specifications by 2006. We also 
expect new EPA rules on off-road diesel fuel and green house gas 
emissions in the near future. These rules have a costly cumulative 
effect. How will we pay for them all? It will be extremely difficult at 
best.
    Co-ops do not have the same access to equity markets as other 
businesses. For example, unlike our competitors, we cannot issue stock 
to raise capital. We cannot turn inward to our member owners for 
funds--our current farmer-owners do not have the money. Over the past 3 
years, Congress has had to approve about $20 billion in emergency 
funding to help farmers survive hard economic times. Our owners are 
farmers, many of whom have limited means.
    Third, As a member of a local cooperative, it is even more 
challenging. We'll have to address many of the same issues as our 
regional co-ops, but with even less flexibility. Consider EPA's phase-
in and two diesel fuel proposals. Regional co-ops will be of little 
help to local co-ops because they are extremely stretched for cash and 
have little working capital. The co-op system is heavily dependent on 
and limited by fuel tankage. If a dual low sulfur diesel system is 
mandated, how would we pay for the additional tanks and pumps? The 
answer is--most of these local co-ops and Mom and Pop convenience 
stores cannot. We will be forced to decide which diesel fuel to carry 
and therefore lose those customers that need the other type of diesel.
    What happens if EPA requires a phase-in? Again who pays? Farmers, 
local co-ops, small town fueling stations, co-op terminals and the 
regional co-ops will pay. Why? Because many of us will have to put in 
additional fuel tanks for only a few years. There are 1.8 million 
farmers, 3,500 local co-ops and 1,500 farmer-owned convenience stores 
and fuel pumps in rural America that might have to comply with 
increased tank and pump requirements for a 4-to 5-year phase-in. This 
is certainly not cost-effective for American agriculture.
    Fourth, I speak as a farmer, especially on behalf of my farm 
family. If our recommendations are not adopted, my farm family will be 
heavily penalized. How? First, who will pay for these hundreds of 
millions of dollars of upgrades? Well, farmers will have to pay through 
reduced patronage. I will lose patronage because my regional co-op will 
have to finance the refinery upgrades, thereby reducing any returns 
normally distributed from the regional co-op back to the local co-ops 
and on to farmers. I will lose patronage from my local cooperative if 
the local co-op has to pay for increased tankage or loses sales. 
Second, to whom will these additional fuel costs for ultra-low sulfur 
fuel be passed, at rates estimated to be from 10 to 15 cents a gallon? 
The answer again is to farmers.
    Our livelihood depends on the success of our farm and the viability 
of our rural community. Local co-ops are an important part of these 
rural communities. We are very concerned about the environment. We 
believe in clean water and clean air and think a 90 percent reduction 
in diesel sulfur levels goes a long way in achieving clean air goals. 
What EPA is proposing--a 97 percent reduction--goes too far, 
particularly for rural parts of the country that do not have these 
clean air problems.
                            recommendations
    What can be done to help the farmer cooperative petroleum system 
and farm families?
    CONGRESS can help the farm family and U.S. agriculture by urging 
that the proposed rule be withdrawn and reconsidered. Now that everyone 
has recently become aware that the on-road diesel rule can have major 
agricultural impacts, and is not just a refiner issue, Congress should 
direct EPA to retook the proposed rule's impacts on agriculture and 
rural America through the Small Business Regulatory Enforcement Relief 
Act process. It is important to understand the impacts on farmers and 
local co-ops as small businesses. Congress can also require for 
proposed new diesel sulfur specifications what it did for unleaded 
gasoline in 1985.
    What happened in 1985? Uncertain about the impact of reducing lead 
in gasoline, Congress passed legislation directing EPA and USDA to 
conduct a 2-year study and joint report. The relevant section from PL 
99-198 is attached for the record. EPA and USDA completed their study 
in 1987, entitled ``Effects of Using Unleaded and Low Leaded Gasoline, 
and Non-lead Additives Designed for Leaded Gasoline.'' This study 
revealed serious problems that had to be mitigated during the lead 
phaseout. We believe a study is also needed on EPA's ultra low sulfur 
diesel proposal and its potential impacts on the availability and costs 
of diesel fuel for farmers and rural America as well as any effects on 
agricultural equipment before the rule is finalized.
    ALTERNATIVELY, if the rule is not reconsidered, we recommend that 
Congress support the following:
     Set a petroleum industry cap of 50 ppm for sulfur in 
highway diesel fuel, in order to achieve major environmental benefits 
and avoid extreme costs.
     Provide maximum compliance flexibility. For example, EPA 
has suggested some potential flexibility by (1) recognizing that 
refiner co-ops have the same difficulties as small refiners and asking 
for comment on eligibility for compliance flexibility mechanisms that 
may be available to small refiners; and (2) permitting a refiner co-op 
to apply for a compliance extension as a hardship case. NCFC supports 
these compliance flexibility options, in combination with the 50 ppm 
standard.
     Should EPA move to an ultra-low standard for sulfur, such 
as 15 ppm, while compliance flexibility may help during the transition 
implementation costs will still be excessive. That is why we have 
argued for the permanence and affordability of the 90? percent 
reduction in diesel sulfur levels.
     Because the fuel rules for gasoline and on-road diesel are 
interconnected, and expected to overlap in a narrow timeframe, refiners 
also need the flexibility to comply with these two rules in the order 
best achievable for them. Under some circumstances in the gasoline 
rule, some refiners may not have to fully comply until 2010. We also 
suggest that we be given until 2010 to comply with both rules.
     Do not require a phase-in or two low sulfur diesel fuels. 
Local co-ops and farmers cannot afford to add more tanks and pumps.
    If the final rule contains these basic elements, we'll work to get 
the job done.
    We look forward to working with the Congress, EPA and other 
stakeholders to achieve a final rule that is compatible with continued 
economic viability in American agriculture and environmental progress. 
Just as farmers need and want cleaner air, we also require reliable and 
affordable fuel supplies. I urge Congress, on behalf of farmer 
cooperatives, my Minnesota farm family, and other farm families across 
rural America, not to let EPA move ``too far too fast.''
                                 ______
                                 

                            [Exhibit, NCFC]

                                                       May 9, 2000.
Hon. Carol Browner,
Administrator, U.S. Environmental Protection Agency,
Washington, DC.
    Dear Administrator Browner: The undersigned agricultural 
organizations and others that serve agriculture are deeply concerned 
that the Environmental Protection Agency's (EPA) proposal to reduce the 
sulfur levels in diesel fuel could have adverse unintended consequences 
for American agriculture and rural America. These could come in the 
form of fuel supply disruptions and excessively higher prices for 
farmers, for both on-farm and highway fuels, if the proposed rule is 
implemented as currently drafted.
    The EPA draft proposal could (1) increase the threat of supply 
disruptions, particularly in rural America, by effectively reducing 
refinery capacity; (2) force many refiners to produce more costly 
ultra-low sulfur diesel fuel for farm and other off-highway uses due to 
distribution limitations, particularly in the agricultural heartland; 
and (3) jeopardize the economic viability of farmer-owned refineries, 
leading to further concentration in the petroleum industry serving 
rural America. Costs for farmers and other rural consumers could range 
from a 5 cents per gallon increase if sulfur levels are set at 50 parts 
per million (ppm) to 10 cents or more at 15 ppm.
    In order to mitigate these potential problems, we strongly urge the 
agency to (1) set an onroad diesel fuel sulfur cap of about 50 ppm, 
which would be a 90 percent reduction from the current level; (2) delay 
and phase in any implementation of a diesel rule until the final 
gasoline rule has been implemented; and (3) maintain a higher off-
highway diesel fuel standard in order to minimize costs to farmers and 
provide refiners with maximum flexibility to produce diesel fuel.
    We support the Administration's clean air accomplishments, but we 
are concerned that an overly stringent diesel sulfur proposal could 
unnecessarily harm U.S. agriculture and rural America, particularly 
during a time of continuing economic hardship that threatens the 
survival of many farmers and ranchers.
    We look forward to working with the Agency to achieve a final rule 
that is compatible with continued economic viability in American 
agriculture and environmental progress. Just as our constituents need 
and want cleaner air, they also require reliable and affordable fuel 
supplies. We are available to meet with you at any time on this 
important matter.
    Sincerely,\1\
---------------------------------------------------------------------------
    \1\ Contains additional organization signatures after May 9 through 
June 14, 2000.
---------------------------------------------------------------------------
      Agricultural Retailers Association
      American Crop Protection Association
      American Farm Bureau Federation
      American Feed Industry Association
      American Soybean Association
      Agrilink Foods
      Cenex Harvest States Cooperatives
      Cooperative Refining
      Country Energy, LLC
      Countrymark Cooperative, Inc.
      Farm Credit Bank of Wichita
      Farmland Industries, Inc.
      GROWMARK, Inc.
      Institute of Shortening and Edible Oils
      National Association of Wheat Growers
      National Corn Growers Association
      National Council of Farmer Cooperatives
      National Farmers Union
      National Grain and Feed Association
      National Grange
      National Private Truck Council
      North American Equipment Dealers Association
      Pacific Northwest Grain and Feed Association
      Society of American Florists
      Southern States Cooperative, Inc.
      Tennessee Farmers Cooperative
      The Fertilizer Institute
      U.S. Custom Harvesters, Inc.
                               __________

                       Food Security Act of 1985

                  Public Law 99-198--December 23, 1985

            study of unleaded fuel in agricultural machinery
    Sec. 1765. (a)(1) The Administrator of the Environmental Protection 
Agency and the Secretary of Agriculture shall jointly conduct a study 
of the use of fuel containing lead additives, and alternative 
lubricating additives, in gasoline engines that are----
          (A) used in agricultural machinery; and
          (B) designed to combust fuel containing such additives.
    (2) The study shall analyze the potential for mechanical problems 
(including but not limited to valve recession) that may be associated 
with the use of other fuels in such engines.
    (b)(1) For purposes of the study required under this section, the 
Administrator of the Environmental Protection Agency and the Secretary 
of Agriculture are authorized to enter into such contracts and other 
arrangements as may be appropriate to obtain the necessary technical 
information.
    (2) The Secretary of Agriculture shall specify the types and items 
of agricultural machinery to be included in the study required under 
this section. Such types and items shall be representative of the types 
and items of agricultural machinery used on farms in the United States.
    (3) All testing of engines carried out for purposes of such study 
shall reflect actual agricultural conditions to the extent practicable, 
including revolutions per minute and payloads.
    (c) Not later than January 1, 1987----
          (1) the Administrator of the Environmental Protection Agency 
        and the Secretary of Agriculture shall publish the results of 
        the study required under this section; and
          (2) the Administrator shall publish in the Federal Register 
        notice of the publication of such study and a summary thereof.
    (d)(1) After notice and opportunity for hearing, but not later than 
6 months after publication of the study, the Administrator shall----
          (A) make findings and recommendations on the need for lead 
        additives in gasoline to be used on a farm for farming 
        purposes, including a determination of whether a modification 
        of the regulations limiting lead content of gasoline would be 
        appropriate in the case of gasoline used on a farm for farming 
        purposes; and
          (B) submit to the President and Congress a report 
        containing----
                  (i) the study;
                  (ii) a summary of the comments received during the 
                public hearing (including the comments of the 
                Secretary); and
                  (iii) the findings and recommendations of the 
                Administrator made in accordance with clause (1).
    (2) The report shall be transmitted to----
          (A) the Committee on Energy and Commerce of the House of 
        Representatives;
          (B) the Committee on Environment and Public Works of the 
        Senate;
                (C) the Committee on Agriculture of the House of 
                Representatives; and
                (D) the Committee on Agriculture, Nutrition, and 
                Forestry of the Senate.
    (e)(1) Between January 1, 1986, and December 31, 1987, the 
Administrator shall monitor the actual lead content of leaded gasoline 
sold in the United States.
    (2) The Administrator shall determine the average lead content of 
such gasoline for each 3-month period, between January 1, 1986, and 
December 31, 1987.
    (3) If the actual lead content falls below an average of 0.2 of a 
gram of lead per gallon in any such 3-month period, the Administrator 
shall----
          (A) report to Congress; and
          (B) publish a notice thereof in the Federal Register.
    (f) Until January 1, 1988, no regulation of the Administrator 
issued under section 211 of the Clean Air Act (42 U.S.C. 7545) 
regarding the control of prohibition of lead additives in gasoline may 
require an average lead content per gallon that is less than 0.1 of a 
gram per gallon.
    (g) To carry out this section, there is authorized to be 
appropriated $1,000,000, to be available without fiscal year 
limitation.
   Statement of David S. Addington, Senior Vice President for Law & 
        Regulatory Affairs, American Trucking Associations, Inc.
    Mr. Chairman and members of the subcommittee: We appreciate the 
opportunity to appear before you today to express our serious concerns 
with the new regulations on diesel engines and fuel proposed by the EPA 
on June 2, 2000. \1\
---------------------------------------------------------------------------
    \1\ ``Control of Air Pollution from New Motor Vehicles; Proposed 
Heavy-Duty Engine and Vehicle Standards and Highway Diesel Fuel Sulfur 
Control Requirements,'' 65 Fed. Reg. 35430 (June 2, 2000).
---------------------------------------------------------------------------
    The membership of ATA, like other Americans, supports the objective 
of clean air. We believe the Government should base its clean air 
efforts on sound science, public safety, and the needs of the American 
economy.
    I will describe the trucking industry, and some key problems that 
the EPA rule poses for the industry and the American economy.
                     ata and the trucking industry
    The American Trucking Associations is the national trade 
association for the trucking industry, with more than 2500 motor 
carrier company members who operate in every State in the Union.
    Trucking is vital to the Nation's economy. Trucks move the majority 
of the freight that moves in America. Seventy percent of America's 
communities depend exclusively on trucks for freight service. EPA 
regulations affecting trucking operations have a direct impact on a 
huge segment of the American economy.
    Although some trucking companies are multi-billion dollar companies 
whose names you know, most of the trucking industry is small business. 
According to the Department of Transportation, almost 50 percent of 
motor carriers have only one truck, and a full 95 percent of motor 
carriers, almost 395,000 of them, have 20 or fewer trucks. \2\
---------------------------------------------------------------------------
    \2\ Federal Motor Carrier Safety Administration, Docket Item FMCSA 
1997-2350-954, Preliminary Regulatory Evaluation (Truck Driver Hours of 
Service), page 60, paragraph 3.
---------------------------------------------------------------------------
             epa proposal: discriminatory--unproven--costly
    The EPA proposal has 3 major problems. It discriminates against on-
road sources of diesel in favor of off-road; it bets our future on 
unproven technologies; and it forces substantial costs on the trucking 
industry and the economy.
    Regarding discrimination, off-road sources of diesel emissions--
such as locomotives, boats, utilities, and generators--produce much 
more of the troublesome emissions than on-road sources. Yet, EPA has 
singled out the diesel-fueled truck for tighter restrictions. EPA's 
decision to single out on-road diesel emissions sources is 
unjustified--indeed, EPA did not even try to justify it. EPA simply 
said they ``plan to initiate action in the future to formulate 
thoughtful proposals covering both nonroad diesel fuel and engines.'' 
\3\ The EPA should initiate a thoughtful proposal now and cover non-
road diesel emissions sources.
---------------------------------------------------------------------------
    \3\ 65 Fed. Reg. 35430, 35438.
---------------------------------------------------------------------------
    The trucking industry has contributed substantially to air quality 
improvements in the U.S. in the past decade. It is time for others to 
do as much as we have already done.
    On technology, EPA wants trucks to employ after-treatment methods 
to reduce emissions, employing technology that is not field-tested and 
proven. EPA is placing a risky bet that 5 years from now the technology 
will be ready to go. EPA should not impose radical changes in diesel 
engine and diesel fuel standards unless and until it knows that the 
necessary technology works.
    On cost, the EPA's own estimates say the proposed rule will add 
$2,768 to the cost of a new heavy-duty truck and, over the life-cycle 
of the truck, another $3,362 dollars--for a total of more than $6,000 
per truck. \4\ EPA also says its rule will add about 4 cents to the 
cost of a gallon of highway diesel fuel. \5\ Even these EPA estimates 
of the increased truck cost and increased fuel cost would be difficult 
for many in the trucking industry to bear, but the refining industry 
tells us that EPA actually has grossly underestimated the increase in 
the price of the fuel.
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    \4\ 65 Fed. Reg. at 35490, Table V.A-1.
    \5\ 65 Fed. Reg. at 35493.
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    Finally, the refining and distribution industries have told us that 
it will be extremely difficult to maintain the purity in distribution 
of the new on-road diesel fuel, and that they cannot guarantee uniform, 
nationwide availability of the product. If the new fuel is not 
available everywhere like the old fuel, it will be a disaster for the 
trucking industry and the economy as a whole.
                               conclusion
    Mr. Chairman, the subcommittee asked me to address the EPA rules on 
diesel engines and fuel, and I am pleased that we had that opportunity. 
But I would be remiss if I did not draw to your attention that this 
rule is only one front of the current three-front regulatory war that 
the Administration is waging on the trucking industry. Like the diesel 
rule, the rules on the other two fronts--the Department of 
Transportation's proposed rule on truck driver hours of service and 
OSHA's proposed rule on ergonomics--also are based on flawed science, 
flawed economics, and unfair Government favoritism toward our 
industry's competitors.
    On all three fronts--hours of service, ergonomics, and diesel--the 
trucking industry faces extraordinary costs as a result of Government 
mandates. Because the economy has been so good, to so many Americans, 
in the past decade, many people overlook the fact that margins in the 
trucking industry have been extremely low. Trucking companies that 
already have a tough time meeting the payroll and making any money 
simply cannot bear the cost of new regulations that the Administration 
wants to impose in its closing days on our industry.
    We appreciate the opportunity to appear before you and would be 
pleased to answer questions.
                               __________
        Statement of Bruce Bertelson, Manufacturers of Emission 
                          Controls Association
    Good morning. My name is Bruce Bertelsen and I am the Executive 
Director of the Manufacturers of Emission Controls Association. MECA is 
pleased to have the opportunity to participate in today's hearing on 
the proposed highway sulfur diesel requirement and how it relates to 
the important issue of reducing emissions from diesel-powered engines 
and vehicles. We believe an important opportunity exists to 
significantly further reduce emissions from highway heavy-duty diesel 
engines by utilizing an engineered systems approach which incorporates 
and combines advanced engine designs, advanced emission control 
technology, and very low sulfur diesel fuel. EPA's recently proposed 
regulatory initiative recognizes the importance of promoting this 
systems-type approach and we believe the Agency's proposal constitutes 
a carefully crafted program that, if finalized, will bring about the 
era of the truly clean diesel engine. Achieving the goal of the clean 
diesel engine presents significant challenges to the engine 
manufacturers, the emission control manufacturers and the oil industry, 
but we believe that, by working together, these challenges can and will 
be met.
    MECA is a non-profit association made up of the world's leading 
manufacturers of motor vehicle emission controls. MECA's member 
companies have over 30 years of experience and a proven track record in 
developing and commercializing exhaust control technologies for motor 
vehicles. A number of our members have extensive experience in the 
development, manufacture, and commercial application of emission 
control technologies for diesel heavy-duty engines.
    Our comments today are based on work being performed by our 
members, their extensive experience in the field of motor vehicle 
catalysis, and a growing body of technical data that is beginning to 
emerge from such programs as the joint government/industry DECSE 
Program.
 technological feasibility of meeting the proposed diesel hde standard
    We believe the emission standards of 0.2 g/bhp-hr 
NOX and 0.01 g/bhp-hr particulate (PM) proposed for highway 
diesel-powered heavy-duty engines can be achieved in a cost-effective 
manner within the lead-time provided, if very low sulfur diesel fuel is 
available. EPA, in its proposal, identified two candidate technologies 
for meeting the proposed emission limits--catalyst-based diesel 
particulate filters for particulate (PM) control and 
NOX adsorber technology for oxides of nitrogen 
(NOX) control. EPA also cites SCR as a 
NOX control option.
                the need for very low sulfur diesel fuel
    Sulfur in fuel adversely affects the performance of all catalyst-
based emission control technologies. The impacts range from reducing 
the effectiveness of these controls to rendering certain catalyst-based 
controls ineffective. While we continue to recommend that EPA establish 
a sulfur cap of 5 ppm, our members believe that with a sulfur cap of 15 
ppm emission control strategies can be developed to meet the proposed 
emission limits. Specifically, with a 15 ppm cap our members are 
extremely confident that all catalyst-based filter technologies can be 
designed to help meet levels of 0.01 g/bhp-hr PM over the full 
regulatory useful life (435,000 miles) of the engine and that 
NOX adsorber technology will be optimized to meet the 0.2 g/
bhp-hr NOX standard.
    Catalyst-Based Diesel Particulate Filters.--Diesel particulate 
filters are commercially available today; the only remaining 
engineering effort is to optimize the filter systems for the specific 
engine to which they will be applied. Worldwide, over 20,000 PM filters 
have been equipped on diesel engines. With a sulfur cap of 15 ppm, our 
members are extremely confident all catalyst-based filter technologies 
can be designed to meet levels of 0.01 g/bhp-hr PM control over the 
full regulatory useful life of the engine.
    In addition to an increase in sulfate, the level of sulfur in 
diesel fuel adversely affects the temperature level at which 
regeneration of the filter occurs. Achieving the exhaust temperatures 
needed to bring about filter regeneration is an engineering challenge, 
even for a fully optimized engine/filter system depending on the engine 
design, engine application, and ambient temperatures. Failure to 
achieve proper regeneration can adversely affect performance and the 
durability of the filter system. Therefore, the impact of sulfur in 
raising the regeneration temperature can be very problematic. Operating 
experience with filter technology in Europe with <10 ppm sulfur diesel 
fuel demonstrates that proper filter regeneration will occur, even when 
vehicles are operated in areas such as Sweden, where low seasonal 
ambient temperatures do occur.
    NOX Adsorber Technologies.--Development and optimization 
work with NOX adsorber technology is progressing at a rapid 
rate, and our members believe that with the availability of very low 
sulfur diesel fuel, this technology will be commercialized in the 2007 
timeframe for diesel engines. While sulfur levels above 5 ppm present 
additional design challenges for NOX adsorber technology, 
companies that are developing this technology believe that with the 
considerable R&D efforts already underway, NOX adsorber 
technology will be optimized to operate with a cap of no higher than 15 
ppm.
    SCR Technology [continuing]. SCR technology is being developed for 
commercial application on motor vehicles in the very near future. The 
technology is achieving significant NOX reductions and is 
also capable of reducing HC emissions and PM. SCR technology, which 
utilizes an oxidation catalyst to facilitate NOX reduction 
to achieve high control efficiencies, requires the same low sulfur 
levels as the NOX adsorber technology. Other SCR technology 
designs are less sensitive to sulfur, but even for these technologies, 
very low sulfur fuel allows the technologies to achieve the highest 
NOX reductions and allows for the full optimization of the 
engine/exhaust control technology system.
                               conclusion
    We believe, working together, the objective of the truly clean 
diesel engine can be achieved. Our industry is prepared to make the 
necessary investments to help insure that the desired emission 
reduction are achieved.
    I would be happy to answer any questions. Thank you.
                               __________
 Statement of James A. Haslam III, Pilot Oil Corporation, on Behalf of 
        the Society of Independent Gasoline Marketers of America
    Good morning Mr. Chairman and members of the subcommittee. My name 
is Jimmy Haslam. I am Chief Executive Officer of Pilot Oil Corporation, 
a family owned private company headquartered in Knoxville, TN. Thank 
you, Mr. Chairman, for inviting me to testify today on the 
Environmental Protection Agency's proposed regulations to reduce on-
road diesel fuel sulfur levels.
    Pilot was started by my father in 1958. We do not make diesel 
fuel--we sell it. Our company currently owns and operates 180 travel 
centers and convenience stores in 37 States stretching from Connecticut 
to California, northward to Wisconsin, and south to Florida and Texas. 
We employ over 7,000 people nationwide and sold approximately 10 
percent of all the on-road diesel fuel in the United States last year. 
As a result, Pilot is the largest independent retailer of on-road 
diesel fuel in the Nation.
    I appear before this subcommittee today on behalf of the Society of 
Independent Gasoline Marketers of America. SIGMA is an association of 
approximately 260 motor fuels marketers operating in all 50 States. 
Together, SIGMA members supply over 28,000 motor fuel outlets and sell 
over 48 billion gallons of gasoline and diesel fuel annually--or 
approximately 30 percent of all motor fuels sold in the Nation last 
year. Collectively, SIGMA members sold over 13 billion gallons of on-
road diesel fuel last year, and 89 percent of our members sell diesel 
fuel.
    My personal experience with Pilot and my representation of all 
SIGMA members at this hearing today combine to make me well qualified 
to speak about the EPA's diesel sulfur proposal--not just from the 
diesel fuel marketers' perspective, but from the perspective of diesel 
fuel consumers as well. From the point of view of diesel fuel marketers 
and our customers, EPA's proposal will have dire consequences on our 
business, on our customers, and, potentially, on our national economy.
    SIGMA urges the members of this subcommittee, as well your Senate 
colleagues, to join in strong condemnation of EPA's proposal. SIGMA 
strongly opposes the proposal for one fundamental reason: it will 
reduce--perhaps substantially--the supplies of on-road diesel fuel.
    Diverse and plentiful sources of supply are the life's blood of 
independent petroleum marketers like Pilot. Without adequate supplies 
of diesel fuel, independent marketers--the most competitive segment of 
the motor fuels marketing industry--will cease to exist as a force in 
diesel fuel retailing. Currently, independent marketers have been able 
to rely consistently on numerous independent and integrated refiners to 
assure our sources of supply. However, if the sources of supply or the 
numbers of suppliers are restricted, independent marketers are forced 
to look toward integrated refiners--in many cases our strongest 
competitors--for diesel fuel supplies. When integrated refiners are 
aware that an independent marketer has many other sources of supply, 
then the integrated refiners are forced to be competitive. When sources 
of supply narrow, however, there are no such forces acting on the 
integrated refiners.
    EPA's diesel sulfur proposal will result in a substantial decrease 
in the overall supplies of on-road diesel fuel in this country. As EPA 
admits in its proposal, some refiners will not be able to make the 
capital investments necessary to produce ultra-low sulfur diesel fuel--
resulting in reduced diesel fuel supplies. EPA also admits that 
desulfurization technology currently does not exist to remove 
sufficient sulfur from certain diesel fuel blendstocks--reducing 
supply. EPA further admits that our nation's diesel fuel distribution 
system will be forced to ``downgrade'' an unspecified portion of our 
nation's diesel fuel production because it will become contaminated 
with higher sulfur products during distribution--again, reducing 
overall supplies. And EPA highlights the fact that, under the proposal, 
domestic diesel fuel will have a substantially lower sulfur level than 
diesel fuel produced in most other industrialized countries--which will 
prevent foreign supplies of diesel fuel from alleviating any shortage 
in domestic production.
    Independent marketers of diesel fuel will not be the only ones to 
suffer under EPA's proposal. Consumers of diesel fuel, including our 
nation's trucking and agricultural industries, will pay for EPA's 
program at the pump. EPA predicts in its proposal that diesel sulfur 
reductions will cost approximately four and one half cents per gallon. 
That number is woefully low. As we witnessed this past winter and 
spring in the Northeast, even small supply shortages of diesel fuel and 
heating oil can cause dramatic increases in retail prices. If overall 
diesel fuel supplies are reduced by 10 percent as a result of EPA's 
proposal--which I believe is not an unreasonable prediction given the 
refiners I have talked with--then the $2 per gallon diesel fuel prices 
we saw in the Northeast last winter will become the norm, if not a 
bargain in the eyes of consumers.
    Given the extent to which our nation relies on diesel fuel to power 
our on-road commercial transportation network, the ultimate impact of 
these price increases and diesel fuel shortages will be felt by the 
economy as a whole through increased transportation costs and 
inflation. While the current staff at EPA may not care about this 
impact of their proposal on the future of our economy because these 
impacts will occur long after this Administration has left office, I 
suspect that many of the members of this subcommittee plan to be 
serving their constituents in Congress in 2006 and will be present when 
the repercussions from this ill-considered proposal are felt by 
consumers and our economy.
    SIGMA would bring this subcommittee's attention to an issue 
contained in the preamble to EPA's proposal that is not currently a 
formal part of its draft regulations. In the preamble, EPA requests 
comments on adopting a regulatory scheme that would permit two on-road 
diesel fuels to exist for a short period of time. EPA envisions that 
refiners would make some ultra-low sulfur diesel fuel for several years 
and continue also to supply the current low sulfur on-road diesel fuel 
during this transition period.
    This EPA proposal should be roundly criticized and discarded. EPA, 
in its attempt to make its drastic proposal on diesel sulfur reductions 
seem reasonable, has floated this idea of dual on-road diesel fuels. As 
the nation's largest independent retailer of on-road diesel fuel, I 
must tell you that this proposal would be disastrous for our industry 
and the nation's motor fuel distribution system. This dual fuel 
proposal would force Pilot and other diesel fuel marketers into one of 
the following scenarios: (1) add an additional underground or 
aboveground storage tank and dispenser system to hold and pump the 
second grade of on-road diesel; or, (2) retail only ultra-low sulfur 
diesel fuel at a time when only a small percentage of our customers 
would require it and risk losing customers to competitors that choose 
to sell the cheaper, low sulfur diesel fuel.
    At the vast majority of our company's 180 locations, we have very 
limited storage for diesel fuel--at most sites, our tanks hold less 
than 24 hours of supply. In many instances, we would not have room at 
our sites to install additional tankage, even if we could get the 
permits to do so. Even if we could install the additional tanks, it 
appears from EPA's proposal that a second on-road diesel fuel would be 
phased out within 5 years, making our investment in that additional 
tank unnecessary and a wasted investment. While Pilot does not own or 
operate bulk storage terminals, I would assume that such a dual fuel 
approach would tax storage and distribution assets at the terminal 
level of distribution as well.
    As a result, I urge the members of the subcommittee to communicate 
to EPA your opposition to the Agency's dual fuel approach. While EPA 
has attempted to portray this idea as a means of easing the burdens of 
the program on refiners and marketers, it in fact will greatly increase 
the costs of the proposed program if it is implemented.
    SIGMA would support a diesel desulfurization program that: (1) 
takes effect in 2010 or later to permit adequate time for the proposed 
experimental emissions control and diesel desulfurization technologies 
to mature and develop, and gives refiners additional time to install 
these new technologies; (2) sets a diesel sulfur cap at 50 ppm, rather 
than the 15 ppm cap that EPA's proposal would mandate; and, (3) 
establishes a uniform transition to the new lower sulfur diesel fuel 
without a dual fuel approach. An EPA regulation that adheres to these 
three principles would have only a minimal impact on overall diesel 
fuel supplies while reducing diesel sulfur levels by 90 percent and 
achieving substantial reductions in emissions from heavy duty diesel 
engines. In addition, the longer implementation timeframe would permit 
the manufacturers of emissions control devices to develop their 
technologies to a level at which a 50 ppm sulfur level would not have a 
negative impact on emissions.
    I appreciate the opportunity to present SIGMA's views to this 
subcommittee. I would be pleased to answer any questions raised by my 
testimony.
                               __________
     Statement Glenn Keller of the Engine Manufacturers Association
    Good Morning. My name is Glenn Keller and I am the Executive 
Director of the Engine Manufacturers Association. The Association, 
headquartered in Chicago, Illinois, represents the worldwide 
manufacturers of internal combustion engines used in all applications 
except passenger cars and aircraft. Among EMA's members are the 
principal manufacturers of truck and bus engines covered by EPA's 
proposed 2007 rulemaking imposing additional regulatory controls on 
heavy-duty engines while limiting the sulfur content of diesel fuel 
used in these engines.
    The diesel-fueled engine is the backbone of our nation's 
transportation system, from delivering produce to our local groceries 
to powering our mass transit systems in our nation's cities and towns. 
The diesel engine can be as clean, if not cleaner, than any other power 
source. It is capable of meeting emission standards more than 90 
percent below today's levels. And emissions from today's engines have 
already been reduced by over 90 percent. We recognize that more, much 
more in fact, can and should be done * * * and we are poised to meet 
that challenge by the end of this decade.
    The key to achieving these future stringent emissions reductions is 
to reduce the sulfur content of diesel fuel. As the Environmental 
Protection Agency acknowledged in its proposed rule, future emissions 
reductions require a systems approach involving the engine, 
aftertreatment and fuel. Fuel quality, one leg of this three-legged 
emissions reduction strategy, enables the technologies necessary to 
make the other two stand.
    Without removing essentially all the sulfur from diesel fuel, 
advanced NOX aftertreatment devices will not be feasible; 
advanced PM aftertreatment will be poisoned; and engines will be 
exposed to excessive wear, increased maintenance costs, and impaired 
durability. I cannot emphasize enough the critical importance of ultra-
low sulfur fuel: it enables substantial NOX emission 
reductions; it provides direct PM emission reductions for every 
vehicle; and it provides benefits not just from new engines, but from 
the entire fleet of diesel-fueled vehicles.
    Improved diesel fuel also has a role in responding to concerns over 
potential health effects. Ultra-low sulfur fuel lowers the total mass 
of particulate from the entire fleet and enables the use of known 
aftertreatment technologies, such as oxidation catalysts, which can 
reduce the organic fraction of PM emissions. A rule that calls for 
ultra-low sulfur fuel also enables the application of catalyst-based 
technologies to reduce NOX that, in turn, will reduce the 
secondary formation of fine particles of concern in our urban air.
    We applaud EPA for recognizing the critical role of fuel sulfur. We 
strongly support the need for a uniform, nationwide low sulfur fuel 
standard with a hard cap on maximum sulfur content. Regional 
differences in sulfur content will not allow the systems approach 
necessary to meet EPA's very stringent NOX and PM emission 
levels. Further, a hard cap on sulfur is critical. Averages simply will 
not work. They are difficult and impractical to enforce. Moreover, the 
engine and aftertreatment legs of the stool must be assured of never 
being exposed to high sulfur fuel.
    In our view, a 15 ppm sulfur limit does not go far enough. Our 
cooperative testing programs have indicated the extreme sensitivity of 
aftertreatment devices to sulfur poisoning. Therefore, EMA advocates an 
even lower limit of 5 ppm sulfur in diesel fuel to ensure we are 
delivering the maximum performance of these devices for the useful life 
of the truck engine, which is up to 435,000 miles. And, diesel fuel 
improvements shouldn't only be limited to trucks and buses. Non-road 
fuels also must be similarly improved.
    We are aware of the various arguments raised by the oil industry 
against improving fuel quality. They don't want to reduce sulfur to 
even 15 ppm, let alone to lower levels. Nationwide ultra-low sulfur 
fuel can--no, must--be achieved, and it can be done cost effectively. 
In a joint project with the American Petroleum Institute and the 
National Petroleum Refineries Association, the Engine Manufacturers 
Association contracted with MathPro, a renown refining consultant, to 
estimate the cost of producing ultra-low sulfur fuel. MathPro concluded 
that the typical refining cost to produce a 5 ppm maximum sulfur fuel 
was from 5\1/2\ to 9 cents per gallon for the most severe sulfur 
scenario which modeled a 2 ppm average across the entire diesel pool. 
Mr. Chairman, we ask that the entire MathPro Study be included with 
this statement in the hearing record.
    So today we are enthusiastic and hopeful about the bright future 
ahead for diesel engines and our industry's ability to produce 
reliable, durable, fuel efficient, high performing diesel engines that 
also are as clean or cleaner than any other power source. There will be 
issues along the way and a great deal of work to be done. But it is no 
longer a question of `IF'. With nationwide ultra-low sulfur diesel fuel 
and a little development time, engine manufacturers have the resources 
to achieve the stringent emission goals set forth in EPA's proposal.
    I would be pleased to respond to any questions the subcommittee 
might have.

                                
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