[Senate Hearing 107-90]
[From the U.S. Government Publishing Office]
S. Hrg. 107-90 (Pt. 2)
U.S. ENERGY TRENDS
=======================================================================
HEARINGS
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
TO CONSIDER NATIONAL ENERGY POLICY WITH RESPECT TO FEDERAL, STATE, AND
LOCAL IMPEDIMENTS TO THE SITING OF ENERGY INFRASTRUCTURE
__________
MAY 15, 2001
JUNE 21, 2001
__________
PART 2
Printed for the use of the
Committee on Energy and Natural Resources
U.S. GOVERNMENT PRINTING OFFICE
75-190 WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON ENERGY AND NATURAL RESOURCES
FRANK H. MURKOWSKI, Alaska, Chairman
PETE V. DOMENICI, New Mexico JEFF BINGAMAN, New Mexico
DON NICKLES, Oklahoma DANIEL K. AKAKA, Hawaii
LARRY E. CRAIG, Idaho BYRON L. DORGAN, North Dakota
BEN NIGHTHORSE CAMPBELL, Colorado BOB GRAHAM, Florida
CRAIG THOMAS, Wyoming RON WYDEN, Oregon
RICHARD C. SHELBY, Alabama TIM JOHNSON, South Dakota
CONRAD BURNS, Montana MARY L. LANDRIEU, Louisiana
JON KYL, Arizona EVAN BAYH, Indiana
CHUCK HAGEL, Nebraska DIANNE FEINSTEIN, California
GORDON SMITH, Oregon CHARLES E. SCHUMER, New York
MARIA CANTWELL, Washington
Brian P. Malnak, Staff Director
David G. Dye, Chief Counsel
James P. Beirne, Deputy Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
Howard Useem, Senior Professional Staff Member
Shirley Neff, Staff Economist
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman *
DANIEL K. AKAKA, Hawaii FRANK H. MURKOWSKI, Alaska
BYRON L. DORGAN, North Dakota PETE V. DOMENICI, New Mexico
BOB GRAHAM, Florida DON NICKLES, Oklahoma
RON WYDEN, Oregon LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota BEN NIGHTHORSE CAMPBELL, Colorado
MARY L. LANDRIEU, Louisiana CRAIG THOMAS, Wyoming
EVAN BAYH, Indiana GORDON SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas JIM BUNNING, Kentucky
PETER G. FITZGERALD, Illinois
CONRAD BURNS, Montana
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Brian P. Malnak, Republican Staff Director
James P. Beirne, Republican Chief Counsel
* Note: Senator Bingaman assumed the Chairmanship on June 6, 2001.
C O N T E N T S
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Page
Hearings:
May 15, 2001................................................. 1
June 21, 2001................................................ 53
STATEMENTS
May 15, 2001
Burns, Hon. Conrad, U.S. Senator from Montana.................... 3
Cook, David N., General Counsel, North American Electric
Reliability Council, Princeton, NJ............................. 10
Craig, Hon. Larry E., U.S. Senator from Idaho.................... 4
Halvorsen, Jerald V., President, Interstate Natural Gas
Association of America......................................... 17
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 1
Nugent, William, Commissioner, Maine Public Utilities Commission,
Augusta, ME, on behalf of the National Association of
Regulatory Utility Commissioners............................... 6
Szwed, Stanley F., Vice President, Transmission, FirstEnergy
Corp., Akron, OH............................................... 21
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 5
June 21, 2001
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 53
Card, Robert, Under Secretary, Department of Energy.............. 68
Dinneen, Robert, Vice President, Renewable Fuels Association..... 103
Fisher, Linda, Deputy Administrator, U.S. Environmental
Protection Agency, accompanied by Robert D. Brenner, Acting
Director of Air and Radiation Program.......................... 61
Grumet, Jason S., Executive Director, Northeast States for
Coordinated Air Use Management (NESCAUM)....................... 92
Johnson, Hon. Tim, U.S. Senator from South Dakota................ 54
Keese, William J., Chairman, California Energy Commission........ 110
Murkowski, Hon. Frank H., U.S. Senator from Alaska............... 58
Segal, Scott, Partner, Bracewell and Patterson, on behalf of
Oxygenated Fuels Association................................... 98
Wyden, Hon. Ron, U.S. Senator from Oregon........................ 55
U.S. ENERGY TRENDS
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TUESDAY, MAY 15, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:37 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Frank
Murkowski, chairman, presiding.
OPENING STATEMENT OF HON. FRANK H. MURKOWSKI,
U.S. SENATOR FROM ALASKA
The Chairman. Good morning. We will call the Committee on
Energy and Natural Resources to order. This is a hearing to
consider national energy policy with respect to Federal, State,
and local impediments to the siting of energy infrastructure.
It is unfortunate that we have a conflict, but that is
really not anything unusual around here. We have the markup of
the Finance Committee that began at 9 o'clock this morning.
There are 174 amendments pending before that committee, and
Senator Bingaman and I are both on the committee. We thought of
putting this off, but in deference to the witnesses who have
come in, we are going to go ahead with the hearing and do the
best we can. Senator Craig and perhaps Senator Thomas will help
me out a little bit.
But in view of the fact that I think 148 of the amendments
are Democratic amendments and I think we have got somewhere in
the area of 24 amendments, we decided to let the Democrats go
first down at the committee. So, I think they will be pretty
well occupied for a while. But enough of that.
Why we are here is to talk about are the realities
associated with that segment of our energy flow that is
constricted. We obviously take for granted the fact you turn
the light on and it works, but the more we hear about
inadequacy of transmission lines, the more we hear about our
gas pipelines being called upon for movement of more gas, more
pressure, we are suddenly aware of things, and where have the
experts been? Where have we been? Why is this problem just
coming to the surface, and what should we and what can we do
about it?
It is kind of like awakening one day and finding that not
only have we not built a new nuclear plant in 10 or 12 years,
we have not really done anything in coal since 1995. We have
found our dependence on oil up to 56 percent. We suddenly
opened SPR for relief, and we find our refineries are operating
at capacity and we really cannot accommodate the 30 million
barrels from SPR without offsetting imports. Then we find that
our natural gas has doubled and tripled in some areas, and then
we find our transmission lines are inadequate, both electric
and gas distribution. It is almost like, as I said, everything
coming together at one time.
So, today the committee, in holding the oversight hearing,
will review the impediments to building new energy
infrastructure, such as gas pipelines, electric transmission
lines.
I think it is important to emphasize what we have to do to
get them built. Obviously, you have to have assurance you are
going to get a return on your investment.
Now, according to the Energy Information Administration,
U.S. energy demand is going to increase 32 percent over the
next 20 years. That means oil is going to increase 7 million
barrels. Consumption is going to go from 20 to 27. And apply it
to gas and everything else. That is a pretty staggering
increase in demand. Those who are saying we can simply pick up
our shortage on conservation with these kind of figures looking
at us in the eye I think are sadly mistaken. We are going to
need all our sources of energy, plus our new technology, to
achieve and meet the demands.
I do not think the American public is simply going to stand
by and be satisfied for nebulous promises in general terms as
opposed to what I think the administration is going to be doing
when they announce their Energy Task Force, come up with some
real solutions. You need real solutions to these problems, not
hypothetical generalizations that you can get there by
conservation or you can get there by CAFE standards. You just
cannot do it. What have we got? 207 million vehicles on the
road, 130 million are automobiles? That fleet is going to turn
over in 10 years, not tomorrow.
A lot of people forget a couple of factors as we look at
our energy crisis. One is the reality that Americans are used
to cheap, affordable, and ample supplies of energy, and it is
what focuses and funds our standard of living, which is I think
something we have to begin to relate to. Are we willing to
compromise our standard of living? Well, I do not know, but
hopefully we will find out today.
I think California's energy problems are a case study of
what can happen. We have seen their resistance in building new
powerplants, new power lines, opposing offshore drilling, and
they have even resisted new natural gas pipelines such as Kern
River. So, it is the old NIMBY, not in my back yard. I think it
should come as little surprise that California has electric
shortages and price spikes and some of the highest oil and
natural gas prices in the United States.
We are criticized, allegedly, for not being sympathetic to
California's problems. I think every member of this committee
is sympathetic, but the reality is that California is going to
have to make certain decisions relative to whether or not they
are going to pass on the price of electricity to the taxpayer
or the ratepayer. I personally do not see any difference in the
two, but I think there is a desperate effort in California to
finesse that and put the obligation for the power price on the
taxpayer as we look at the manner in which retail price caps
have prevailed.
The L.A. Times reported Monday a debate over San Diego Gas
and Electric's plan to construct a 270 million, 31-mile long,
500,000 volt transmission line through Riverside County in
California. The line would help alleviate the transmission
bottleneck in the region that has seen such a significant
factor behind the State's factor the State's rolling blackouts.
But the project has been dogged by opponents. Neighborhood
groups are organizing door to door against the project. And as
a consequence, I can quote the following. ``See, this isn't
about us not wanting this in our back yard,'' said one of the
leaders fighting the transmission line. It is called the
Southwest Riverside County. ``This is all for one and one for
all. We don't want this in anybody's back yard.'' Well, it has
got to be somewhere, folks.
California's problems are a warning sign of what will
happen in other parts of the country if we do not take action
to ensure our energy future. We are going to have to learn from
the mistakes in California so they do not spread across the
rest of the Nation. I hope today's witnesses will give us their
perspective about this problem and what can be done to
facilitate new energy projects.
Senator Craig, Senator Thomas, and Senator Domenici in that
order.
[The prepared statement of Senator Burns follows:]
Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
Mr. Chairman, I thank you for your commitment and focus on the
energy situation we have before us. You have called several hearings to
bring attention to a national energy policy--building an energy
infrastructure is one of the most important yet.
Nearly everyone on Capitol Hill and in the White House, including
myself, has thrown their support behind alternative energies and energy
conservation. For those willing to be honest and blunt about the
current situation, we know that, in this stage of the game,
conservation and available alternative energy is not enough to provide
energy for the United States to continue as a leading economy.
Expansion of natural gas, oil, and coal development is crucial.
Although more discussion and action is needed, we've had a
significant focus on the generation of energy in this committee. The
question remaining for everyone is, once we generate traditional or
alternative power, how will it be transmitted when and where it needs
to be? How can we eliminate barriers blocking the creation of natural
gas pipelines?
Whether a net importer or exporter, one state cannot completely
shelter itself from this grid-wide crisis brought about by lack of
generation and transmission infrastructure. Impediments to siting are
hampering natural gas pipelines and electric transmission lines. A
tangled web of regulation, transmission line bottlenecks, environmental
extremism, and plain apathy has put us in this situation. Hopefully
this committee's hearings serve as a wake up call.
At the same time the Pacific Northwest is facing supply shortages,
transmission bottlenecks and lack of transmission for additional supply
place another layer of burden on a grid facing skyrocketing market
rates. The Bonneville Power Administration has at least five to six
major bottlenecks, that if dealt with, will ease the crunch in Western
Montana. Along with bottlenecks, we have situations where weather
conditions in the summer affect the transmission lines in Kalispell,
MT.
Transmission issues, as my fellow committee members well
understand, are not limited to my state of Montana, and the effects of
transmission problems in Montana are not limited to Montana. A tree
knocking out a power line in Idaho could mean power shortages in San
Francisco. Limited transfer capability from a sub-station in Spokane,
WA means limited electricity coming to the Flathead Valley in MT or
vice-versa. All you folks out there who need power--we have it in
Montana, but with the current state of our transmission lines, we don't
have a way to get it where its needed.
Added authority for siting transmission lines and pipelines appears
to be a necessity. For transmission lines, upgrades and new
construction is essential. For natural gas pipelines we can loop the
lines and add compression to pump more gas down the same path. But with
the amount of transmission capability needed over the next 20 years, it
is apparent that we cannot stop at upgrades, new lines must be built.
We can, and must, identify and reform, or in some cases, remove
some of the regulatory burdens. We have a mandate to assess and improve
agency performance, which could lead to more timely processing of
permits and applications to produce power. A similar mandate must also
follow for increasing and upgrading transmission capabilities as well
as natural gas pipelines. That's why I support S. 172, the Electric
Reliability Act, with my friend Gordon Smith. This bill will benefit
electricity consumers by promoting the reliability of the bulk-power
system.
Three hundred and ninety three gigawatts of new generating capacity
is needed by 2020, and a 52 percent increase is expected in natural gas
consumption. With that increase expected in generation and
consumption--the same should be planned for transmission. We have an
Administration that inherited a lot of chores left undone by the
previous administration, but with an energy intensive Administration
under President Bush and Vice President Cheney I am confident that we
will begin the work that is needed, no matter how late. I look forward
to hearing from our distinguished panel of witnesses and how they are
working to meet these challenges, as well as how this committee can
meet the challenges.
STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR
FROM IDAHO
Senator Craig. Mr. Chairman, thank you very much.
A couple of winters ago my wife and I and a group of
business people from Idaho had an opportunity to spend a couple
of weeks in China. We were in Shanghai in a beautiful hotel
that had been recently built. My guess is it would have
qualified as a Four Seasons or possibly a medium grade Ritz. It
was a very fine, beautiful hotel, meeting all western standards
except one: The power kept going out. Places to plug in the
computers, places to get on line, places to uplink to the
satellite, but about every time you tried, your connection was
broken by a power blink. The reason is they have no grid. They
have no uniform system of delivery of power through China, and
it clearly is an impediment to their growth and to the quality
of the kind of growth they will have in the future. Of course,
they are moving very quickly to try to remedy that.
That was never our problem as a country because of
foresightedness on the part of State public utilities
commissions and the Federal Government working together to
resolve that early on in our processes of electrifying the
country.
But somehow we have dropped behind a bit, and I think this
hearing is critically important to determine where we go now
and what kind of new authority we give, if necessary, to
reawaken this country and to build upwards of 230,000 miles of
transmission line and tens of thousands of miles of gas
pipeline that are going to be necessary to meet these growth
curves that are predicted, and reasonably predicted, for the
future.
As many of you know, I have been a critic of giving the
Federal Government eminent domain over private property,
believing that that siting authority could best reside in the
States. At the same time, I recognize the problem and recognize
that we cannot sit idly by, as our chairman just recognized,
and allow the NIMBYphites of this country to understood the
kind of connective processes we have so effectively put in
place over the years that have built the marvelous electrical
system that we have.
It needs to be upgraded and it needs to be upgraded
rapidly. We are changing concepts of management in how we
handle transmission systems in this country in a restructured
environment. All of that has to come to play as we determine
how we solve the energy crisis we are clearly in. There is no
excuse for this other than the blame ourselves for allowing it
to happen. Now we ought to be smart enough--and I think we
are--to get out of it and to do so in sometimes extraordinary
ways.
But we should not walk all over the right of the private
property owner, nor will we walk all over the environment. All
of this can be done and done I think effectively with the
environment in mind and with private property in mind, and out
of that, our job is to strike a balance.
So, I am anxious to hear from all of you this morning, as
you express your concerns--some of you have had direct
experience in this problem--and how we deal with it. We must
deal with it. Thank you.
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. This is, I think, going to be a very
interesting time. We all know what the problem is. I think most
of us understand and most people understand what needs to be
done over time. When consumption goes up and production does
not, then you have obviously a problem.
I think a couple of issues, however, that we have not
talked about a lot are, one, what we can do, if anything, in
the more immediate future. I think that is going to be
important. And the other then is having gotten into a position
to produce energy, whether it be through gas, whether it be
through coal or electricity or whatever, then how do we get it
where we are going?
The electricity is supposed to grow. 1,300 plants are
projected over the next several years in order to do something
there.
Natural gas, a 52 percent increase in the next several
years.
So, what are we going to do?
Limitations on infrastructure have been a real problem, of
course. There has been a decline of 5 percent in transmission
investments over time. But I think we have to look at
interstate--and I agree with my friend from Idaho, but if we
are going to have interstate transmission, if you are going to
produce coal, mine mouth, for example, in Wyoming, and the
market is in California, then how do you do that? I think we
have to find a way to have interstate transmission. We need
maybe to take a look at a national transmission grid, perhaps
operated by an independent operator of some kind.
But eminent domain is going to be an issue.
Who is going to own these facilities, and how does a
producer, particularly a merchant producer or generator, get on
these movements? The cost of transmission. Someone said the
other day that gas at the wellhead in Wyoming is less than $5
and about $14 when it gets to the State of California. If that
is the case, we have got a little problem in the cost of
movement of these kinds of things.
So, in any event, it is very exciting to talk about it.
I notice in today's paper they are saying the Cheney report
is probably going to say that the Nation needs 36,000 miles of
natural gas pipeline in order to meet the needs. So, we have
got some problems.
I look forward to your comments.
Senator Domenici [presiding]. I am not going to have any
opening remarks. We are going to proceed. We have four
witnesses today. Mr. Nugent, Commissioner of Maine Public
Utilities Commission, Augusta, Maine, on behalf of the National
Association of Regulatory Utility Commissioners, would you
please proceed?
STATEMENT OF WILLIAM NUGENT, COMMISSIONER, MAINE PUBLIC
UTILITIES COMMISSION, AUGUSTA, ME, ON BEHALF OF THE NATIONAL
ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
Mr. Nugent. Thank you, Mr. Chairman, members of the
committee. Thanks for having me back.
You may recall the last time I was here I was asking you
that you work with the administration to produce a fully
constituted FERC, appointing the people to the two vacancies.
Now, I do not know what you did, but the two nominations have
been made. I understand you are going to have hearings on them
very quickly, and President Bush has nominated in Pat Wood of
Texas and Nora Mead Brownell of Pennsylvania two able,
energetic, and knowledgeable people. There are no finer
candidates among the 220 State commissioners. So, I thank you
for however you pulled that off. You did a good job.
But on today's subject, on the infrastructure thing, I
think it is useful to divide your consideration of it into the
three broad categories of natural gas pipelines, electric
generating facilities, and electric transmission lines.
In my experience, the FERC-run siting process worked very
well in Maine for the gas pipelines. FERC sited, permitted, and
supervised construction of more than 400 miles of natural gas
pipelines, including several river crossings, crossings of
trout and salmon streams and other environmentally sensitive
areas, in about 36 months. There may be problems in pipeline
siting, but they do not seem to be apparent in Maine or, for
that matter, in New England.
There seem to be few impediments to building new generation
in New England. As Mr. Cook is likely to tell you, New England
has brought 2,300 megawatts on line this year, a 10 percent
addition to New England's capacity. We now have a capacity
margin, with a tie line from Hydro-Quebec, of more than 18
percent. Maine alone has built five generating stations
totaling more than 1,600 megawatts in the last 3 years. That is
twice as much generation as California and we are one-twenty-
fifth their size.
Right now the real impediments, if they may be called that,
in siting generating stations or the real realities are fuel
supply and capital. 3 or 4 years ago, the announcement was we
were going to build 30,000 megawatts, 30 gigawatts of new
generating capacity in New England. And many of us wondered how
you are going to do that. The question is is there enough
natural gas supply to power 30,000 megawatts of new generating
stations. And the answer was, well, there seems to be enough
for four to six. Now we are up to six to eight. On one of those
new pipelines that was created through Maine, new compressors
are being added to increase the capacity by 50 percent. So, the
market seems to be responding there. I do not know whether we
will get all the way to 30,000 megawatts in the short-term
future, but it does seem to be responding.
Generating companies seem to announce three, four, or five
projects across New England and then actually build maybe two
or three of them, abandoning the remainder for the moment. It
seems to be a response to a dynamic market. Someone else's
project may have gotten to the market first. While you were
planning and building yours, someone else already brought
theirs on line. It may be that the best way of being certain of
having two new plants playing in the local market in 3 years is
to start developing for and then move in response to the
opportunities. You want to see where you can get the best
combination of local support and access to markets.
The biggest puzzle remaining is transmission development.
It is a puzzle because I am not aware of very many examples in
this area and because New England, to my knowledge, has not yet
developed a program to beef up the system for future growth in
a comprehensive way.
There are four examples that come to mind. We constructed
38 miles of transmission across Maine to connect a new
generator in Rumford to the grid. There is now under
consideration a 90-mile transmission line, a second
transmission line, to connect Atlantic Canada to the New
England grid. There was some transmission development in the
Boston area, and transmission upgrades in Maine to bring that
16,000 megawatts into the New England market.
The Rumford program went quite well actually, although it
confronted State regulators with some new problems. Normally in
a regulated environment, when you wanted to build transmission
and to issue a certificate of public convenience and necessity,
you first examined need. Does the market need more power? Then
what plant were you going to build to supply that power. Then
if you needed a transmission line, it followed that you would
grant the authority to condemn the land, or eminent domain, if
necessary. First you try to acquire it. If you cannot get it,
use the eminent domain.
Where are you in a world where four developers may see a
market opportunity and each does develop his own generation to
meet the same need? Do you grant eminent domain authority in
that circumstance? It is not as clear as it was in a fully
regulated environment. There are more alternatives and you are
trying to respond to markets.
With regard to the MEPCO line, right now the proponents of
that line are not pushing it very aggressively, and to some
extent, it is a question of cost. Can you build that line and
bring Atlantic Canada energy into the New England market in a
cost effective manner?
In the Boston area, you are dealing with a situation in
which there was a load pocket. Sithe Energy started to develop
a generator, was under construction with a generator in that
area to meet the load in that area, and transmission interests
moved up and developed an alternative solution to the problem,
socializing the costs across the New England area. The
importance of this example is that you have to see generation
solutions as an alternative to transmission solutions. Do you
put generation close to the market and avoid the need to build
transmission, or do you build the generation at some distance,
and then are you confronted with the need to move the power
from that distant location into the market?
To some extent, we are dealing with mismatches in these
circumstances. Who should build these transmission facilities?
Utilities or merchant transmission plants? Should it be a
regulated activity or an entrepreneurial activity? Before
anyone jumps aboard the ``let it just be fully competitive,''
remember that we are dealing with a very scarce resource, and
freeing it up to a fully competitive environment could produce
pricing behavior similar to what is going on in the California
energy market.
Now, with regard to regional solutions, you should know
that the New England Conference of Public Utilities
Commissioners has a long history--these are the six commissions
from the six New England States--of working closely together.
We have paralleling us in the private sector an independent
system operator, which operates the transmission grid
throughout the New England system.
The New England commissioners have recommended that a
regional regulatory authority be established--they have done
this in comments to the FERC--and that it work in concert with
the FERC to oversee market activities. Our commission
recommends that we take that a step further and make it a
fuller regional regulatory advisory group to the FERC so that
the authority would repose in the FERC. People close to the
scene would develop solutions that met the conditions on the
ground in New England, recommended to FERC. If FERC felt it met
the national standards, the FERC, over a period of time by
affirming these decisions, would tend to give credibility to
this model.
I offer that as a model for New England only. I do not
suggest that this is what western Governors ought to do or
anyone else. I think maybe what we ought to do is let models
develop in different parts of the country that meet a national
standard, but that the individual models are tailored to meet
local conditions.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Nugent follows:]
Prepared Statement of William Nugent, Commissioner, Maine Public
Utilities Commission, Augusta, ME
Good morning. My name is Bill Nugent. I am a Commissioner on the
Maine Public Utilities Commission and First Vice President of the
National Association of Regulatory Utility Commissioners, commonly
known as NARUC. I greatly appreciate the opportunity to appear before
the Senate Energy and Natural Resources Committee on behalf of NARUC
and I respectfully request that NARUC's written statement be included
in today's hearing record as if fully read.
NARUC is a quasi-governmental, nonprofit organization founded in
1889. Its membership includes the state public utility commissions for
all states and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. NARUC's members regulate the retail rates and services of
electric, gas, water and telephone utilities. We have the obligation
under State law to ensure the establishment and maintenance of such
energy utility services as may be required by the public convenience
and necessity, and to ensure that such services are provided at rates
and conditions that are just, reasonable and nondiscriminatory for all
consumers.
Today I have been asked to address the issue of ``impediments to
siting energy infrastructure.''
As a nation, we want the lights to come on whenever we flip the
switch. We want to run all of our consumer goods that use electricity
as inexpensively as possible. We want to be able to be employed by and
own companies that produce these electric-powered consumer goods. We
want our companies to be able to buy power at interruptible rate
levels, but never have to be interrupted.
However, we do not want generation facilities fouling the air,
water, and land, nor do we want transmission lines running through our
communities or near our schools or homes. We do not want gas pipelines
running under our feet or near our communities. We do not want to pay
any additional costs associated with renewable energy. We do not want
to spend the money necessary on research to find technologies to
replace the energy sources we currently depend upon.
Therefore, the conclusion that we must draw from all of this is
that the main impediment to siting energy infrastructure is the great
difficulty in getting public acceptance for needed facilities. Quite
frankly, this tells us that no matter where siting responsibility
falls, with State government or the Federal government, siting energy
infrastructure will not be easy and there will be no ``quick fix'' to
this situation.
Historically, the States have had the responsibility and authority
to site transmission, generation, and intrastate pipelines. In fact,
the generation and transmission infrastructure that is currently in
operation now, as well as that infrastructure currently under
construction, has received State siting approval. Additionally, those
infrastructure projects that are in the planning stages are being
planned with State approval in mind.
Make no mistake, NARUC and its membership understand that
additional generation and transmission is necessary in all regions of
the country. NARUC's members are also well aware of the difficulties
evolved with the siting of these facilities. The fact remains that in
spite of these difficulties, the States have been successful in siting
the electric infrastructure that exists today. However, we must also
continue to be cognizant of the basic laws of physics. As much as we
all would like to be able to move electrons from wherever they are
produced to wherever they are needed, like we can with natural gas
molecules, the electric transmission system is not able to accommodate
those types of transactions. In other words, the transmission system as
it now exists was not built to handle the types of wholesale
transactions that a competitive market will require. This means we will
have to be innovative to make the system function the way we need it to
function.
NARUC believes that the States should do more to improve upon the
tremendous success story of the nation's electricity infrastructure.
States exercising jurisdiction over the siting and certification of
transmission facilities should not discriminate against interstate
facilities, meaning that in general, interstate facilities should be
sited, certificated, and otherwise regulated under the same standards
and procedures as intrastate facilities.
NARUC supports voluntary regional bodies that permit the States in
which an interstate transmission facility is proposed to be sited, to
issue certificates authorizing the construction of the proposed
facility through collective decisionmaking. If States choose to retain
certification authority for themselves, there should be agreed upon
mechanisms to resolve disputes where individual States involved have
come to conflicting and/or inconsistent determinations in their
respective deliberations. These voluntary regional bodies could:
address siting of transmission; identify regional bulk power market
needs for State siting agencies to consider in their respective
deliberations; and, plan for the construction of new interstate
transmission facilities.
Congress should affirm that States have the primary authority to
establish, operate and govern these voluntary regional siting bodies,
and the Federal Energy Regulatory Commission (FERC) could act as an
appropriate ``backstop'' authority where States or regions fail to act.
Additionally, Congress should provide an explicit grant of authority to
the States and FERC to act in cooperation.
In conclusion, NARUC believes that States are the appropriate
authorities to exercise jurisdiction over the continued siting of most
energy infrastructure, including electric transmission and generation.
Additionally, NARUC supports a voluntary regional body approach to
address the siting of transmission facilities. Until we all begin to
make sacrifices, it will continue to be extremely difficult to improve
our energy infrastructure. We as public officials must also try to use
our positions to apply reason rather than fanning the flames of
emotion.
Thank you for your time and attention. NARUC members and staff look
forward to working with the members of this Committee to put forth a
successful national energy policy. Thank you again and I look forward
to your questions.
The Chairman [presiding]. Thank you very much.
Mr. Cook.
STATEMENT OF DAVID N. COOK, GENERAL COUNSEL, NORTH AMERICAN
ELECTRIC RELIABILITY COUNCIL, PRINCETON, NJ
Mr. Cook. Good morning, Mr. Chairman and members of the
committee. My name is David Cook. I am general counsel for the
North American Electric Reliability Council. I have submitted
detailed testimony for the record.
NERC commends this committee for taking on the critical
issues of transmission infrastructure. NERC firmly believes
that steps must be taken to improve that infrastructure if the
Nation is to reap the benefits of competitive electricity
markets.
The committee's hearing is especially timely. Today NERC is
releasing its 2001 summer assessment which evaluates the
reliability of the bulk electric system for June through
September. NERC agrees with the overall conclusions of the
California independent system operator that it will not have
sufficient resources to meet expected demand this summer and
that rotating blackouts will be necessary. However, NERC
expects those conditions to be more severe than reported by the
California ISO, in part because our assessment is based on more
current information. We expect rotating blackouts in California
for about 260 hours over the course of this summer, with the
average size of the curtailments about 2,100 megawatts and as
much as 5,000 megawatts curtailed at peak periods.
Extreme drought conditions throughout the Pacific Northwest
will reduce the available output of hydro resources. Although
we expect it to be able to serve all its firm demand this
summer, it will not have electricity available to export to
California and elsewhere. Unless the region receives
significant precipitation during the summer and fall, the
Pacific Northwest may well experience capacity shortages this
coming winter.
New England and New York have adequate resources to meet
their demand this summer, but they bear watching because those
areas are particularly sensitive to long-term heat waves and
higher than anticipated generating unit outages.
Attachment A to my testimony is the Summer 2001 Assessment
Summary Report. The full report, as well as a more detailed
special report focusing on California and the Pacific
Northwest, may be downloaded from NERC's website.
Several factors contribute to the challenges we face.
First, demand has been steadily increasing. Actual demand and
energy growth rates experienced in the United States over the
last 10 years have been consistently above what people have
projected that growth rate would be. Merchant generators are
now building new plants to meet that increased demand in
response to increased prices that we have been seeing on the
wholesale markets.
But the same is not true for transmission. Over the last 10
years, circuit-miles of high voltage transmission lines
increased at less than 1 percent per year. Over the next 10
years, we are projecting that circuit-miles of high voltage
transmission will increase at a rate of less than half of 1
percent a year. Stated another way, in North America 10 years
ago, we had a little under 200,000 miles of high voltage
transmission lines. Right now we have about 200,000 miles of
high voltage transmission lines, and 10 years from now, we are
projecting that we will have just a little over 200,000 miles
of high voltage transmission lines.
The lack of additional transmission capacity means that we
will increasingly experience limits on our ability to move
power around the country and that commercial transactions that
could displace higher priced generation will not occur. It
could also mean that areas experiencing supply shortages will
not be able to count on other areas with ample generating
resources to help in emergencies.
The existing grid is also being pushed harder and used in
ways for which it was not designed. The systems were not
generally designed to move large blocks of power from one part
of the country to another across multiple systems. Yet, that is
the way business is being conducted today.
The increasing stress on the grid shows up in two ways.
First, there is more congestion on the grid for more hours. On
many days last summer, NERC transmission loading relief
procedures had to be invoked to curtail transactions that were
overloading the transmission facilities between north and south
in the Eastern Interconnection. The interruptions resulted in
lost business for the merchants. For the buyers, it meant
replacing that power with higher priced generation and, in some
cases, interrupting interruptable customers. What did not show
up are transactions that merchants or marketers decided not to
engage in because of the likelihood they would be interrupted.
We expect those conditions again this summer.
NERC is also seeing increased violations of the reliability
rules.
There are steps that we can take to improve our structure,
however.
First is to pass legislation that would establish mandatory
reliability rules. NERC and a broad coalition has been pushing
that. Senator Smith has reintroduced the reliability
legislation that passed the Senate last year as S. 172. The
NERC legislation has been included in both Senator Murkowski's
bill, S. 389, and Senator Bingaman's bill, S. 597. I was
pleased to note that just last week the Western Governors
Association reaffirmed their support for such legislation.
Second, we need to remove impediments to expansion of the
transmission grid, and I would put those impediments in three
areas. The first has to do with siting and certification.
Projects that would strengthen the grid are just not getting
built. Imagine a mine-mouth generating plant in the Powder
River Basin with a direct current transmission line to Chicago
and to the west coast. Under our current process, some sort of
separate certification and siting would be needed in each State
that that line crossed, as well as dealing with the Federal
resource and land management agencies. If we had a single
unified process, that kind of project could get built. We need
to change how we do things.
A second major impediment has to do with economics. The
rates of return that are being given on transmission are not
likely compensating people for their risk. A robust
transmission system would pay large dividends by increasing our
supply options and allowing us to move large blocks of power
around. We are being penny wise and pound foolish about the
transmission system.
Finally, under utility restructuring, it is now less clear
who has responsibility and authority to build transmission. We
need to develop mechanisms for assessing what additional
facilities the network requires and clearly assigning who has
the responsibility and authority to build them.
There is no magic bullet. There is no single thing to be
done that will solve these problems. We need to pursue a whole
portfolio of actions. But operating around limitations and
foregoing economic opportunities because we cannot find a way
to expand our energy infrastructure is not a sound or
responsible strategy.
Thank you very much.
[The prepared statement of Mr. Cook follows:]
Prepared Statement of David N. Cook, General Counsel, North American
Electric Reliability Council, Princeton, NJ
SUMMARY
The North American Electric Reliability Council (NERC) firmly
believes steps must be taken to improve the electricity transmission
infrastructure if the Nation is to reap the benefits of competitive
electricity markets. The development of the United States transmission
infrastructure has lagged far behind other developments in the electric
industry. Even if competitive electricity markets were not the goal,
the limitations of the transmission system seriously restrict the
choices that we have available for meeting the growing demand for
electricity.
NERC is a not-for-profit organization formed after the Northeast
blackout in 1965 to promote the reliability of the bulk electric
systems that serve North America. It works with all segments of the
electric industry as well as customers to ``keep the lights on'' by
developing and encouraging compliance with rules for the reliable
operation of these systems. NERC comprises ten Regional Reliability
Councils that account for virtually all the electricity supplied in the
United States, Canada, and a portion of Baja California Norte, Mexico.
RELIABILITY
The challenges before us are to develop a robust transmission
system to support expanding trade in electricity and to maintain the
high level of reliability that our nation's businesses, citizens, and
the economy itself depend on. Reliability means different things to
different people. For the customer, it could mean, ``Does the light
come on when I flip the switch?'' Or, ``Does a momentary surge or blip
re-boot my computer or cause me to lose a whole production run of
computer chips I was manufacturing?''
NERC defines the reliability of the interconnected bulk electric
system in terms of two basic and functional aspects, adequacy and
security. Adequacy means the ability of the electric system to supply
the aggregate electrical demand and energy requirements of the
customers at all times, taking into account scheduled and reasonably
expected unscheduled outages of system elements. Security means the
ability of the electric system to withstand sudden disturbances such as
electric short circuits or unanticipated loss of system elements. The
challenges we face concern both the adequacy of the transmission system
and our continuing ability to maintain the security of the bulk power
system.
2001 SUMMER ASSESSMENT
The Committee's focus on this issue is especially timely: Today
NERC is releasing its 2001 Summer Assessment,* which evaluates the
reliability of the bulk electricity system in North America for June
through September of 2001. It assesses the expected demand and the
resources available to meet that demand this summer and also addresses
transmission reliability issues.
---------------------------------------------------------------------------
* Retained in committee files.
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The Assessment concludes that California will experience
significant difficulties meeting its projected electricity demand this
summer, with involuntary demand curtailments (rotating blackouts)
expected during many hours of the summer. Extreme drought conditions
throughout the Pacific Northwest will reduce the available output of
hydroelectric resources. Although the Pacific Northwest is expected to
serve all its firm demand this summer, it will not have electricity
available to export to California and elsewhere. In addition, the
report cautions that New England, New York City, and Texas should be
closely watched, despite having adequate re sources to meet demand. New
England and New York City are particularly sensitive to long-term heat
waves or higher-than-anticipated generating unit forced outages. Texas
will undergo a major shift in its operation in June when it opens up a
new retail market system and consolidates to a single control area. The
report concludes that generating resources should be adequate to meet
projected electricity demands in other areas of North America this
summer.
The Assessment also points to concerns regarding north-to-south
transmission transfer capability in the eastern portion of the United
States, particularly east of the Mississippi River. The ability to
transfer electricity from the north to the south in the Eastern
Interconnection was severely tested last summer, spurred on by
temperature diversity (cool temperatures in the north and hot in the
south), plus high fuel prices in the south. Early indications are that
key transmission interfaces used to transfer electricity from north to
south are already fully subscribed and transmission congestion will
again be prevalent in this area throughout the summer.
As a supplement to its 2001 Summer Assessment, NERC conducted an
in-depth independent examination of the expected summer conditions in
both California and the Pacific Northwest based on interviews with
experts from both the California Independent System Operator (CAISO)
and the Northwest Power Pool (NWPP). NERC agrees with the overall
conclusions of the CAISO that the CAISO will not have sufficient
resources to meet expected demand this summer and that involuntary
curtailments of firm customer demand (rotating blackouts) are expected.
However, NERC expects those conditions to be more severe than reported
by CAISO, in part because the NERC assessment is based on more current
information. NERC anticipates that firm demand in California may be
curtailed for about 260 hours over the course of this summer, with the
average size of the curtailments about 2,150 MW, and as much as 5,000
MW required to be curtailed at peak periods.
The NERC assessment of the NWPP concludes that this subregion will
serve all its firm electricity commitments this summer. However, due to
limited energy output from hydroelectric facilities resulting from
severe drought conditions, NWPP will not have the ability to export the
amounts of electricity it traditionally has to California or elsewhere.
Unless the region receives significant precipitation during the summer
and fall, the Pacific Northwest may well experience capacity shortages
this coming winter.
Attachment A to my testimony is the 2001 Summer Assessment Summary
Report. The full report, as well as the Special Report that focuses in
more detail on California and the Pacific Northwest, may be downloaded
from NERC's web site at www.nerc.com.
HOW THE SYSTEM WORKS
The California experience has focused peoples' attention on
electricity issues in ways they never have in the past. Because of that
increased awareness, we can use the California experience to talk about
how the bulk electric system really works. California is not an island;
it is part of a much larger grouping that we refer to as an
Interconnection. The North American grid is divided into three
Interconnections. The Western Interconnection includes not only
California, but also the rest of the United States from the Rocky
Mountains to the Pacific coast, as well as the Canadian provinces of
British Columbia and Alberta, and a portion of Baja California Norte,
Mexico. The Eastern Interconnection includes not only most of the
United States east of the Rocky Mountains, but also Canadian provinces
from Saskatchewan through the Maritimes. The third Interconnection
comprises the Electric Reliability Council of Texas.
The interconnected nature of utility operations makes possible the
transfer of power from one area to another for economic reasons as well
as sharing resources in emergencies. California is a summer-peaking
area, and it normally imports surplus power from the Pacific Northwest
in the summertime to augment its own generating resources. By contrast,
the Pacific Northwest is a winter peaking area, and it normally imports
surplus power from California in the wintertime. That hasn't happened
this year.
California has also demonstrated the limits on the transmission
system. No doubt you've heard of Path 15, a link between Southern and
Northern California. Earlier this year, on some days the California
Independent System Operator had to curtail firm load in Northern
California, even though sufficient generation resources existed in
Southern California to meet the load. Path 15 was loaded to its limits
and there simply was no way to move additional energy into Northern
California.
Interconnected operations also mean that a disturbance occurring in
one part of an Interconnection can have adverse effects throughout the
Interconnection. The 1996 Western outage that affected San Francisco,
Los Angeles, and the desert Southwest and shut down the Diablo Canyon
nuclear power plant started with a tree contacting a power line in
Idaho. And whether an individual state chooses to open up to retail
competition or not, the states are still connected together as part of
one Interconnection.
WHAT'S HAPPENING NOW: DEMAND AND GENERATION
A number of factors have contributed to our present circumstance.
First, demand has been steadily increasing. The consensus projection
for the average annual peak demand growth over the next ten years is a
relatively modest 1.9% for demand and 1.9% for energy use. The
projected growth in demand is similar to the projections of the last
several years. High and low bands around the base forecast show a range
of the forecast uncertainty to account for weather, economic growth,
industry deregulation, and other factors. Both peak demand and energy
projections are substantially below the actual growth rates experienced
over the last ten years as demand has been driven by extreme weather at
peak times and a strong economy. Actual demand and energy growth rates
experienced in the United States over the last ten years have actually
been closer to the rate calculated as the high band for both demand and
energy.
Second, in many parts of the country merchant generators are now
building new plants to meet that increased demand, in response to the
increased prices that we have been seeing in the wholesale electricity
markets. During the past 10 years, generation was being added at the
rate of only 0.86% per year, even while demand was growing at the rate
of 2.7% per year. That picture is changing, although in some parts of
the country supplies will be tight for the next few years. Over 20,000
MW of new merchant capacity came on line to serve demand in the United
States for the summer 2000. This year, New England has added another
2,300 MW. The Electric Reliability Council of Texas has added more than
6,000 MW. The East Central Area Reliability Council has added more than
4,000 MW since last summer. A crucial 600 MW is being added within New
York City and Long Island. While that story is not being repeated
everywhere, even California, which is experiencing shortages now, is
expected to have significantly increased reserve margins within a few
years.
WHAT'S HAPPENING NOW: TRANSMISSION
The same is not true for transmission. Over the last 10 years,
circuit-miles of high voltage transmission lines (230 kv and above)
increased at only 0.75% per year. Over the next 10 years we are
projecting that circuit miles of high voltage transmission will
increase a total of just 4.2%, or a rate of less than 0.5% per year.
Stated another way, in North America 10 years ago we had a little less
than 200,000 circuit-miles of high voltage transmission lines. Right
now we have about 200,000 circuit-miles of those lines. And 10 years
from now we are projecting that we will have just a little over 200,000
circuit-miles of high voltage transmission lines. The transmission
dollars that are being spent today are to connect the new generation to
the grid--they are not going to build new lines to strengthen the
grid's ability to move large blocks of power from one part of the
country to another. That lack of additional transmission capacity means
that we will increasingly experience limits on our ability to move
power around the country and that commercial transactions that could
displace higher priced generation won't occur. And, it will mean that
areas experiencing supply shortages, like California is now, won't be
able to count on other areas with ample generating resources to help in
emergencies.
Moreover, the existing grid is being pushed harder and is being
used in ways for which it was not designed. Historically, each utility
built its system starting in the city-centers, because the early
generating stations were located close to load centers. As the cities
grew, the electric systems grew with them, spreading outward from the
center. The weakest part of the electric grid is generally at the
places where one system abuts another. Initially utilities installed
connections between two systems for emergency purposes and to share
generating reserves to keep costs down. Gradually those
interconnections were strengthened so that adjoining utilities could
buy and sell electricity when one had lower cost generation available
than did the other. But the systems were not generally designed to move
large blocks of power from one part of the country to another, across
multiple systems. Yet that is the way business is being conducted
today. The volume and complexity of transactions on the grid have grown
enormously since the advent of open access transmission.
Electric industry restructuring adds to the challenge. In the past
a vertically integrated utility had complete responsibility for all
aspects of its electric system, from planning and building the
transmission system, through assuring that sufficient generation was
constructed, to operating and maintaining the transmission and
distribution systems. With restructuring, those responsibilities are
being divided among multiple entities and, in some cases, those
responsibilities may be falling between the cracks. Regional
Transmission Organizations may provide a means to reintegrate some of
these functions. But the RTO proposals that have been filed to date
vary considerably in the extent to which the RTO has the authority to
take on the responsibility for expanding the transmission system. In
some parts of the country existing entities, such as the PJM
Independent System Operator, have successfully integrated those
functions. It remains to be seen whether that degree of integration
will be replicated in other parts of the country, and whether
neighboring RTOs will strengthen the interconnections between them.
The result of all this is that the transmission grid is being
increasingly stressed. That stress shows up in two ways. First, NERC is
seeing more congestion on the grid, for more hours of the day. Last
summer in the Eastern Interconnection there were substantial transfers
of power from north to south. Cooler temperatures in the north meant
that surplus generation could seek higher prices in the south where the
temperatures were hot. On many days security coordinators had to invoke
NERC transmission loading relief procedures to curtail transactions
that were overloading the transmission facilities between north and
south. The interrupted business deals resulted in lost business for the
merchants and a need to replace the transaction with higher priced
power for the buyers and, in some cases, interruption of interruptible
customers. What do not show up are the transactions that merchants or
marketers decided not to engage in because of the likelihood they would
be interrupted. We know that those same transmission facilities are
fully subscribed for the coming summer, meaning we could see a repeat
of last year's pattern if we experience similar weather conditions and
fuel prices.
Second, NERC is seeing increasing violations of its reliability
rules. The grid is generally operated in a first contingency mode, that
is, so that the grid can withstand the loss of its largest element and
remain stable and secure. That means that all the transmission lines
are operating within their own thermal limits as well as the operating
security limit of the grid (meaning that the failure of a particular
line won't cause a cascading failure of another line, collapse of
system voltage, or instability of generators). So when a large
transformer fails or lightning strikes a power line, as happens as a
matter of course, the grid can absorb that loss without losing its
integrity. Operating in this manner preserves the stability of the
grid, but it does sometimes place limits on the amount of power that
can be moved from one part of the grid to another.
This is the area where NERC's rules operate, setting the standards
by which the grid is operated from moment to moment, as well as the
standards for how future transmission systems must perform. Those
latter standards include the things that need to be taken into account
when one plans and constructs an integrated system that is capable of
being operated securely. The NERC standards do not design where
facilities go, either transmission or generation, or what kind or how
many facilities should be built. They do indicate what system
performance tests must be met, which influences how the system must be
built if it is to be capable of secure operation. So, when fewer
transmission facilities are built, operating the system in a secure
fashion will place limits on the amount of power that can be
transferred.
Last summer there were a number of instances where operators
allowed facilities to remain loaded above their security limits for
extended periods of time, placing the grid at prolonged risk of major
failure. Some entities have made the economic judgment that it is less
costly to them to violate the rules than to follow them. We have seen
entities improperly leaning on the Interconnection, causing unscheduled
and unmanageable flows and potential voltage problems. As the limits of
the system are reached and transactions must be curtailed, we are
beginning to hear suggestions to relax the reliability rules to allow
higher flows to occur. In an interconnected system, taking such risks
to realize some short-term economic gain affects not only the system
where the limit occurs, but also all the systems in the same
Interconnection. For example, in the 1996 outages in the Western
Interconnection, customers far away from the initiating problems were
interrupted for significant periods of time.
WHAT'S NEEDED
Fortunately, there are steps we can take to improve our
transmission infrastructure. First is legislation to change from a
system of voluntary reliability rules to one that has mandatory rules
coupled with an enforcement mechanism backed by government. NERC and a
broad coalition of industry supporters have been pursuing legislation
to achieve enforceable reliability rules.
Goals of Reliability Legislation
Mandatory and enforceable reliability rules, for
All operators and users of the bulk power system in North
America
Fairly developed and fairly applied, by
Independent, industry self-regulatory organization
Oversight within U.S. by FERC
Must respect the international character of the
interconnected North American electric transmission system
Regional entities will have a significant role in
implementing and enforcing compliance with these reliability
standards, with delegated authority to develop appropriate
Regional reliability standards.
The self-regulatory organization model follows that of the
securities industry, where the National Association of Securities
Dealers and the securities exchanges act as self-regulators under SEC
oversight.
Last year the Senate adopted the NERC legislation as S. 2071, but
the bill died in the House. Senator Smith reintroduced that legislation
this year (S. 172). In addition, the NERC legislation (including
provisions addressing the roles of the states and coordination with
regional transmission organizations) has been included in both Senator
Murkowski's bill (S. 389) and Senator Bingaman's bill (S. 597). NERC
strongly urges you to adopt legislation containing the reliability
provisions in this session of Congress. That will enable us to develop
an organization and infrastructure to enforce the reliability rules and
keep the grid secure.
Second, we need to remove the impediments to expansion of the
transmission grid. I would group the impediments into three major
areas. The first has to do with the certification and siting of new
transmission facilities. Imagine a project to build a mine-mouth
generating plant in the Appalachians with a large, direct current line
to deliver the power to New York City and New England. Or a similar
mine-mouth plant in the Powder River Basin, with direct current links
into Chicago and to California, so electricity could be delivered to
where it was needed. Those lines would cross many states, and under out
current process some sort of separate certification and siting
procedure would be required for each one. Often, the relevant state
laws were enacted at a time when the public utility operated local
generation to serve local customer demand. In order to receive a
certificate of need, the utility had to demonstrate local benefits to
justify the impact of building the transmission lines it needed. Local
opposition to transmission facilities can be daunting, especially where
there is no perception of local benefits. Yet these are really
interstate facilities that affect a whole region or even many regions.
If the proposed facilities cross federal lands, then the Federal Land
Management Policies Act is triggered, and even more procedures are
involved. Projects that would strengthen the grid are today being
delayed due to an inability to obtain certification and rights of way.
Other projects are not even attempted, as potential developers decide
not to undertake the effort. We need to change how we do things.
A second major impediment to expanding the transmission grid has to
do with economics. The cost of transmission is a relatively small
portion (6 to 8%) of the overall cost of delivered electricity. Against
the prices that prevail in the West today, that number is even smaller.
A robust transmission system would pay large dividends by increasing
our supply options and allowing us to move large blocks of power from
where it is available to where it is needed. Yet the regulated rates
that we allow transmission owners to charge may not compensate for the
risk they take on. Requiring that investment to be recovered over a
period of thirty years may no longer be practical. We need a rate
paradigm that recognizes the value that transmission plays in our
economy. As well we need a rate paradigm that allows those who build
new transmission to recover their investment. The way business is now
conducted on the grid, capacity that one transmission owner adds may
well be consumed by the parallel flows of transactions of others who
purchased a ``contract path'' on other facilities.
Finally, there is the issue of how many different entities own
pieces of the grid and have various responsibilities for it. I earlier
spoke about the changes occurring from restructuring as the functions
and responsibilities formerly handled by a vertically integrated
utility are divided among different entities. Who has the
responsibility and authority to build transmission is now less clear.
We need to develop mechanisms for assessing what additional facilities
the network requires and clearly assigning who has the responsibility
and authority to build them.
There are models that point the way. One very promising model can
be found within the Electric Reliability Council of Texas. ERCOT uses
an annual collaborative process of stakeholders to decide what
facilities need to be added to the grid to serve the expected load.
Once the needed facilities are identified, the responsibility to build
the facilities is assigned to one of the transmission owners within
ERCOT. A governmental authority (the Texas Public Utilities Commission)
with jurisdiction as broad as the grid conducts the proceeding to
determine whether to certificate the facilities and where to site them.
The fact that the proposed facilities are the outgrowth of the
collaborative process carries significant weight in the state
proceeding. The costs of building the facilities are then allocated
equitably to all load served by the grid and to others who use the
grid.
CONCLUSION
NERC commends the Committee for attending to the critical issue of
enhancing our transmission infrastructure. There is no magic bullet, no
single thing to be done that will solve the challenges we face.
Instead, we must pursue a portfolio of actions. We are not likely to
achieve everything we would wish for out of any of them, but taken
together, the portfolio approach provides the strongest opportunity for
us to make the improvements we need. First and foremost, we need
legislation authorizing development of an industry self-regulatory
reliability organization to set and enforce mandatory reliability rules
for all users of the bulk power system. That will promote and maintain
the reliable operation of the bulk power system that we do have.
Further, we need to expand demand-side measures and develop additional
generation (both central station and distributed). Finally, we need to
expand the transmission grid, by both building new lines and exploiting
new technologies to get more capacity out of the existing grid and
carry more energy over existing rights-of-way.
Operating around limitations and foregoing economic opportunities
because we can't find a way to expand our energy infrastructure is a
not a sound or responsible strategy. Our nation, its citizens, and its
businesses deserve a robust electricity supply system that allows us to
realize our full potential. Thank you.
The Chairman. Mr. Halvorsen, good morning.
STATEMENT OF JERALD V. HALVORSEN, PRESIDENT, INTERSTATE NATURAL
GAS ASSOCIATION OF AMERICA
Mr. Halvorsen. Good morning, Mr. Chairman. My name is Jerry
Halvorsen. I am president of the Interstate Natural Gas
Association of America, and I am here to testify this morning
regarding the need for natural gas pipeline infrastructure.
The Department of Energy's Energy Information
Administration estimates that the use of natural gas will
increase from slightly over 22 trillion cubic feet per year
today to somewhere around 30 trillion cubic feet somewhere
around 2010. This is a 32 percent increase in gas demand.
Mr. Chairman, before I discuss the natural gas pipeline
infrastructure, I want to emphasize, as we have before, the
need to continue to develop natural gas supply. INGAA continues
to encourage the administration and Congress to open Federal
lands, both onshore and offshore, for exploration and
production of natural gas. Mr. Chairman, 40 percent of the
natural gas reserves in this country are offshore, and we
absolutely have to get to those reserves if we are going to
meet future needs.
We also, as you know, strongly encourage the development of
at least one natural gas pipeline from Alaska. North Slope
producers report that 6 to 8 BCF per day of natural gas is
currently being reinjected in the Alaska North Slope. This gas,
coupled with 1.2 BCF per day estimated to come from the
Mackenzie Delta, is expected to comprise 10 percent of the
natural gas supply for North America by 2015. I cannot
underscore, Mr. Chairman, the urgency--and I know you are a
strong advocate of this--of getting this natural gas to market
in the lower 48 States.
The current natural gas pipeline infrastructure will not
support a 30 Tcf market. There simply is not enough pipeline
capacity from the supply basins that will supply this
additional gas or address demand growth in certain areas.
A recent INGAA study estimated our industry would need to
invest about $34 billion in interstate pipeline and storage
infrastructure development over the next 10 years just to keep
up with where the market is going. An average of approximately
2,000 to 2,100 miles of new natural gas transmission pipeline
will be needed each year, and we estimate that the expenditures
for new pipeline construction will vary between $2.2 billion
and $2.5 billion per year.
Mr. Chairman, we brought a Merrill Lynch map which we have
propped up over here, which shows the proposed projects at the
FERC as of September 2000. The blue lines are the existing
interstate pipeline infrastructure, while the arrows describe
the proposed addition to the pipeline network.
Currently there are 24 major natural gas pipeline projects
pending at FERC, and the list of these projects is attached to
our testimony.
I do want to commend Chairman Hebert and the FERC staff
working to move many of these projects along. FERC approved the
Kern River expansion to California in what we believe is a
record, 21 days. FERC is also examining, under Chairman
Hebert's leadership, how they can further streamline the
process, and we think they are headed in the right direction.
Again, we commend Chairman Hebert for the great job that he is
doing.
INGAA still supports having the Council on Environmental
Quality, or CEQ, with FERC as the lead agency, forming an
interagency task force to develop an interagency memorandum of
understanding to expedite the environmental reviews and
permitting of interstate natural gas pipelines. Delays, Mr.
Chairman, are not at the FERC per se, but with the other
agencies that are involved in bringing all these people
together. And we think CEQ can help on this, and we intend to
follow up to see what we can do to get their attention on this.
One impediment that we encounter from time to time is
opposition to new or expanded natural gas pipeline facilities
by local distribution companies. The last attachment to my
testimony shows the California utilities, mainly Sempra, have
protested new interstate pipeline expansions to California.
Again, I think everybody in the gas industry needs to work
together if we are going to get the new capacity built and on
line.
In closing, I would like to say that in response to an
increasingly competitive environment, natural gas pipelines
have reduced operating costs aggressively over the past decade
in response to competition. From 1996 to 1999, pipeline
operating costs have fallen by an average of almost 27 percent.
And we have a study on this, Mr. Chairman, we would be happy to
provide for the record.
These decreased operating costs are being passed on to the
consumers in the form of lower charges for pipeline
transportation.
Mr. Chairman, in closing, I would like to assure you that
INGAA and the natural gas pipeline industry are working to meet
the increase we foresee in natural gas demand by building the
necessary infrastructure we are going to need for the coming
decade.
Thank you very much for this chance to appear.
[The prepared statement of Mr. Halvorsen follows:]
Prepared Statement of Jerald V. Halvorsen, President, Interstate
Natural Gas Association of America
Mr. Chairman and members of the committee, my name is Jerry
Halvorsen. I am President of the Interstate Natural Gas Association of
America (INGAA) and am here to testify regarding the need for natural
gas pipeline infrastructure.
The Interstate Natural Gas Association of America is the trade
association that represents virtually all of the interstate natural gas
transmission companies operating in the United States, as well as
natural gas transmission companies in Canada and Mexico. INGAA's member
companies transport over 90 percent of the natural gas consumed in the
United States through over 280,000 miles of interstate pipeline.
The Department of Energy's Energy Information Administration (EIA)
estimates that use of natural gas will increase from 22.7 Tcf today to
30 Tcf sometime around 2010 (a 32 percent increase in gas demand).
Other experts forecast a similar growth in gas use.
Before I discuss natural gas pipeline infrastructure, I want to
emphasis the need to continue to develop natural gas supply. As we have
in the past, INGAA continues to encourage the Administration and the
Congress to open federal lands, both onshore and offshore, to
exploration and development of natural gas. The National Petroleum
Council has estimated that there are 137 Tcf off limits to develop in
the Rocky Mountain area and another 76 Tcf offshore the continental
United States.
We also strongly encourage development of at least one natural gas
pipeline from Alaska. North Slope producers report that 6 to 8 BCF/d of
natural gas is currently being reinjected in the Alaska North Slope.
This gas, coupled with the 1.2 Bcf/d estimated to come from the
Mackenzie Delta, is expected to comprise 10 percent of the natural gas
supply for North America by 2015. I cannot underscore the urgency of
getting this natural gas to market into the lower 48 states at the
earliest possible date.
The largest area of growth in natural gas demand is expected in
electric generation, which currently uses natural gas to fuel 16
percent of electric generation, followed by the industrial sector. The
primary reasons for the large growth in the gas segment of the power
generation market are the relatively low capital costs of gas-fired
generation, the low air emission characteristics of those facilities,
and the reduced timeframe it takes to permit and build those
facilities. It is estimated that delivered natural gas prices must stay
below approximately $4 per MMBtu for gas to beat out a new highly
efficient coal plant for new power generation. Following is a chart
that shows the benefits that accrue from using natural gas in a 300
Megawatt electric power plant.
COMPARATIVE EMISSION LEVELS FROM A 300-MEGAWATT POWER PLANT
------------------------------------------------------------------------
New gas-
Existing New coal fired
coal boiler combined-
boiler cycle
------------------------------------------------------------------------
NOX Emissions........................... 0.50 0.18 0.04
(lb/MMBtu)............................
SO2 Emissions........................... 1.20 0.42 0.00058
Particulate Matter...................... 0.11 0.04 0.0029
(lb/MMBtu)............................
CO2 Emissions........................... 205 205 125
(lb/MMBtu)............................
------------------------------------------------------------------------
The INGAA Foundation has received projections that natural gas use
for electric power generation should be about 6.5 Tcf by approximately
2010. If this projection is reduced to a lower case of 4.8 Tcf with
coal replacing the remainder of the capacity, it is estimated in
Implications of Reduced Gas Use on Emissions from Power Generation,
prepared by Energy and Environmental Analysis, Inc., that emissions of
mercury and uncapped nitrogen oxides emissions would increase by 10
percent and carbon dioxide emissions would increase by 4 percent. The
111,730 million ton increase in NOX emission is comparable
to the NOX emissions from 4 million cars. The 108 million
ton increase in CO2 emissions is comparable to the
CO2 emissions from 28 million cars.
The current natural gas pipeline infrastructure will not support a
30 Tcf market. There simply is not enough pipeline capacity from the
supply basins that will supply this additional gas or to address growth
in certain markets. Energy and Environmental Analysis, Inc. prepared a
study for the INGAA Foundation in 1999 called Pipeline and Storage
Infrastructure Requirements for a 30 Tcf U.S. Gas Market. The INGAA
Foundation plans to release an update of this study showing natural gas
demand and capacity needs by region early this summer.
The 30 Tcf study estimated that our industry would need to invest
about $34 billion in interstate pipeline and storage infrastructure
development between 1999 and 2010 just to keep up with where the market
is going. An average of approximately 2,000 to 2,100 miles of new gas
transmission pipeline will be needed each year. Expenditures for new
pipelines and pipeline expansions were $2.2 billion in 1999 and $2.5
billion in 2000. Three new pipelines, as well as many pipeline
expansions, were brought on line last year--the Alliance Pipeline
brings natural gas to the Chicago area from Alberta, Canada, Vector
Pipeline delivers natural gas from Chicago to Indiana and Michigan and
ends in the storage fields of Dawn, Ontario and the Maritimes Northeast
Pipeline delivers natural gas from Sable Island, off the East Coast of
Canada, through Maine and into the Boston area.
The Merrill Lynch map that is behind me, and enclosed with this
testimony, shows the now proposed projects at Federal Energy Regulatory
Commission (FERC) as of September 2000. The blue lines are the existing
interstate natural gas pipeline infrastructure while the arrows
describe the proposed additions to the pipeline network.
Currently, there are 24 major natural gas pipeline projects pending
at the FERC. (A list is attached to my testimony.) Projects determined
to be major are those that deliver approximately 100 MMcf/day or more.
These projects are proposed in almost every region of the country. If
approved, they would add an additional 8,598 MMcf/day; expand the
pipeline system 2,389 miles and cost $9 billion. There are numerous
other filings for pipeline expansions that are well less than 100 MMcf/
day also pending at FERC. A number of our companies are also holding
``open seasons'' to determine where there may be need for additional
pipeline capacity. The current rules at FERC are working. All of our
INGAA companies are working to meet the additional demand for natural
gas that they see in their own market areas and elsewhere.
The following chart from the Energy Information Administration's
report U.S. Natural Gas Markets: Recent Trends and Prospects for the
Future depicts the proposed natural gas pipeline projects as of March
2001 by region of the country.*
---------------------------------------------------------------------------
* Attachments to this statement have been retained in committee
files.
---------------------------------------------------------------------------
I want to commend Chairman Hebert and the FERC staff for working to
move many of these projects along. FERC approved a Kern River proposed
expansion of 135 MMcf/day to California in what I believe is a record,
21 days. By adding compression to Kern River, this increased supply of
natural gas from the Rocky Mountain area should reach the California
border by late July of this year. FERC has also approved conversion of
Line 2000 (formerly part of the All American crude oil pipeline) to
natural gas to boost deliverability into California by as much as 230
MMcf/d. This project is scheduled to come on line by the end of August.
FERC is reexamining its process of pipeline construction approval.
FERC is considering seeking volunteers on selected new pipeline
proposals to begin to work with FERC on the Environmental Impact
Statement prior to completing the application to file so that the
National Environmental Policy Act (NEPA) process can be expedited. It
is anticipated that this could reduce the timeframe of certificate
processing for those projects by six to eight months.
This is an important step. Many new natural gas-fired electric
facilities can be built in a year or less from the time they commit to
a natural gas supply. However, if additional pipeline capacity needs to
be built, this process, in the best case, could take over two years to
prepare, file and obtain approval.
INGAA members are also building new storage facilities and
reopening liquefied natural gas (LNG) facilities that had been
mothballed for many years. (A map of these existing facilities is
attached to my testimony.) These facilities provide supplementary
supply. CMS is currently receiving LNG at their Lake Charles facility
and has recently received final approval from FERC to expand their peak
send-out capacity. Williams and Southern Natural are restoring
facilities at Cove Point, Maryland, and Elba Island, Georgia,
respectively. Our member companies are also considering building new
LNG facilities close to growing markets. We project that LNG will not
add substantially to our natural gas resources over the next ten years
but it will provide a niche supply in key areas.
INGAA still supports having the Council on Environmental Quality
(CEQ), with FERC as the lead agency, forming an interagency task force
to develop an interagency memorandum of understanding to expedite the
environmental review and permitting of interstate natural gas
pipelines. If the affected agencies can work on their specific
approvals concurrently as opposed to sequentially and use a common file
of pipeline information, this can help reduce the time it takes for the
NEPA process and obtaining permits while assuring that all the
requirements of NEPA are met. We hope they will take a lead effort in
facilitating the same discussions with state and local agencies.
One impediment we encounter from time to time is opposition to new
or expanded natural gas pipeline facilities by local distribution
companies. For example, one large east coast pipeline proposal was
opposed, at least at some point, by four local distribution companies.
As the last attachment to my testimony shows, California utilities,
mainly Sempra, also have protested new interstate pipeline expansions
to California.
Before closing, I want to point out to the Committee that, in
response to the increasingly competitive environment, pipelines have
reduced operating costs aggressively over the past decade. Technology,
including advanced remote control and telemetering technology, has been
a major driver of these lower costs. From 1996 to 1999, pipeline-
operating costs have fallen by an average of almost 27 percent.
These decreased operating costs are being passed on to consumers in
the form of lower charges for pipeline transportation. The only
exceptions to this pattern are pipeline systems that have added new
facilities to increase capacity.
Mr. Chairman, I want to assure you that INGAA and the natural gas
pipeline industry are working to meet the increase we foresee in
natural gas demand by building the necessary infrastructure to deliver
natural gas and storage to end-use markets. INGAA's goal is to have a
flexible, safe and transparent transportation grid that will provide
clean natural gas to America at a reasonable cost.
The Chairman. Thank you, Mr. Halvorsen.
Mr. Stan Szwed. Good morning.
STATEMENT OF STANLEY F. SZWED, VICE PRESIDENT, TRANSMISSION,
FIRSTENERGY CORP., AKRON, OH
Mr. Szwed. Mr. Chairman and members of the committee, thank
you for the opportunity to testify here today on impediments to
transmission siting and building new transmission
infrastructure. I am Stan Szwed, vice president of Transmission
for FirstEnergy Corp. of Akron, Ohio. We are the Nation's tenth
largest electric utility, serving some 2.2 million customers in
northern Ohio and western Pennsylvania, and when we complete
our merger with the New Jersey-based GPU, we will be the
Nation's fourth largest electric utility.
I would like to focus on electric transmission today and
specifically the following three points: one, the need for
Federal authority regarding transmission siting; two, the
creation of a brand new electric transmission industry and its
need to match supply to demand, that is, to build more
transmission infrastructure; and three, the needs of the new
transmission industry that Congress should address to get more
transmission built.
Simply stated, the country needs more transmission. No one
is building transmission lines and now is the very time we need
to dramatically enhance transmission infrastructure. We need to
transform a network of what are now local roads into an
interstate highway system. If we focus on wires and get
electric transmission right, a major ingredient to successful
competitive markets will have been addressed.
The transmission principles that you and Senator Craig
articulated last year provide the right framework for a market-
driven and business-oriented resolution to transmission issues.
A key impediment to increasing transmission capacity is
siting. Having a siting problem, however, means we have
something to site.
There are other barriers to building transmission lines
that need to be addressed, including the need for new
investment, disincentives in the tax code, the Holding Company
Act, and the potential for new Federal regulatory authority.
Let me first turn to your priority of today, siting.
With wholesale electric competition, transmission today is
much more interstate, certainly more than in 1935 when the
Federal Power Act was adopted. By contrast, gas pipelines were
considered interstate when Congress passed the Natural Gas Act
in 1938. Congress gave the then Federal Power Commission
authority to issue a certificate of public convenience and
necessity for construction of interstate gas pipelines and
authorized the certificate holder, if necessary, to exercise
eminent domain authority in court.
That is what we need now for electric transmission. We
recommend granting the Federal Energy Regulatory Commission the
authority to site electric transmission facilities, consistent
with its authority under the Natural Gas Act. We also endorse
your siting provision, Mr. Chairman, included in your
legislation in the 106th Congress.
But again, there has to be something to site. With a
regulated service such as transmission, setting out the right
business proposition depends very heavily on Congress and
Federal regulators establishing the right Federal policies.
In addition to the siting recommendations that I just made,
the following is what we believe the Federal Government must
do.
First, with regard to transmission rate reform, Congress
should reform transmission ratemaking to reflect the risks and
uncertainty in the new transmission industry. Put yourselves in
the shoes of an ordinary investor. Assume that this regulated
transmission industry has been newly reconfigured, supply and
demand patterns are in flux, the regulatory environment is
uncertain, and the company may have limited future flexibility
on how to position, acquire, and dispose of assets. Are you
going to invest? The answer is no. But somebody has to or we
will be headed for trouble.
Providing for innovative transmission rates is an absolute
must to afford the transmission business the opportunity to
earn a competitive rate of return, and that is what is needed
to attract new investment.
On taxes, Congress should enact tax reform to remove
disincentives to formation of regional transmission
organizations and to provide incentives for new investment.
Specifically, we need to allow for tax-deferred sales and tax-
free spinoffs of transmission property. In addition, we need to
accelerate depreciation periods for transmission property.
On the Holding Company Act, Congress should repeal the act
or at least exempt from its requirements steps taken to form a
regional transmission organization or a regional transmission
company. The Holding Company Act stifles investment and makes
it harder to form transmission companies and regional
organizations.
On FERC's authority over dispositions of utility property,
Congress should repeal or streamline section 203 of the Federal
Power Act. FERC's reviews under 203 take far too long and are
duplicative reviews conducted by other agencies.
On regional transmission organization formation, Congress
should avoid giving FERC authority to mandate RTO structure.
The voluntary approach of FERC Order 2000 is working as some 98
percent of investor-owned transmission assets are being
committed to regional organizations.
Mr. Chairman, I have touched on a lot of issues. Let me
just take a minute to summarize by simply saying it this way.
Very personally for nearly the last 4 years, myself and other
transmission executives across the country have been working
nonstop to launch the much-needed new transmission industry.
And all of the issues I have raised here today from siting to
rate reform and all the rest, including the Holding Company
Act, stand in our way. They frustrate our efforts and stunt the
growth of this new business. But more important from your
perspective, these legal and regulatory impediments deny your
constituents the smart, switchable electric transmission
network our country needs for reliable, robustly competitive
and high quality electric service. That electric service is the
kind of service you must have for the 21st century and to
propel our growth.
Thank you for holding this hearing and calling attention to
our Nation's need for more and better energy delivery
structure.
[The prepared statement of Mr. Szwed follows:]
Prepared Statement of Stanley F. Szwed, Vice President, Transmission,
FirstEnergy Corp., Akron, OH
Thank you for the opportunity to testify before the committee
today. I am Stan Szwed, Vice President, Transmission for FirstEnergy
Corp. FirstEnergy is a diversified energy services company
headquartered in Akron, Ohio, and is the nation's 10th largest electric
utility. We serve 2.2 million customers in Northern Ohio and Western
Pennsylvania. We are in the final stages of our proposed merger with
New Jersey-based GPU. GPU serves 2.1 million customers in Pennsylvania
and New Jersey. When our merger is completed, FirstEnergy will be the
4th largest electric utility in the nation based on customers served.
FirstEnergy has been an industry leader on electric transmission
issues, and we have worked diligently with other industry leaders and
with state and federal regulators on groundbreaking work that will
result in the development of transmission organizations for the
electric industry of the future. During the course of our work, we have
tried to help policy makers set the right course for transmission. I
hope that my experience on these two efforts--the development of a for-
profit regional transmission organization (RTO) called the Alliance
RTO, and the promotion of proper federal policy on transmission with a
group known as the informal coalition--will be of value for the
Committee.
My testimony will focus on the following four areas: (1) the
importance of federal authority to site new transmission facilities;
(2) the creation of a brand new electric transmission industry and its
need to grow and improve--that is, match supply to demand with more and
better transmission infrastructure; (3) other important needs of the
new transmission industry that Congress must address to get more
transmission capacity; and (4) lessons from my work with the Alliance
RTO and a policy-oriented group called the informal coalition.
Simply stated, what the transmission industry needs today is more
and better infrastructure. The growth or addition of transmission miles
to the interconnected network has been so dismal that it makes the
growth of electric generation look wild in comparison. As some
commentators have put it, there is a ``transmission investment gap.''
Senators, no one is building transmission lines and it is happening (or
not happening) at the very time we need to dramatically enhance our
transmission infrastructure. What is needed is the steady
transformation of a network of what are now local roads into an
interstate highway system. Focus on the wires and get transmission
right, and a major ingredient to successful competitive markets will
have been added.
Mr. Chairman, the principles you and Senator Craig articulated last
year provide the right framework for resolving this critical issue.
Those are: a market-driven and business-oriented resolution to
transmission issues; the voluntary development of transmission
institutions; the continued flexibility of the market to determine the
structure of RTOs; and encouragement for expansion of transmission
investment.
As the Committee has identified in holding this hearing, one of the
key impediments to increasing transmission capacity is the problem of
siting new lines, particularly lines that are designed to facilitate
interstate or interutility power transactions. Since one must first
have a line to site before it is time to consider the siting process,
it is important to discuss other critical impediments to increased
capacity. These include the need for new investment, disincentives in
the tax code, the Public Utility Holding Company Act (PUHCA), and the
potential for new federal regulatory authority. Let me first discuss
siting.
REFORM TRANSMISSION SITING
Transmission siting is a significant impediment to reliable and
competitive electric service. If it is not addressed, constraints we
have in the system today are going to get worse. Transmission systems
are being asked to function in ways they were never designed to
function. The combination of increased demand for electricity and new
types and patterns of transactions is causing transmission traffic
jams. In the last 5 years, the annual number of transactions between
regions has increased from 25,000 to 2 million.\1\ The transmission
systems have handled this increase reasonably well, but the number of
occasions on which transmission curtailments must occur is increasing.
---------------------------------------------------------------------------
\1\ Ron Scherer, ``The Other Electricity Crisis: Transmission
Lines,'' February 20, 2001, at 3 (citing Edison Electric Institute).
---------------------------------------------------------------------------
Moreover, without the proper financial incentives for transmission
expansion, bottlenecks will proliferate. Attached to my testimony are
two charts that illustrate the problem. One shows that between 1995 and
1999 the number and complexity of wholesale transactions have grown
enormously, resulting in increased use of transmission systems. The
other is even more sobering, showing that annual transmission
investments, in constant inflation-adjusted dollars have been declining
for almost 25 years--at an average rate of $115 million per year.
Consistent with the recent development of wholesale electric
competition, transmission has become much more of an interstate
business than it was ever thought it would be. Certainly, it is a far
cry from what it was in 1935 when the Federal Power Act was adopted.
Congress chose not to provide the Federal Power Commission (FPC), the
predecessor to the Federal Energy Regulatory Commission (FERC or the
Commission), with eminent domain authority in 1935, given that electric
service was generally local in nature. When Congress passed the Natural
Gas Act in 1938, it gave the FPC authority to issue a certificate of
public convenience and necessity for construction of gas pipelines, and
gave the holder of such a certificate the ability to go to court to
exercise eminent domain authority, if necessary, to build transmission
facilities. That grant of authority reflected the interstate nature of
the gas business, where the commodity was being transported across
State lines. The same is now true of the electric industry.
Utilities have been as hesitant as many in Congress to suggest that
the Commission ought to have authority for transmission siting. For
many in Congress, it has been a matter of principle that land use
decisions ought to remain at the local level. For utilities, it has not
only been a matter of principle, but a matter of political sensitivity.
We need to rely to a great extent on the judgment of State utility
commissioners and other officials in our business. While we prefer
deference to traditional State prerogatives, the increasingly
interstate nature of transmission is undeniable, and the importance of
constructing new facilities to facilitate interstate, if not inter-
regional transactions, speaks to adopting a more streamlined process
with a role for the federal government.
A State through which a utility line must pass may be reluctant to
authorize its construction if there is no direct local benefit,
regardless of the benefit to interstate commerce. In the new
competitive marketplace, this is a potential recipe for disrupting the
supply chain. New lines are going to benefit the entire network, and
help ensure a large, robust competitive marketplace. Not having new
lines also has an effect on the entire network. Some entity with
responsibility for this larger area needs to be accountable for these
decisions.
We endorse Chairman Murkowski's siting provision included in S.
2098 from the 106th Congress. We hope that this provision can be
included in legislation in this Congress.
Alternatively, FirstEnergy recommends granting the Commission the
authority to site electric transmission facilities similar to the
authority contained in the Natural Gas Act. Under Section 7(c) of the
Natural Gas Act, a certificate of public convenience and necessity is
required before a natural gas company can undertake the construction,
operation, extension or acquisition of facilities used in the
interstate transportation or sale of natural gas.
Depending on the type of facilities being proposed in an
application for a certificate of public convenience and necessity for a
gas pipeline, the FERC requires detailed information concerning the
proposed facilities including, among other things, the proposed route,
the environmental impact of the proposed facilities, identification of
affected landowners and steps taken to address any concerns affected
landowners might have with respect to the proposed facilities and
documented compliance with various Federal laws.
Once FERC has granted a certificate of public convenience and
necessity with respect to the facilities, if the holder of the
certificate cannot acquire the rights-of-way necessary to construct and
operate its proposed facilities, it can acquire the same by exercise of
the power of eminent domain in the District Court of the United States
for the district in which the facilities are located.
I endorse federal siting authority, even though in Ohio we have a
comparatively good siting process. Each State handles transmission
siting differently. In Ohio, prior to about 25 years ago, we had a
process much like many other States where an applicant for a
transmission line would have to gain approval from a variety of State
regulators at the State Public Utility Commission, the Environmental
Protection Agency, and other agencies who administered statutes that
might be affected by a proposed facility. In addition, a utility would
have to get approvals from local governments. What a utility might find
is that local governments would pass ordinances to block proposed
facilities. What we have nationally now is a situation somewhat
analogous to what most states used to have, with utilities needing to
gain a variety of approvals to build the network to support interstate
commerce.
In the early 1970s, Ohio adopted a law modeled after one in New
York State that established a transmission siting board. Today in Ohio
if you propose a transmission facility, the application need only be
approved by the State siting board. The applicant must demonstrate a
need in Ohio for the facility, and must demonstrate that environmental
considerations are given due regard. Once those thresholds are met, the
board issues a certificate of environmental compatibility and public
need. I am told that thirty-nine states follow this model, but there
are still a number that do not.
Siting more transmission is a means to achieving reliable, cost-
effective electric service in the new electric marketplace. However,
siting is only one challenge, and it is necessary to provide details on
some of the other critical problems. As difficult as transmission
siting has been, it is of less importance in my view to the future of
the transmission industry and electric service generally, than letting
this brand new transmission business be a business that people are
willing to grow.
enable the independent transmission business to form and grow
The new transmission business must be able to make a case for
itself. It must be able to demonstrate to investors, employees,
customers, regulators, suppliers, and others that it can perform and
grow--that it can be a stand-alone enterprise. For a stand-alone
transmission company operating independently of affiliated generators,
distribution companies or other market participants, this means it must
demonstrate that it can attract investment, recruit and keep highly
talented, highly motivated people, and pay a just and reasonable return
to its owners. Investors need to know that investing in the new
transmission industry has commensurate opportunity for reward as
investments of similar risk.
This point bears emphasis: federal and state regulatory policies
are separating the generation, transmission, and distribution
components of an industry on which so many conveniences and necessities
of modern life are dependent--light, heat, refrigeration, water, sound,
transportation, safety and medical services, to name a few. The
objective of these policies is to promote competition for electric
service within wholesale and retail markets by permitting both retail
customers and generators access to the transmission system on a
nondiscriminatory basis. In particular, the FERC, by promoting the
formation of Regional Transmission Organizations, is requiring
transmission service to be furnished by large multi-state organizations
independent of transmission owners. This policy requires the
transmission business to stand on its own in providing reliable
transmission service, expending its facilities to support growing
competition for electric service, and providing reasonable compensation
to stockholders. Since reliable and readily available transmission
service is one of the keys to effective competition, a regulatory
environment must be created that gives this new transmission business
the opportunity not simply to survive, but to thrive.
The new transmission industry might look to the naked eye a lot
like part of the old utility, with the same power lines, the same
people running the facilities, regulated returns and so on. However,
lest anyone think that electric restructuring is just a simple asset
shuffle, California demonstrates that we cannot overlook the direct
relationship between investing to keep up with changing demands and
electric reliability.
Open access to transmission facilities, which FERC required in
Order No. 888, means that transmission lines once solely used for the
vertically integrated company that owned the line, are now part of an
interstate transmission highway that could be used by anyone. The
problem is that as a whole, the systems were not built to serve as an
interstate highway. They were built to deliver electricity from a
specific power plant to a specific load center within the regulated
service area of a single utility or utility system. The separation of
transmission from the traditional utility and the transfer of control
over transmission service to RTOs introduces new requirements and
dictates a new approach to ensuring reliability of transmission
service.
Let me explain it this way. Open access is the equivalent of making
Constitution Avenue accessible for use for I-95 traffic. It has worked
fine as a main artery for local traffic all these years, but now it
must facilitate through traffic. If it cannot be upgraded to handle the
interstate traffic, there could be serious consequences. Separation and
regionalization are the equivalent of saying that we are going to turn
over control of Constitution Avenue to a regional entity that will plan
for its expansion so the I-95 traffic can get through. However, the new
interstate operating entity has to have its own borrowing authority. In
the real life of the new transmission industry, the operating entity is
the private sector, and we need to compete with others in the private
sector to attract investment to tackle the project. I might add with
respect to siting that the local authorities might not be too keen on
building an interstate highway through the heart of town.
Don't just take my word for how important it is to get the new
transmission industry right. Look at the findings of the January, 2001,
report of the PA Consulting group, ``The Future of Electric
Transmission in the United States.'' This report argues that ``the
inability of the restructuring process to adequately address as yet the
needs of the transmission sector is jeopardizing the health of both the
sector and of the entire electric power industry, which it supports . .
. . [The] lack of additional incentives in the face of new risks lies
at the heart of many of the problems now facing the transmission
sector.'' Or look at the possible scenarios envisioned by Cambridge
Energy Research Associates in its Autumn, 2000, report, ``High Tension:
The Future of Power Transmission in North America.'' It concludes that
with the proper incentives, the transmission sector will function
appropriately, but without the proper incentives, the resulting
inadequate, unreliable transmission system will force a government
takeover of transmission or a patchwork of distributed generation as
customers avoid crumbling transmission networks altogether.
Enabling large regional transmission businesses to become
operational is a significant technical challenge requiring millions of
dollars of investment in new equipment and systems. The new technology
needs to keep pace with the end uses of electricity. There are
increasingly end use applications of computers and computer-based
control equipment where not only the quantity but the quality of
electric service is fundamental to enabling everything to work. At
times, even the smallest disturbance can cause a malfunction of this
sensitive equipment. New technologies are required to improve power
quality, and that takes investment.
In a regulated service such as transmission, setting out the right
business proposition depends very heavily on Congress and federal
regulators establishing the right federal policies. In addition to the
siting prescriptions I recommended above, the following is what we
believe the federal government must do.
REFORM TRANSMISSION RATES
Congress should reform transmission rate making to reflect the
risks and uncertainties in the brand new transmission industry. FERC
has a legal obligation to set rates that simultaneously protect
consumers' interests in having reasonable rates and investors'
interests in a reasonable return on investment. However, transmission
rate reform, which many parties acknowledge is needed, has been too
long in coming. The best thing for consumers is a robust, growing
transmission network, and it will require some different regulation to
bring that about.
Put yourself in the shoes of an ordinary investor. The stock broker
calls with the opportunity to invest in a company that provides a
regulated service, which typically has a comparatively low risk and a
commensurate return. However, this regulated industry has been newly
reconfigured, supply and demand patterns are in flux, the regulatory
environment is uncertain, and the company may have limited future
flexibility on how to position, acquire and dispose of assets.
This is an investment I do not want to have to make, because it is
a vision of the future of this new transmission industry I do not have
and our country should not have. Instead, I want to bring this brand
new industry to investors full of hope that a well-run transmission
business will gain customers and be able to keep some of the rewards
for providing good efficient service and improving customer
satisfaction. This is the essential task for the industry, Congress,
and FERC.
We support transmission rate reform so that returns on transmission
assets are in line with assets in industries having commensurate risk.
We also support innovative rate treatments, such as allowing
transmission owners to share with customers some of the financial
benefits of providing more cost-effective service. FERC is moving in
the right direction on issues like these, but encouragement from
Congress, especially in the form of legislative language directing FERC
to consider the need for transmission investment and expansion when
setting rates, is very important.
REMOVE TAX BARRIERS
Congress should enact tax reform to remove disincentives to
formation of regional transmission organizations and to provide
incentives for new investment. Specifically, we need to allow for tax-
deferred sales and tax-free spinoffs of transmission property, as
called for in Chairman Murkowski's bill, S. 389. This language resulted
from an agreement between the Edison Electric Institute, the American
Public Power Association, and the Large Public Power Council. In
addition, we need to accelerate depreciation periods for transmission
property, as called for in S. 596, introduced by Senator Bingaman.
Forming a for-profit transmission company or transco, which is what
my company and many if not most other utilities are doing to comply
with Order No. 2000, is extremely difficult, and is complicated by the
tax laws. To meet the Order's independence requirement, many utilities
prefer to find a way to divest transmission assets, especially if they
are forming transcos. In other cases where government action results in
a taxable event that would not otherwise have occurred, the tax code
prevents incursion of tax penalties. If utilities sell transmission
property and reinvest the proceeds into other utility property, taxes
should be deferred until a taxable event involving the property occurs.
If utilities spin off transmission property, this should not be
considered a taxable event.
As for depreciation of transmission assets, the depreciation period
should be brought into line with periods for property in other
industries, given the changed circumstances under which the industry
must attract capital. We thank Senator Bingaman for his foresight on
this point.
REMOVE PUHCA BARRIERS
Congress should repeal the Public Utility Holding Company Act, or
at the very least, exempt newly-formed electric transmission companies
qualified as RTOs from its provisions. When the Senate Banking
Committee held a hearing on S. 306, the Public Utility Holding Company
Act of 2001 (which has now been adopted by that committee by a 19-1
vote), Cindy Marlette, FERC's Deputy General Counsel, testified to the
impact of PUHCA on RTO formation, stating:
PUHCA may cause unnecessary regulatory burdens to utilities
who, in compliance with Commission policy and regulations, seek
to form or join regional transmission organizations (RTOs). . .
. Under PUHCA, any entity that owns or controls facilities used
for the transmission of electric energy--such as an RTO--falls
within the definition of public utility company, and any owner
of ten percent or more of such a company would be a holding
company and potentially could be required to become a
registered holding company. This could serve as a significant
disincentive for investments in independent for-profit transcos
that qualify as RTOs.
Put simply, the Holding Company Act stifles investment in the
emerging independent transmission industry.
repeal or reform section 203 of the federal power act
Congress should repeal or streamline the review of dispositions of
utility property by the FERC under section 203 of the Federal Power
Act. Among other things, this review is a barrier to consolidation of
transmission networks and formation of RTOs.
Section 203 of the Federal Power Act is currently a ``one size fits
all'' provision that applies to the disposition of all jurisdictional
assets with a value of $50,000 or more. It applies to everything from a
simple sale of a transmission substation to the most complicated
utility. FERC reviews of dispositions of property under section 203
take far too long and are often duplicative of reviews conducted by
other agencies. For some transactions, review is required by FERC, the
Department of Justice, the Federal Trade Commission, the Securities and
Exchange Commission, the Nuclear Regulatory Commission, and each
affected State. Utility transactions should be reviewed by the
government, commensurate with the way transactions involving other
industries are reviewed. There are important societal and governmental
interests to be protected. However, the massive, time-consuming,
duplicative review specific to the electric utility industry is
contrary to consumer interests because it delays companies' ability to
respond to market needs and needlessly increases transaction costs.
The industry is positioning itself to dispose of transmission
property because FERC determined to have RTO formation. Recently when
FirstEnergy established a transmission subsidiary within our own family
of companies, the federal review, including SEC approval, took over a
year. Although the FERC acted promptly by comparison--that is, within 7
months--reforming or eliminating the property disposition review at the
Commission would be a positive step.
AVOID MARKET STRUCTURING AUTHORITY
Congress should avoid giving FERC new authority to restructure the
industry. As noted above, RTOs are forming. They are doing so according
to what the experts in this industry have judged to be in the long-term
interests of transmission service and transmission customers. This
process is already subject to intense FERC review and approval.
Now is certainly not the time to add market structuring authority,
with 98 percent of investor-owned transmission assets being committed
to RTOs. The industry is demonstrating that many proposals in the last
Congress for additional RTO authority were unnecessary. Many also have
proposed giving FERC market power authority. We believe this would have
a chilling effect on the investment and industry consolidations needed
to capture the efficiencies of competition and ensure adequate supply
and reliability of delivered power. Antitrust agencies already have
ample authority to ensure industry compliance with antitrust laws. FERC
was designed as an economic regulatory agency. Market structuring
functions should remain primarily elsewhere.
Furthermore, if the federal government focuses the transmission
debate on the authority of the Commission to restructure the industry,
it conditions the industry to be concerned with regulation, and not
with improving transmission systems. The businessmen will be regulatory
experts, not transmission experts. Lately my colleagues and I have
spent a lot of time negotiating our way through regulatory changes and
policy debates, when what we need to do most is run this critical
business and focus even more intently on customer satisfaction.
ADOPT MANDATORY RELIABILITY STANDARDS
We support the adoption of mandatory reliability standards to
provide for proper enforcement of the rules of the road. We support the
reliability language of the North American Electric Reliability Council
(NERC), as modified to address concerns about its interplay with the
reliability requirements for RTOs contained in Order No. 2000.
In the 106th Congress, Congressmen Tom Sawyer and Richard Burr
introduced H.R. 2786, legislation which addresses many of the
transmission problems I have just mentioned. Key portions of that
legislation were adopted by the House Subcommittee on Energy and Power
in the last Congress as part of H.R. 2944. It is also my understanding
that Vice President Cheney's Energy Task Force report may be headed in
the same direction.
I would now like to turn my attention to some of the work
FirstEnergy has been doing to form a regional transmission organization
and to promote appropriate federal transmission policy.
THE ALLIANCE RTO
FirstEnergy is one of the leaders in forming the Alliance
Transmission Company LLC, which we anticipate will be qualified as the
Alliance RTO. This entity, now substantially approved by FERC, will be
a for-profit transmission company. The business of the company will be
to provide transmission service. The companies who now own the assets
that comprise the Alliance will become its customers, along with other
generators and utilities.
For the past two years, the major portion of my daily activity and
the people I work with has been focused on forming the Alliance RTO.
The model we built has attracted five more members to the Alliance,
which will now be able to provide transmission service roughly from the
Gateway Arch in St. Louis to Kitty Hawk. It will link large load
centers such as Chicago, Detroit, Cleveland, and Northern Virginia.
There are business and human challenges that must be overcome. On
the business side, we are focused on crafting and executing the
business and financial arrangements necessary to establish electric
transmission institutions that can serve growing competitive markets
for electricity. This is the cutting edge of financial restructuring.
On the human side, the new transco will need experienced and highly
trained, highly motivated personnel. It takes experienced people to run
these systems. The system operators are the finest people around. The
last thing they want to happen is to reduce load or have a blackout.
They take pride in making sure that we effectively balance resources
and load, and they work day and night--literally 24 hours a day, seven
days a week, 365 days a year--to keep the lights on. We must keep these
operators. However, without the right business proposition, and without
some certainty about the direction and promise of this emerging
industry, how will we keep them?
THE INFORMAL COALITION
In July 1999, FirstEnergy and five other companies launched the
informal coalition, which to my knowledge has been the only
transmission-specific policy oriented group in Washington. The group's
members today are DTE Energy, Duke Energy Corporation, FirstEnergy
Corp., Northeast Utilities System, Public Service Electric & Gas
Company, and Southern Company. The companies in the group recognize the
importance of expanding transmission capacity and adhere to the
principles I have mentioned that you and Senator Craig espoused last
year. As a practical matter, these principles translate into the kind
of agenda items I have discussed. While the group has not yet endorsed
a specific transmission siting proposal, we recognize that the
increasingly interstate nature of transmission argues for a federal
role.
In the past two years, we have held somewhere near 200 meetings
with Senators, Congressmen, the Administration and staff. Many key
federal decision makers are relying upon our expertise, and we are
grateful to have earned their trust.
Looking at where we have come from, I am very proud of this group's
efforts. In less than two years, transmission has gone from an issue
that most policy makers were not discussing--or if they were discussing
it, an issue that centered around more authority for FERC to structure
the market and other issues either harmful to the future of the new
transmission industry or off the track of what is really critical to
its success--to one of the central issues in the restructuring debate.
It seems that most people now agree on the need for the appropriate
investment picture as an integral feature of transmission policy.
CONCLUSION
Thank you for holding this hearing and calling attention to our
nation's need for more and better energy delivery infrastructure. I am
grateful for the opportunity to offer my perspective on the need for
reform of electric transmission siting laws and to support the policy
direction you have charted, Mr. Chairman. Equally, if not more
important, I hope you will consider my recommendations for wider
ranging reforms that are needed to free industry to launch the
independent electric transmission businesses of the future and close
the transmission investment gap.
The Chairman. Thank you very much, Mr. Szwed. I would like
to compliment the panel on the excellent testimony.
I think, unfortunately, we do not seem to be making the
impression that is necessary in the American people, and it is
unfortunate. I really wonder if the crisis is going to simply
have to get worse before people come to grips with the reality.
I am embarrassed that I do not have some of my colleagues
on the other side. I know we had a conflict with the Committee
on Finance that came up and it is a lengthy hearing, but half
the witnesses were chosen on the other side and half were
chosen on this side. I think out of courtesy it is unfortunate
that we do not have any members here from the other side, and I
want it noted because I think it does represent a reality that
we have got an important topic here that is vital to relief
relative to decision making. We have the responsibility for the
decision.
Gentlemen, we have heard a lot about conservation. I think
we are all in agreement that conservation has to be a
significant part of the overall energy policy, but does anyone
believe that we can get there through conservation alone? Yes
or no.
Mr. Halvorsen. No, sir.
Mr. Nugent. No.
Mr. Cook. No.
Mr. Szwed. No.
The Chairman. All right. I appreciate that.
I am also inclined to address some of the questions
relative to what I see are not signs of realism in recognition
of the realities that we are facing today but still a continued
NIMBY attitude, not in my back yard, towards relief. Mr. Cook,
for example, a few weeks ago Connecticut rejected a new high
voltage transmission line connecting Long Island to the New
England power grid out of concern for the oysters. And I am
very fond of oysters.
[Laughter.]
The Chairman. But nevertheless, they did not want it in
their back yard.
In California, there has been opposition to building new
powerplants, but even the relief of starting an existing
powerplant at Huntington Beach, California, for 450 megawatts,
which can be turned on tomorrow, is opposed not because it is
in violation of any air or water quality. It is the heating/
cooling process evidently creates algae and there is opposition
from those who have boats around the area. If you have a boat,
you have a generator, you do not need a long extension cord.
Another NIMBY.
Yesterday in the Los Angeles Times, there is a growing
opposition to the construction of a new high voltage
transmission line by San Diego Gas and Electric. Well, if the
transmission lines are not built and the power lines are not
built, yet the consumer wants reasonable and reliable
electricity, how are we going to get through not just to
California, but to the rest of the public that we have got a
crisis here and a significant portion of the relief is new and
expanded facilities?
Mr. Cook. It is exactly circumstances like those that you
mentioned, Mr. Chairman--I think those in the industry could
probably catalog others as well--that are one of the factors
why this is not happening. It is why we believe that we need to
change how we are doing things if we are going to be able to
get the kind of infrastructure in place that we need to have to
move forward.
The Chairman. It is certainly frustrating. We are talking
about complaints of the price of natural gas at the border in
California is too high. I think this would go to Mr. Halvorsen.
Am I not correct that the California Commission, as well as
local gas distribution companies, have consistently fought
against new pipelines?
Mr. Halvorsen. Yes, sir, that is true. That is why we
attached the chart to my testimony.
The Chairman. For example, did not Sempra, the parent
company of Southern California Gas, file at FERC an opposition
to the recent Kern River pipeline expansion?
Mr. Halvorsen. As well as the transwestern expansion, yes,
sir.
The Chairman. Am I also not correct the State of California
has steadfastly insisted that all interstate pipelines end at
the border of California with the intrastate pipelines inside
the border being subject to State jurisdiction?
Mr. Halvorsen. Yes, sir, that is correct.
The Chairman. Is not the net effect of this to deny
California consumers the benefit of FERC's open access
transportation program which has saved consumers elsewhere in
the United States billions of dollars?
Mr. Halvorsen. Well said, Mr. Chairman. That is exactly the
right answer.
The Chairman. Well, if I am giving you the right answer and
you are agreeing with me, what is the relief? Logic dictates
reality. But is the shoe not pinching enough?
Mr. Halvorsen. Well, we tend to speak a different language
I think sometimes. We have been trying, and particularly I
think it is unfortunate that some of the local distribution
companies that need the gas have been opposing the pipeline
projects. So, again, we are doing our best to communicate that
we all ought to work together on this.
The Chairman. There was a proposal out of San Jose near the
Cisco plant to put in a facility, and that was objected to. If
they are going to object to everything, I assume they simply
are going to be satisfied to buy their power, as much as they
can, outside the State, if they can.
Well, Mr. Nugent, your association represents State public
utility commissioners. As you know, we have an energy bill in.
A number of members are sponsors of that. We are being
criticized because our bill did not include eminent domain for
electric transmission lines. We talked and thought a lot about
it when we discussed it in the makeup of the bill. We thought,
since we have eminent domain on pipelines, that maybe the
States would address it as far as their responsibility was
concerned of ensuring their constituents have access. So, we
did not put it in. We have been severely criticized for that.
We can put it in. It may be in the task force report. I am
inclined to think it is, although I do not know that for a
fact.
But many States are protesting. Here is States protest
Bush's plan for siting power lines. I am sure you saw that in
the Wall Street Journal.
The reason that we have to do it federally, even though I
am opposed to it in theory, because I think the States ought to
meet the obligation, is that States are incapable of coming to
grips and allowing access. Now, you are in the business, Mr.
Nugent.
Mr. Nugent. Mr. Chairman, I reject the characterization
that States are incapable. First of all, different States react
in different ways.
The Chairman. Well, let us say the States that I mentioned
clearly are not together in relieving themselves of their own
problem.
Mr. Nugent. What I think is developing, as you mentioned a
moment ago, the shoe is pinching. I think that may serve as
part of an educative process. I think what you are finding is
that States are gravitating towards a view that they have to
work together to develop a regional solution and do it in
concert with the FERC. It may be that you should repose some
authority within the FERC that ought to be exercised in
conjunction with the people who are very close to the local
situation to develop those solutions for the local area.
The Chairman. I believe in that in theory and I concur with
you. The only problem I have is some of those folks that really
are in charge of making things work are not in charge of the
political realities associated with the decision.
Mr. Nugent. I led off in the testimony here telling you
that the FERC siting process for natural gas pipelines worked
fine in our experience. It may be that you would find a model
there. I do not think you ought to ignore the very substantial
input that you get from people who are working every day in the
region.
The Chairman. I agree with you totally.
My last question is to Mr. Halvorsen. You made reference to
gas coming down from Alaska. This proposal ultimately would go
into the Midwest market. It would involve a 48-inch pipeline
3,600 miles long. It would cost somewhere between $10 billion
and $15 billion depending on some of the circumstances, but the
$15 billion is closer in the sense of moving it in the Midwest.
That would take about 3,600 miles of X80 pipe, very little of
which we make in this country.
Do you think that it could stimulate the steel industry and
the steel industry could be competitive with the industry in
Japan and Korea relative to an order of this magnitude? It is
my understanding it would keep the steel mills in Korea and
Japan busy for 2 years.
Mr. Halvorsen. Senator, we have the steel companies members
of our INGAA foundation.
The Chairman. I know you have.
Mr. Halvorsen. As you know, we are completing a study on
how we can get the infrastructure in place down here to meet
that Alaska gas when it hits the border so we can make sure we
get it around.
The steel people I talked to here are gearing up for the
challenge. They are literally licking their chops at what they
see as some great opportunities, and I think you are going to
see an industry here that is going to be very competitive.
The Chairman. Well, I hope so because it is a great
opportunity for the American steel industry, and I hope the
industry and the unions get behind the reality that we do have
an energy crisis in this country and we are not going to
conserve our way out alone.
Senator Craig.
Senator Craig. Let us pursue the eminent domain and FERC's
role a little more. Mr. Cook, you spent a good number of years
at the FERC.
Mr. Cook. Yes, I did, sir.
Senator Craig. We are looking at what FERC is trying to do
with regional transmission organizations and in that, they have
attempted to address siting concerns to some extent. Spend some
time with us, if you would, talking about regional transmission
authorities and the role they could play here--and any of the
rest of you who would wish to speak to that--and what we might
do or what FERC might do to increase that process or authority.
Obviously, Mr. Nugent is pleased with the way FERC handled
gas transmission.
Mr. Szwed, you have talked about, in your testimony, the
role that Ohio played in adopting model law, and at the same
time, you used the analogy that we are moving from local roads
to interstate systems for transmission. Is the RTO the best
route to do, and if it is, what need we do more to strengthen
it if it in fact needs to be strengthened?
Mr. Cook. I think, Senator Craig, the way the RTO's are
developing around the country is quite varied. The ownership of
the transmission is still split among lots of owners. Some
RTO's have more authority and responsibility with respect to
transmission planning than others do. It is a very mixed
picture.
I think what is important is that there be a central place,
a central forum, where those issues can get worked out. The RTO
may be that kind of place if it is coupled with some sort of
central forum, single forum, where the real authority for going
ahead and siting and constructing is happening. That may be
possible on a regional basis.
My guess is you would need to couple it in some fashion
with some Federal authority, but it may be able to be done in
conjunction with a regional grouping of State authorities.
We need a central sort of single forum for looking at these
kinds of issues.
Senator Craig. At FERC?
Mr. Cook. It could be the FERC. It could be FERC in
conjunction with groups of States, but as long as whatever that
body was had the authority to really make the decision and move
forward, rather than having to then go back to individual
States and deal with Federal resource agencies as well on a
piecemeal basis.
Senator Craig. Eastern States have a little different setup
or a little different landscape than we do in the West as it
relates to the Federal authorities and large expanses of
Federal land where that can be an increased complication.
Mr. Cook. Yes.
Senator Craig. Do any of the rest of you wish to speak
specifically to that issue of the RTO and authority?
Mr. Szwed. Yes, Senator Craig, I do have a few comments I
would like to make.
First of all, with regard to regional transmission
organizations, a comment. What I believe that a regional
transmission organization ought to be is a regional independent
transmission company, a company whose sole business is to
provide transmission service. It is an owner and operator of
assets separate from existing utility companies today. In that
kind of a context, that is an entity that owns and operates
assets and seeks to make investments in assets to provide for
transmission service to customers.
I see that being regional in nature, and as you know,
regional in nature because since 1992 we have had a great deal
of wholesale competition in the electric business and more
recently, particularly in my part of the country, a great deal
of move to retail competition. So, the regular franchised
service territories that we saw as electric utilities are now
dramatically different and more regionalized.
I think that is really important as we step back and think
about what kind of infrastructure from a transmission
standpoint we need to be able to provide for a robust,
competitive marketplace.
Obviously, I went through a number of points regarding the
needs for rate reform and so forth, about attracting investment
that is so important from a Wall Street perspective. It is so
important ultimately from a customer perspective.
But turning the attention to siting--you mentioned Ohio a
few minutes ago. This is real tough for me because I feel like
I am between a rock and a hard place with regard to siting. I
really do appreciate and understand many of the aspects
associated with local concerns regarding siting. In Ohio, way
back when, we actually had a situation where local communities
and so forth got involved in the siting process. But as times
changed, we centralized the siting review process in the Ohio
Power Siting Board so that we would, from a State perspective,
have a single organization that would review environmental,
review the need, review all the aspects of putting together
siting. Now, we are moving to more of a regional, even broader
than regional, transmission network that may involve the siting
of more than one State jurisdiction.
I think from a transmission owner/operator standpoint what
I am involved in in my business today, in order to try to build
this infrastructure, I think it is important that there is a
way to streamline that process, to get the certifications that
are necessary, and move forward with building transmission
projects. I just think that has to happen in some way, shape,
or form. But like I said, it is a difficult situation, and what
we have proposed here is a move toward more of what is done on
the natural gas side from FERC's standpoint in the hopes that
that infrastructure can be built more readily.
Senator Craig. Anyone else? Yes, Mr. Nugent.
Mr. Nugent. Mr. Craig, I would say that the commissioners,
the regulators from really Maryland to Maine, an area that is
very much into the retail competition model, are not yet at the
point of moving towards independent transmission companies. 2
years ago, we convened a meeting of people interested in this
matter that led to agreements among the ISO's in the PJM area,
New York and New England, to cooperate on removing the seams
between them. They have five task forces that are working to
make them function better in markets, transmission business
practices, and so on. The commissions from Maryland to Maine
have set up an oversight structure to monitor what they are
doing and drive that process. To the extent we can, we are
trying to achieve improvements in that fashion. To the extent
inabilities to site transmission come, we would presumably move
to attack that problem.
Mr. Cook. Senator Craig, one other comment on the RTO's is
really a question of scope. The limitations that we saw in
Eastern Interconnection last year that we will see again this
year really cut across the country through Tennessee, Kentucky,
and restrict the movement of power from the northern tier
States down to the south.
Senator Craig. Those resulted in those spikes. Is that what
you are suggesting?
Mr. Cook. Well, there are actually limitations on the
transmission system. We had to cut transactions because the
systems were overloaded. Those really are falling in the seams
of RTO's. So, the problem, in addition to sort of a regional
transmission organization not necessarily having authority to
deal with situations within its own territory, you then get the
additional problem of having to cross those seams between
RTO's.
Senator Craig. My time is probably up, Mr. Chairman. One
last question. Do you envision regional transmission companies?
If so, are they in the concept of the interstate in which they
would actually own the toll lines by which the marketplace
would access to move its power?
Mr. Cook. That is certainly one model, and I think it is
more conceptual at this point. The American Transmission
Company is one company that is just a transmission only
company. Transenergy is the one trying the build the line
across Long Island Sound. That will be sort of a standalone
transmission company. Depending on how some of these issues
that we are talking about this morning get worked out, you may
see more of that, and certainly that is one direction it can
go.
Mr. Szwed. Senator, I do see regional independent
transmission companies, and they, being in the transmission
business, regulated by FERC with a perhaps lighter-handed
regulation by FERC, with a for-profit motive. They would have a
tariff approved and put in place by the company through the
approval of FERC, and all customers would have open and
nondiscriminatory access to the system per the requirements of
the tariff.
But I think going after your question about perhaps
interacting with neighbors and so forth, I see that company
being in that kind of a business to want to make sure that
investments are made and services provided to relieve
congestion as appropriate, as economically appropriate as well.
Senator Craig. Thank you, gentlemen.
The Chairman. Senator Thomas.
Senator Thomas. Thank you, Mr. Chairman.
Mr. Nugent, you have defended, and properly, the State
activities. Has the National Association of Regulatory Utility
Commissioners put together any sort of plan that deals with
interstate movement?
Mr. Nugent. NARUC does not do that because we do not do a
plan for our member States. We try to enable them to become----
Senator Thomas. That we are not going to operate as
independent States forever is pretty clear. You are going to
have to move interstate. There is going to be a national
transmission grid, and if you are going to be there in the
State, it looks to me like you have to look beyond what you are
doing in your State.
Mr. Nugent. And that is absolutely true, and I do not think
you would find any State further down that path----
Senator Thomas. Well, have you got a plan? Have you talked
about a plan?
Mr. Nugent. We have not done it through NARUC. We are
actively doing it in the regions and developing it.
Senator Thomas. Well, it is not all regions either, I do
not think.
Where do you get your fuel for generation?
Mr. Nugent. The fuel for generation comes from largely
outside our region.
Senator Thomas. What are you using?
Mr. Nugent. Well, at the moment the fuel in the margin is
natural gas, and it comes from Atlantic Canada and Western
Canada, and the third source would be the gulf.
Senator Thomas. Yes. Well, it may not always be that in the
energy business that gas is going to be the preferred fuel. So,
you may find that instead of moving gas, you may be wanting to
move coal-fired electricity that goes beyond perhaps your
region. It does not seem to me that we can be quite as
parochial as you seem to be with regard to your State.
Mr. Nugent. I am not suggesting that we are parochial. On
the other hand, State commissions operate within State
authority, and what we are trying to do is to get State
authorities to align and to work in a coordinated fashion
throughout a region. We cannot tap into Federal authority. That
is yours. You have got it.
Senator Thomas. I am not talking about authority, Mr.
Nugent. I am talking about plans. I am thinking ahead. I am
talking about using your expertise to deal with the problem. I
think it is important that we do that.
What do you do, Stan, with regard to--I mean, we have had
transmission for a very long time. It is not a new idea. How do
we move towards a third party operator? I think there is a good
deal of support for that idea as far as an interstate grid is
concerned.
Mr. Szwed. I think that is a very good question. Just to
step back for a moment, today's power system and the way it was
built to provide for regulated utilities and to bring
generation to load in franchised areas, the Eastern
Interconnection, when you steps back and think about it, is
just one of the most fantastic synchronous machines ever
constructed by man. And it works.
But today we have introduced a great deal of wholesale
competition. There are different sources of generation now on
line or maybe some generation that is not on line anymore, for
whatever reason. We are using that system so much differently.
And places where congestion might never have occurred are now
occurring.
Senator Thomas. I understand. Where you have generation and
distribution aligned, why, of course. But why has there not
been transmission? There has been obviously a need for it. Why
has there not been investment?
Mr. Szwed. A couple of things. I think in many respects
with regard to the regulation of the asset, the rates of return
that have been authorized and the utilities have received for
returns on these investments have not really kept up with other
competitive investments in that regard. In many respects,
because of that--I hate to use this word, but in many utilities
it has been a stepchild to other investments that were
necessary in other parts of the system.
I think today what I have been working on with other
utilities in my region is to create a separate business for
transmission, like I said before, a company that would own and
operate.
Senator Thomas. Where would you get the capital investment?
Mr. Szwed. Well, that is a good question. I was just in New
York yesterday talking to a couple of colleagues on the
investment banking front. I think there are people who are
willing to invest in this kind of a business because it would
be a regulated business, it would have cash flows. There is a
place for that in an investor's portfolio.
The point is, however, in order to get utilities to think
about divesting these assets, selling them to a third party to
create that business, it requires the more regulatory certainty
with regard to the kind of prices that could be charged, the
regulatory environment that it would operate in, and so on. We
need some of those things done. We need some of those other
hurdles I talked about removed in terms of quicker reviews of
utility disposition of property, those willing to divest those
assets. We need some of those fixes to make that work.
Senator Thomas. Mr. Cook, just very briefly, what is your
notion of the changes in reliability rules?
Mr. Cook. Principally, sir, we need to move to enforceable
rules. Right now NERC sets operating policies for how the grid
is run, but there is no enforcement mechanism. It is just a
matter of peer pressure. The legislation that is pending here
now in the Congress would establish a system through an
industry self-regulatory organization to set and enforce those
rules with Government oversight.
Senator Thomas. If you do not have an adequate transmission
system, how are you going to be reliable?
Mr. Cook. Well, what we are doing now with those rules and
what we would do is to make sure that the existing system, as
the existing physical system, is operated in a manner that it
stays secure so that you do not have cascading outages such as
occurred in----
Senator Thomas. So, what we hear--and I do not mean to
interrupt, but I have to move along. We hear all the time,
well, there has not been any transmission, so there is not
enough capacity. You are saying if you operated it differently,
there would be--is there enough capacity?
Mr. Cook. No, there is not enough capacity. What we are
saying is that because the capacity is limited, the operating
rules will place limits on how much trade can take place on the
grid, and that is not wise for the economy.
Senator Thomas. What I guess I am really seeking from any
of you--and I will not take any more time--is we all know the
things we are talking about here that have to be done, but they
are long-term things. We are not going to have a national
transmission system for 5 years or whatever. But some of the
things that we could do--for instance, do something to make the
capacity of the current system work better or be able to do
some things. I do not know whether it is new source on
generating plants or whatever, whether we can change
regulations. We can do some things to have some fairly soon
changes. We talk about all this stuff we talk about, and it is
great but it ain't going to happen in the next few years. We
have to get started on it.
Mr. Cook. That is exactly my point. Some of these things
will take some time, but we need to begin.
Senator Thomas. We need to also think of some things that
might have some impact in the next 6 months, and there are some
things, regulatory things. There are some things about
generators. There is some generation that could be going on
that is not going on currently because of rules and
regulations. Some of these things can be done. I cannot
understand why a distributor for gas would be opposed to
increasing the volume of fuel he has to distribute.
At any rate, I have taken enough time. Thank you, sir.
The Chairman. Did you want an answer to that?
Senator Thomas. No. I do not think there is an answer to
that.
The Chairman. You left a hanging participle or something my
English teacher told me somewhere sometime.
[Laughter.]
The Chairman. Senator Domenici, perhaps you can enlighten
us.
Senator Domenici. First, thank you very much for calling
this hearing. It is a very important issue, and I hope we learn
from it.
Let me just talk a little bit about natural gas with any of
you who are experts on natural gas and then talk to what kind
of mix America is going to have, when we finally solve this
problem, as to the resource we use.
Our staff's information would indicate that the Energy
Information Administration projects that we need 393 gigawatts,
translating into 1,300 new powerplants. That is 300 megawatts
each.
Now, could I ask, in your expertise, whatever your
respective endeavors are, would you generally agree that they
are probably right in terms of just new additional resources
needed for electric generating, for those who use electricity
over the next 20 years, as they have said here? Do you agree,
Jerry?
Mr. Halvorsen. Yes, sir.
Senator Domenici. Why do you agree with that? Is this
arithmetic, just adding up a percent of growth each year, or
how is it arrived at?
Mr. Halvorsen. Yes, and I think they have probably as close
a finger on that, Senator, as anybody around. That is why we
think they are an excellent source of data. So, they are pretty
credible.
Senator Domenici. Now, I wonder, is there a group that you
are aware of, aside from those who want to use a different mix,
including conservation, which I will speak to in a minute, that
says to live our current lifestyle and grow in a modest manner
as projected for us to succeed over time--is there some group
that says this number is way too high that any of you are aware
of? Mr. Nugent, do you as a regulator believe that nationally
we need about this much over the next 20 years?
Mr. Nugent. I think it is a plausible number. Whether the
number is there or it is modestly lower, I am not going to take
issue with it.
Senator Domenici. So, it is plausible.
Mr. Nugent. Yes, sure.
Senator Domenici. What about the rest of you?
Mr. Nugent. Even if you do not get all the way there, even
if you want to only go halfway there, you have got a lot of
work to do.
Senator Domenici. That is my point I am going to get to
very shortly.
Mr. Szwed. When you think about how everything in our
economy today is so dependent on electricity, and quality
electricity, given the types of sophisticated control and
computer equipment we have, and just to move to electrify so
many things, from my standpoint I find continued growth to be
credible. Frankly, we see that in our service territories
today. We see growth. We see load growing, and we need to
accommodate for that.
Senator Domenici. It would seem to me the logic of all of
this would be if 1,300 is a plausible number of 300 megawatts
each, that we then ought to ask those who think conservation
should play a big role--and I think most of us are in that
category--and just ask how much conservation can we expect and
let somebody give us that number. I would assume there is a
realistic number of some sort that somebody will say we can
conserve X amount if we change our ways, change some standards,
do some other things, we can save X amount. Does everybody
agree that that is doable, that there are people out there who
can give us those kind of answers?
Mr. Nugent. There are people who claim to, yes.
Senator Domenici. Would it not seem logical, unless the
answers are totally implausible, that what we ought to do is
say, okay, we agree. Now, let us subtract the conservation
number from the 1,300, the 300, and what does that leave left
over? And it is going to be a very big number. Then it seems
like, regardless of where you come down, we ought to get
started building those. To me that seems very logical. It may
be 1,000. It may be 1,100, but it seems like if you just draw a
big graph and say how much do you conserve, and off the 1,300
times 300, and we would be left with an amount.
Now, let me ask. We are down to that amount that we are
going to have to do in new electric generating capacity. I am
not ignoring conservation. I am down to that amount. The Energy
Information Administration projects that most of that new
capacity is going to be natural gas, in fact, a very large
percentage. I think they say 92 percent of that new capacity
will be natural gas.
Now, I do not know how they would get that number, but do
any of you have any ideas that it need not be that kind of mix,
that it might be a different mix than that?
Let us talk, before you answer, on what the current mix is.
I understand it is 52 percent coal. Right? 22 percent nuclear,
and it looks like many more of those are going to be relicensed
than we thought. So, as a matter of fact, we will take that off
the 1,300 new powerplants in some arithmetic manner because we
are going to need less because we are going to have more
nuclear on board. But nuclear is only 22 percent, and all the
rest is made up by the other sources, with wind and solar being
less than 1 percent, as I understand it, if you were to draw a
picture.
Now, let me ask, do any of you have any doubt that, as a
matter of capacity, the United States of America, if it sets
its will to this, can build this many powerplants to get on a
line towards solution? Do you think we can, Mr. Nugent, based
upon your experience with the industry, with American will----
Mr. Nugent. I think the capability is there. Sure, if the
signals are sent and that is the direction you want to go on
it. We have demonstrated extraordinary productive capacity in
the past, and with the proper will and signals called, of
course, you could do that.
Senator Domenici. I just wanted to ask if any of you
remember a point in history when we were producing 1,300
powerplants over a period of that amount. I think there were a
number of periods when annually we were producing equivalent of
one-twentieth of 1,300. Is that not correct? Mr. Cook, do you
know?
Mr. Cook. I have not done that kind of math, Senator, but
certainly there is the capability, assuming the conditions are
right and we make the right policy choices to move forward.
Mr. Szwed. Certainly, Senator, also I am just speaking from
my own company's experience. Over the past couple of years, we
identified a need for the load that we are responsible for
serving, and over the last 3 or 4 years, we as a company
ourselves put in 500 to 600 megawatts of natural gas fired
peaking type capacity, which we were able to successfully do in
a couple of years. So, I think you can. I think we can get
those kind of things done. We do have the wherewithal to do
that.
Senator Domenici. Now, let me ask another question. There
is going to be some objection to this many powerplants because
some are going to say it will dramatically impact the ambient
air. It will make our air dirtier. Now, as a matter of fact,
that is not necessarily so, is it? If we add 1,300--it will not
be that many, but let us use that number, less whatever we do
not have to build. We build that many 300 megawatt plants. Do
we have to damage the ambient air from its current status? I
note, Mr. Halvorsen, you are saying no.
Mr. Halvorsen. I think the other factor, Senator, is I was
in the nuclear business for 12 years. You absolutely have to
have nuclear power. I think it has taken a bum rap in the last
few years, but I think it is very important for Congress to set
the working with the industry not only to push the relicensing
of existing plants, but to figure out a framework where you can
begin to build new plants and gain the public confidence back.
I think that has been the missing link here recently.
Senator Domenici. Yes, sir.
Mr. Nugent. I was just responding to the question on the
ambient air. I think any new facility you put in is certainly
going to have a marginal impact on air. The question will be,
over time, whether the retirement of other dirtier facilities
may not offset that impact. It is a complex equation.
Senator Domenici. However, it cannot happen, but your
answer would be incorrect if you were using all nuclear power
because there would be no addition to the ambient air. We are
not talking about----
Mr. Nugent. I was not talking about that.
Senator Domenici. I am talking about a number of them being
that, however.
Mr. Nugent. That is fair.
Senator Domenici. Now, let me just close by asking with
reference to natural gas, do any of you know--follow this chain
with me. We are over in New Mexico. Believe it or not, we are
on Vermejo Ranch owned by Mr. Turner, sold as far as the
mineral rights to somebody else, with Mr. Turner having some of
the mineral rights privately owned, and they are finding
natural gas there in a beautiful, beautiful pristine area. We
will soon be able to take you all up there and show you how you
can drill new wells in a pristine area and leave the smallest,
smallest footprint you can imagine.
The Chairman. We can help you with that.
Senator Domenici. You can come and see this. It is in
reality.
The Chairman. Well, we have on in reality.
Senator Thomas. There is no ice there in New Mexico.
[Laughter.]
Senator Domenici. But I want to just assume for a moment
gas is coming out of that new field, maybe 1,000 new wells
more, and it is heading toward--pick a market. California. What
happens to the price from the wellhead price to the delivery?
My constituents who are drilling the natural gas wells are not
getting the kind of price that is being charged at the other
end when it is delivered to a utility to burn. Where are the
stop-overs that cost money, that push that price up from what
my people are getting the field for their gas versus the
delivery point? Do any of you happen to know?
[No response.]
Senator Thomas. I think the answer is no.
Senator Burns. The silence was deafening.
Senator Domenici. It would be interesting to find out, not
to find that out to be a negative toward anyone, but it would
be good to know.
My last question of any of you is with reference to the
infrastructure aside from the plant itself--we have all been
discussing pipelines and the like--is there any question in
your minds that as far as America having the capacity to build
that infrastructure in a timely manner, that we can do that,
that that is on the side of doable over the period of time that
is being discussed? Mr. Nugent, can we do it?
Mr. Nugent. I think you can do it. I think the question is
figuring out the right plan, the right design, and one that
meets what is now becoming a much more competitive market than
it has ever been before.
Senator Domenici. Do any of the rest of you have a thought
on that?
Mr. Szwed. I would say so, and I think I would add to the
list that he said, relative to making sure that the right
economic incentives and framework are there to make those
investments attractive.
Senator Domenici. I think you know that nuclear powerplants
are being bought and sold today in the United States. Companies
are buying them, selling them, trading them because they are
generating electricity at the cheapest price of all generating
facilities in the United States.
Do any of you, who have experience in this area, have an
opinion as to whether or not we should seriously pursue some
new nuclear powerplants in this mix over the next 20 years? Mr.
Halvorsen, do you have a view?
Mr. Halvorsen. Senator, I have got a view. It goes back to
how the industry was founded. There was a joint congressional
committee on atomic energy many years ago that helped the
industry build the first plant. I believe it was in
Shippingport, Pennsylvania. I think there has been a lot of
very good research done by the Department of Energy on nuclear
technology, on how they can be safer, and so forth.
I think it is up to this committee, to some extent, to
provide the leadership to bring the industry and Government
together to say, let us take the risk, let us dive in, the
country needs these plants, and get it done. And I think you
can do it.
Senator Domenici. Mr. Szwed.
Mr. Szwed. Yes, I would agree with that. I think another
consideration that should be taken into account here is there
are probably several plants that were either put on hold or
just not completed. Maybe someone needs to go back and take a
look at what it would take to get those done and bring those on
line.
Senator Domenici. Thank you very much. Thank you, Mr.
Chairman.
The Chairman. Thank you very much, Senator Domenici.
Senator Burns.
Senator Burns. I hear a phrase that I used a year ago that
before we can really go headlong into electrical deregulation
that we have to have a national grid that was similar to the
interstate highway system. We have to be able to shift great
blocks of power in a fairly efficient manner to any section of
the country. I say that my retail folks in Montana should have
access to Florida power if they so want to buy Florida power,
but that takes a national grid, and we do not have that today.
Is that correct?
Mr. Cook. That is correct. We have got pieces, but at some
pretty critical points, it is like we have got an interstate
system that is joined up by some country roads.
Senator Burns. Have we identified where those ties are that
need redoing in order to put the interstate system together?
Have those areas been identified?
Mr. Cook. There are particular places that have been
congested on a regular basis. You have heard of Path 15 in
California. There is an interface between Minnesota and
Wisconsin that shows up on a lot of days as congested. There
are several places where we sort of know where the current
areas of congestion are. That is not the same as building a
more robust transmission system to allow further trade.
Senator Burns. What we have got to think of is the people
who finally use this product, and of course, they depend on it.
I would say right now that the generators and the transmission
people still, for the most part, have a credibility problem.
I have mentioned this before. I was rather taken aback way
back in January when I picked up the Los Angeles Times. In a
recent poll that was taken in California, 54 percent of the
Californians still believe that they have no shortage of power,
that they are being subject to gouging and a little bit of
greed. Jerry, we can sit and shake our head on that, but that
was the poll, and that tells me we have got a credibility
problem with the people.
I am still going back to this situation of the interstate
system, how we can shift blocks of power in order to address a
shortage.
Now, let us face it. I do not think our growth in the
industrial area, as far as demand on electricity, has increased
a lot. But more homes have computers now. And do you know what
we do? We go off and leave them on. Now, if you want to know
what will drive conservation, it is price that will drive it
more than anything else. I think a lot of us are becoming a lot
more aware. We go around the house and turn things off now when
we leave in the morning, where we were not doing that maybe a
year or 2 ago.
I am interested in how important is it that we revisit the
EPA's rule on new source, on upgrading the efficiency of coal-
fired plants. Would you want to comment on that? As you know,
right now if you redo a coal-fired plant to increase its
efficiency and output, it makes the plant subject to total
review by the rule of the EPA on new source. How important is
it that we revisit that?
Mr. Nugent. This has implications, it seems to me, for the
installation of new equipment too.
Senator Burns. That is correct.
Mr. Nugent. When I am talking about new equipment, I am
talking about a totally separate generator which may have a
much cleaner profile.
Senator Burns. Well, I say to upgrade both----
Mr. Nugent. I understand. You have an upgrade over here and
you have a new generator over here which may be markedly
cleaner, and if this new one is able to achieve much greater
cleanliness in output, the question is, do you want to undercut
its position to do it? It is clearly a matter of what the
economics are in the two situations.
Senator Burns. But if we upgrade the old plant, if we put
new equipment in to increase its output and efficiency.
Mr. Nugent. Its output, efficiency, and cleanliness, it
seems to me come in tandem. Why should you see it in isolation?
Senator Burns. But why they're not upgrading is they have
become subject to that review.
Mr. Nugent. Because of how stringent the standard is. I
understand that.
Senator Burns. How important is that, that we revisit that?
Mr. Szwed.
Mr. Szwed. I have to say I am a transmission executive, so
I deal mostly with the wires instead of our powerplants. But
from our standpoint, as we look at either upgrading plants or
making modifications to plants, it is pretty important to know
what the rules of the road are and whether there is some
upgrade that triggers some new source standard or not. So, it
is important to us to be clear as to what those rules are and
what rules we are operating under so that we can make effective
decisions about how to operate and modify our facilities.
Senator Burns. I was interested in your figures on how much
we are going to have to build in order to keep up with demand
in the future. We know that is going to be a lot higher than a
lot of us have really thought to this point.
To the chairman, I still think that eminent domain has to
be a part of national legislation and that power is vested in
FERC if we are to build this interstate highway. And the States
I think will definitely have a role to play.
We in Montana can provide pretty economic power if we can
transmit it at mine-mouth type generation with coal. We have
got over 250 years of compliant coal, low in sulfur. We would
like to be a part of the answer here, part of the solution. But
right now, all the transmission lines out of Montana are at
full capacity. So, we know transmission is going to play a
large role. If those people who want to be NIMBY's, then let
them be and we will produce the power for them and be a part of
the solution, if we can get transmission. We are going to have
to do something because of the demand.
These server farms are taking a lot of electricity, a lot
more than we really planned on in this new generation of how we
make a living.
So, we thank you for your testimony. I appreciate that.
But the building of the interstate highway is very, very
important to me. I think our ability to move blocks of power.
But let us think about the consumer here for a little bit and
the end use of this because I have got industry shut down in
Montana because of price and we have got an economy that can be
brought to a standstill both in transportation and in our
everyday life. We have got farmers this year who will not be
able to turn on irrigation pumps. So, we have still got to feed
and clothe this country and it takes power to do it.
Thank you very much for your testimony today.
The Chairman. Thank you, Senator Burns.
Senator Bingaman.
Senator Bingaman. Mr. Chairman, I think Senator Landrieu
ought to go ahead. She was here ahead of me.
The Chairman. Correct. Senator Landrieu.
Senator Landrieu. Thank you, Senator Bingaman, for that
courtesy. I will be brief.
I want to thank the chairman for holding this hearing
because I think the testimony has been very helpful in keeping
us focused on this very important problem facing our Nation. It
truly is a crisis that needs to be dealt with as soon as
possible. The challenging thing is that no matter what we would
do in the next week or months or years, it is not going to be
fixed in a short period of time. But I think it is important
for us to lay the right groundwork. So, I am looking forward to
working with my ranking member and chairman in developing the
framework of a solution.
Let me first follow up on the comments from the Senator
from Montana and agree with him that one of the most important
things that needs to be in any piece of legislation that
ultimately passes is a sophisticated and effective approach in
creating this national highway system. As a producer State
myself--although Montana produces coal, Louisiana produces a
great deal, as you know, of natural gas--we can produce all day
long, but unless we can transmit it, unless we can transport
it, unless we can get it to other parts of the Nation, all the
production in the world, while it does us obviously some good
in terms of jobs generated from the production, is not going to
contribute to the overall solution.
So, building that highway I think, Mr. Chairman and our
ranking member, needs to be our real primary focus. We have the
supply and I think we have the potential for a good mix of
supply. But focusing our efforts on building this grid I think
is important.
I think the Senator from Montana was also very astute at
trying to help us to find out where the gridlock is, where we
can identify in the Nation today where the traffic is backed
up, to try to open those avenues, as well as where the need is
going to be to create new avenues so we can get this flow of
power moving.
In addition, let me also make a comment to the panel that
while our State is very proud of our efforts to produce natural
gas in abundance, we consider it a good fuel supply. It can
meet a lot of environmental standards. I want this committee
and the panelists also to know that our State is concerned
about an over-reliance on natural gas, which would drive the
price too high, therefore putting many of our industries at a
considerable disadvantage when the price of natural gas is too
high. The way to compensate or deal with that is to create
multiple sources of supply.
So, Senator Domenici's point about increasing nuclear,
making sure, of course, that it is environmentally safe, but
promoting policies that increase nuclear energy in this Nation
I think are important, as well as looking and revisiting the
environmental rules and regulations that help us to have coal
as part of that mix. But for it to be as clean as possible and
as compliant is very important because while Louisiana is a
producer of natural gas, we are also a great consumer of
natural gas to run our chemical industries and our powerplants,
our agriculture, and agribusiness industry. So, I want to just
make that point for the record.
Then I want to also go on the record as saying that I do
think that the Federal Government is going to have to be as
strong as possible in this whole issue of eminent domain,
respecting the States and respecting the regional needs. There
needs to be, at a minimum, a Federal backstop to make sure that
States and regions have adequate time to make the decision, but
if those decisions are not made or if the decisions are being
hampered or if too much time is being taken, then I do think
whether it is FERC or some other agency should step in for the
siting of plants, transmission power lines so that this Nation
can grow.
Finally, Mr. Chairman, I have heard you say this, but it is
very important. If we do not make the right decisions in the
next couple of months, the economic vitality of this Nation
could be and is being seriously hampered by this situation.
This is not a small matter, and we are going to have to really
put aside the old conservative/liberal Democrat/Republican
views and try to forge ahead with a robust--creating new ground
because if we do not, the economic vitality of this Nation is
going to suffer and for no reason because we have the supply.
We just need the political will.
So, I want to be put down on the record as being for a
strong Federal presence to make sure that this issue is dealt
with and to be respectful to States and respectful to regions.
But the Federal Government most certainly has a role to play
for the benefit of all the States and all the thousands and
millions of individual and companies that are reliant on us
getting a source of reliable, steady electricity to continue to
give prosperity to this Nation so that more places can grow and
expand. And that is a very important issue for this committee
and before the Congress.
I thank you for your testimony this morning.
The Chairman. Senator Bingaman has questions and
statements. I am going to have to excuse myself, gentlemen.
Senator Bingaman [presiding]. Thank you, Mr. Chairman.
Gentlemen, let me first apologize for not being here during
your testimony. The Senate Finance Committee scheduled a markup
of this tax bill after we had scheduled this hearing, and
unfortunately that required me to be there for some period this
morning.
Let me ask a couple of questions. One issue that I am
particularly interested in trying to get your thoughts on is
where the authority should be vested or located to make
decisions on siting of power plants and transmission lines.
Now, in the case of natural gas, gas pipelines, FERC has
the authority. As I understand it, that has not worked as well
as some would like it to perhaps. It has not been a totally
problem free solution to the problem.
In the case of electricity, many people are saying that the
choice is between authorities at the State level or at the
Federal level.
What I have been interested in trying to explore and pursue
is getting more authority at the regional level where I think
it makes more sense to have the authority located. We have, of
course, significant authority already at the regional level for
regional transmission organizations, but we do not have real
authority at the regional level for making any decisions on
siting. I do not know how practical you think it is for us to
pursue that. I would be interested in any thoughts any of you
have. Mr. Nugent, did you have any thoughts on this?
Mr. Nugent. Yes, sir. This is an area that commissions
really from Maryland to Maine have been working actively in. We
are working on, in a broad sense, to encourage the closer
cooperation of the three ISO's that cover the area, PJM, New
York, and New England. The commissions from the mid-Atlantic
and New England have a memorandum of understanding between them
which would govern how we would monitor the development in that
regional venture. The attempt here is to see if we cannot
produce, short of an RTO, something that would function as well
in all respects, such as facilitating transmission between the
regions, and markets that would function as well as a regional
transmission organization. I would venture to say, though no
one has concluded that, that if we find that it falls short of
meeting the standards for regional transmission operations
adequately, that we would probably take the next step with
regard to how the circumstance ought to be resolved.
One of the difficulties in the middle of this, of course,
is that the New York Public Service Commission has more power,
to some extent, more authority than the rest of us because its
ISO falls entirely within its jurisdiction as opposed to the
other States where it does not. And we rely on the FERC
authority.
Now, in addition, there is no area in the country where
commissions have worked more closely together than in New
England, where the New England Conference of Public Utilities
Commissioners has served as a common ground for the meeting of
the New England commissions. We are looking for governance just
within New England of ISO, New England, and operations of the
regional grid, we have as New England commissioners proposed
that there be an independent regional markets board in order
for what might be a New England only RTO to be a truly
independent structure, that there also be a market monitoring
and mitigation unit independent from the ISO and market
participants to ensure the proper functioning of that market.
My commission has gone beyond that and said that we also ought
to oversee the operations or advise the FERC on the operations
of the ISO in New England.
Now, we are not asking for the establishment of a direct
authority. We believe that the FERC has and, if not, ought to
have the authority to rely upon a regional group that would
examine issues from a regional perspective, try to devise
solutions that meet the regional needs, and serve those up and
make a decision on it. If, over time, the FERC was satisfied
with the quality of decisions that was coming forward and was
repeatedly endorsing those decisions or not disturbing them,
that would grant a degree of credibility to that regional
oversight mechanism, and that regional oversight mechanism
could be expected to give solutions that met local
circumstances and to give them far more promptly than if you
have to cycle them through Washington.
Senator Bingaman. So, is it fair to say you think FERC
should have some kind of backstop authority to put in place and
enforce what the regional group comes up with, but not the sort
of national siting authority that they have got in the case of
gas pipelines?
Mr. Nugent. I think it ought to be a backstop authority. I
may come to regret this some day if they do not agree with me,
but the point is you have to have solutions that are consistent
with a national model and national principles. But that does
not mean that you cannot devise solutions in New England that
are somehow different from California that meet each region's
immediate needs but are still consistent with a national model.
Senator Bingaman. Mr. Cook, did you have any thoughts on
that?
Mr. Cook. Yes, sir. I think it is important to develop a
single forum where those issues can get worked out, and the
scope of the authority of that forum ought to be to have a
geographic reach sufficient to deal with the issues that it is
trying to grapple with. And a regional model may fit that kind
of thing, but there will be seams between regions.
One of the matters we discussed earlier today was the
siting of a transmission line across Long Island Sound to move
power from New England onto Long Island. That is a situation
where you really have two regions abutting each other, and it
is a common jurisdiction between them. Some of the other issues
that we have talked about deal with lines that could cross two
or three regions, and there will need to be a mechanism to deal
with those kinds of things.
In Texas, they have got a pretty good handle on things
because the Texas commission has authority for virtually the
whole grid within Texas and they can make decisions that take
account of those issues and then implement them. We do not have
that luxury in the rest of the United States. The grid really
crosses State boundaries, crosses regional boundaries, and we
need an effective way to deal with those issues.
Senator Bingaman. Mr. Halvorsen, did you have a thought on
this or Mr. Szwed?
Mr. Szwed. I guess I would just like to say a couple
things. Our testimony today recommends that with regard to
electric transmission siting, that it has a Federal presence.
There is the Federal Energy Regulatory Commission Authority
that would parallel that what is in the gas industry today. As
I said before, I think we need to look at that more broadly
because of the broader nature of markets.
I do not know if that is the solution. I really recognize
the sensitivity between local and regional issues relative to
siting issues and so forth. But I am also concerned about
making sure that if someone has the ability to build a
transmission line or is ready to build a transmission line,
that we have a process in place that can be streamlined, if you
will, to get through the permitting side and get to the point
where the construction can begin. I would be concerned about
creating too much in the way of a great deal of bureaucracy
around it, but clearly knowing what agency that you can go to
ultimately to get that siting approval.
Senator Bingaman. And that should be FERC.
Mr. Szwed. In our estimation that should be FERC. We also
in our testimony indicated that I think in Chairman Murkowski's
bill from last year there was a provision that had FERC as a
backstop if after certain conditions were not met from the
States, that FERC would step in. But, yes, we are advocating
that there be Federal authority on this to help move the
ability to get these lines or other facilities in place.
Senator Bingaman. Is the setting of generation reserve
margins something that should be done on a regional basis?
Mr. Cook. I think that is typically done State by State.
Some regions now set those kinds of things, and that really
needs to take account of, the way the system is designed, the
kinds of resources that are available on the system. I do not
expect a single national standard would be set.
Senator Bingaman. But if, in fact, we wind up with a de
facto set of regions that we are trying to oversee and manage,
then something like setting generation reserve margins should
be done at that level too rather than just at the State level.
Mr. Cook. I think those things need to take account of the
interconnected nature of the system, and going State by State
does not do that.
Senator Bingaman. Did you have a thought on that?
Mr. Nugent. We currently are doing it on a regional basis.
It is done through ISO New England. We are currently somewhere
around 18 percent, if you include the tie line from Hydro-
Quebec. But off the top of my head, I think it would be useful
to have some sort of minimum standard that extended more
broadly. Take the situation, for example, if we have an 18
percent standard and New York and PJM had only a 5 percent
standard, you might find the excess capacity that we have and
are counting on to carry us through the next period might be
drained away by people in adjacent areas. So, I think you
probably want to have some minimum standards that are set
there, and that question requires a much more careful and
thoughtful response than I have been able to give you. But you
do have to have some consistency of approach.
Mr. Szwed. I would characterize some of the reserve margins
you are talking about in two categories. There is an operating
reserve margin which is specifications that NERC and many of
the regional councils associated with NERC specify that needs
to be on to meet any contingencies on a real-time basis. So,
for example, in my part of the country, we are required to
carry, I believe it is, a 4 percent reserve margin every hour
of the day. So, in the event a generator comes off line or if
there is some other disturbance on the system, the other
components of the system could react to that and make up----
Senator Bingaman. And where does that requirement come
from?
Mr. Szwed. That is an operating procedure and protocol that
comes from the North American Electric Reliability Council and
the associated regions of the country that have those. Every
one of these regions of the country have an operating protocol.
Then there is more of a planning reserve margin which is
probably in the traditional way we used to plan generation. We
would look at the load. We would look at the long-run load
projection. We would look at the long-run supply, and we would
look at the reserve level between those numbers. In many
respects, they are numbers like you heard before, 15 to 20
percent depending upon the situation. I think that question has
to be thought about in the move to competitive markets and
whether there should be a specified reserve margin or not. I
think that may be a question for the individual locales and the
State of where things are in terms of the move to retail
competition.
Senator Bingaman. I guess an obvious question is, if you
set a reserve margin, then who would have the ultimate
authority to enforce compliance with that reserve margin and
take the steps necessary to do that?
Mr. Nugent. Two comments, Mr. Bingaman. One is, it seems to
me, if you set a standard and you have a regional structure
that is linked or backstopped by the Federal one, it would be
incumbent on that regional structure to meet the standard that
was set at the Federal level, and if it failed to do so, the
Federal entity might move in.
One of the things you have to keep in mind is this is not
just an operating question, but it goes to the subject we
discussed the last time I was here, which is the functioning of
markets. You have to have adequate additional capacity in
markets to support a fully competitive market. So, you do want
to encourage the existence of certainly a substantial amount of
extra capacity.
Senator Bingaman. Well, let me stop with that. I gather the
other members have given up. So, why do we not terminate the
hearing. Thank you all very much for being here and testifying.
[Whereupon, at 11:31 a.m., the hearing was recessed, to be
reconvened on June 21, 2001.]
[Subsequent to the hearing, the following was received for
the record:]
Southern California Gas Company,
Los Angeles, CA, May 23, 2001.
Hon. Frank Murkowski,
Chairman, Senate Energy and Natural Resources Committee, Dirksen Senate
Office Bldg., Washington, DC.
Dear Senator Murkowski: At the May 15, 2001, Senate Energy
Committee hearing on Energy Infrastructure Siting, Jerald Halverson,
President of the Interstate Natural Gas Association of America, in
response to a question asked by Chairman Murkowski, suggested that
Sempra Energy, the parent of Southern California Gas Company (SoCalGas)
has opposed critically needed pipeline expansions to California
markets. In his prepared statement, Mr. Halverson appended a table
documenting such opposition. This table is also an exhibit in the
currently ongoing formal hearing at the Federal Energy Regulatory
Commission (FERC), which is investigating the practices of an affiliate
of an interstate pipeline. The exhibit lists six interstate pipeline
proposals, dating back to 1989, and purportedly shows that SoCalGas has
protested the proposed expansions.
Before I address the inaccuracies in this table, let me state
SoCalGas' general position on interstate pipeline expansions:
SoCalGas supports construction of interstate and intrastate
pipelines when necessary to meet the needs of its customers;
and
SoCalGas believes that construction should be coordinated to
ensure regulators, both state and federal, that proposed
expansion facilities will meet the needs of consumers.
We recognize that interstate pipeline capacity is necessary to
provide natural gas supplies to help fuel the economy. But sometimes
``light handed regulation'' over interstate pipelines has produced
volatility in commodity prices and has reduced the rights of customers
to existing interstate capacity.
Mr. Halverson's table claims that in the Kern River 2001 Emergency
Expansion, ``SoCalGas protests degradation of service because it will
not expand Wheeler Ridge capacity.'' It is important that you know
exactly what SoCalGas said in this case.
``SoCalGas supports expansions that will provide more reliable
and usable pipeline capacity. However, the expanded capacity
needs to be rationalized and it must be constructed to
facilitate deliveries to targeted markets, e.g., electric
generating loads. . . . the question presented by this filing
is whether it is appropriately tailored to serve the intended
markets.''
Our filing requested that FERC convene a comprehensive conference
(within 15 to 20 days of the filing) to collaborate among the market
participants and the state and federal regulators. FERC denied this
request and issued a license to build, without making any determination
as to whether this pipeline will actually serve any electric generation
needs, either now or in the future. Subsequent to this order, FERC
agreed to convene this conference on May 24, 2001. This is only one of
the inaccuracies included in this table.
A review of the applications listed on the table, including
actually reviewing the comments that SoCalGas has submitted over the
years, reveals that we have opposed some of the projects. But it is
critically important to understand the reason for our opposition. For
many years SoCalGas objected to pipeline construction or expansion
projects that reduced the reliability of existing services. For
example, the Mojave pipeline necessitated expansion of the upstream
pipeline system of El Paso Natural Gas Company, on which SoCalGas had
secured significant levels of transportation rights to serve customers
in southern California. SoCalGas requested that shippers on the El Paso
expansion be granted rights to deliver gas into the Mojave system (the
purpose of the expansion project) but not to the delivery point of
SoCalGas (Topock) since SoCalGas had all rights to this point. FERC
rejected this request (effectively abrogating our contract rights) and
allowed new shippers to have the same level of service as SoCalGas at
the Topock point. Any company opposition has consistently been based
upon the need for coordinated action, which federal regulators have
steadfastly refused to provide, until now.
Local distribution companies in California, as well as the CPUC,
opposed projects that threaten the reliability or economic viability of
consumers' existing interstate pipeline rights. Federal regulators have
consistently refused to consider these issues or concerns. California
utilities and their consumers have endured substantial stranded costs
resulting from these policies, as well as a basic inability to utilize
services even when paying maximum rates. The poorly conceived nature of
interstate pipeline construction in the 1990's has exposed customers to
hundreds of millions of dollars in stranded costs.
Mr. Chairman, we have a very difficult problem to solve. FERC has
now finally agreed to host a public forum for all stakeholders on this
issue. We are hopeful that a comprehensive discussion of western region
natural gas infrastructure needs will occur at this conference. It is
our hope that this discussion will provide a clearer understanding of
what gas infrastructure will be needed to satisfy future natural gas
demand in California and the west.
Very truly yours,
Lee M. Stewart, President,
Energy Transportation
Services,
Southern California Gas
Company.
U.S. ENERGY TRENDS
----------
THURSDAY, JUNE 21, 2001
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:55 a.m. in room
SD-106, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN,
U.S. SENATOR FROM NEW MEXICO
The Chairman. I am informed that Senator Murkowski is on
the way, but wants us to go ahead and start, so we will do
that. I am also advised that Senator Wyden wanted to make a
short statement because he has a conflict and needs to go to
another committee, so I will defer to Senator Wyden to make his
statement.
[The prepared statements of Senators Bingaman and Johnson
follow:]
Prepared Statement of Hon. Jeff Bingaman, U.S. Senator From New Mexico
The purpose of the hearing is to consider energy policy with
respect to fuel specifications and infrastructure constraints and the
impact on gasoline supply and price. The Committee held the first part
of this hearing on April 26. The administration was still working on
its energy policy then so that hearing focused on the refiners and
distribution networks. Today we are happy to have witnesses from the
Department of Energy and the Environmental Protection Agency.
As we have all noted, gasoline prices have become increasingly
volatile in recent years. There are a number of factors that have
contributed to an increasingly tight and inflexible market.
1. Escalating consumption by light duty passenger vehicles, led by
the growth in the number of SUV's, which EIA projects to increase over
2 million barrels a day within the next ten years.
2. The Number of different fuel specifications that must be
produced and distributed around the country, some metropolitan areas
require their own specific formulation.
3. The difficulty of siting new facilities, whether due to
environmental permitting difficulties or just plain community
opposition, refineries and pipelines are now operating virtually at
capacity with little down time for repairs and maintenance.
As we know, U.S. Refinery capacity has not grown as fast as demand
for fuels, especially the highly sophisticated refineries needed to
produce clean fuels. In addition, refining capacity is not evenly
dispersed around the country. The Gulf Coast refineries produce a large
portion of the fuels used in the midwest and the east. The need to
transport those fuels hundreds of miles increases the opportunity for
something to go wrong somewhere in the system, as we saw last summer in
the midwest.
Another complication is the concern with groundwater contamination
from MTBE. California has banned MTBE effective in 2003, eleven other
states are seeking to do the same. Daniel Greenbaum, the Chair of EPA's
Blue Ribbon panel on oxygenates, testified before this Committee in
April that, due to changes in refining capability, oxygenates are no
longer needed to produce reformulated gasoline.
The Clean Air Act is not under the jurisdiction of this Committee,
but how environmental regulations affect the availability of affordable
fuels is of serious concern to us. The administration's recent decision
to deny California's request for a waiver of the oxygenates raises some
serious supply concerns. I hope the witnesses will be able to clarify
the administration's position.
In the energy bill I introduced earlier this year with a number of
my colleagues, we proposed streamlining the number of fuel
specifications. The administration's national energy plan also
recognized the need to create greater flexibility in the fuels markets.
I hope the administration witnesses can give us more detail.
I have serious concerns that without action soon to both limit
demand growth and to increase the flexibility in the system, we are
going to see ever higher and more volatile gasoline prices. The public
expects us to develop policies to prevent that from happening. I look
forward to hearing testimony from the witnesses and to some discussion
about how we should proceed.
______
Prepared Statement of Hon. Tim Johnson, U.S. Senator From South Dakota
Mr. Chairman, very few items affect the American consumer more
directly than the price that they pay for gasoline. The recent
volatility and increases in gas prices have affected all of us and left
us grasping to determine the reasons for the changes. It is time that
we get some answers on what is happening and look for solutions that
can stabilize the situation.
I think it is important that we take a broad view of the issues we
are addressing today. To me, this committee should be focusing in
energy security and how we can mitigate the boom-bust cycle with which
we are constantly faced in the gasoline and energy industries. While I
think it is important that we consider issues such as reformulated
gasoline and its effect on prices, we must also look as the makeup of
our supply and how we can improve the energy security of the nation.
There are many different types of gasoline on the market. Most of
the differences in the makeup of gasoline have been largely driven by
environmental concerns. The changes to the Clean Air Act in 1990
required oxygenate standards in gasoline in areas of the country that
have poor air pollution. Using RFG has been largely successful in those
areas and in other areas that have opted into the program. The federal
standard for RFG is fairly clear and uniform--RFG must contain at least
2% oxygen by weight. Federal RFG has a very strict recipe for sulfur,
oxygen, toxics and vapor pressure that are the same everywhere. Some
states have chosen to set up additional requirements to meet emission
standards, increasing the use of so-called boutique fuels. This appears
to have caused a greater variance in prices than the federal RFG
standard.
But, as we all know, MTBE, the main additive used to meet the
oxygenate standard is being phased out because of water contamination
concerns. California applied for a waiver from the oxygenate standard
because it is phasing out MTBE by 2002. However, the EPA has denied the
waiver, correctly pointing out that California did not meet the
requirements for a waiver under the Clean Air Act.
If MTBE is phased out, ethanol is the main additive that would be
used to meet the oxygenate requirement. Concerns have been raised about
the ability to meet the oxygenate standard with ethanol. The chief
concern appears to be the ability to meet the capacity in California.
The California gasoline market is approximately 14 billion gallons per
year. The total amount of ethanol that would be required to replace
MTBE is about 600 million gallons per year--less volume than required
by MTBE. The ethanol industry is currently producing 2 billion gallons
per year and growing, so there is enough capacity. Moreover, California
state agencies concluded last year that if ethanol were substituted for
MTBE, there would be benefits for water quality and no substantial
adverse effects on air pollution.
Concerns have been raised that gas prices will go up in California
with ethanol use. But EPA Administrator Whitman pointed out recently
that if the oxygenate requirement were waived, this would only increase
the amount of gasoline that would be used to replace the oxygenates,
further straining gas supplies and potentially causing prices to go up.
The California issue is important and how it is addressed can go a
long way to determining how we balance gas supplies and the
environment. However, when considering gasoline composition, energy-
related factors are not driving the debate. All of the formulations of
gasoline are the result of controlling properties that effect
emissions. These are important issues that must be considered when
debating energy policy. But the current requirements set a very thin
line of error and are quite varied, causing some confusion in the
market.
I have introduced legislation with my colleague on the committee,
Senator Hagel, that would help to alleviate some of these constraints
and focus the issue on energy concerns. Our bill, the Renewable Fuels
for Energy Security Act of 2001, would require that all transportation
fuel produced in the United States to contain a percentage of Renewable
fuel. This includes ethanol, biodiesel and other biomass fuels. Unlike
the current scheme which aims at particular areas in order to produce
results, our legislation would ensure that an energy benefit would
accrue to everyone nationwide while providing important environmental
benefits.
The debate that is before us today presents us with a unique
opportunity to address these issues. There are many different types of
gasoline out there. We must consider the environmental impact but also
consider energy concerns. Bringing all parties together to find
comprehensive national solutions that mitigate the difficulties that we
face in our gasoline supplies would go a long way towards increasing
the energy security needs of the nation. Ethanol and renewable fuels
can and should be a vital part of this solution.
Thank you, Mr. Chairman, and I look forward to the testimony.
STATEMENT OF HON. RON WYDEN, U.S. SENATOR
FROM OREGON
Senator Wyden. Mr. Chairman, than you, and I very much
appreciate your thoughtfulness, and I will be brief.
As this country struggles with the high cost of gasoline at
the pump, the oil industry has claimed that a lack of refinery
capacity and restrictive environmental standards are the causes
of the current supply shortages and high prices. Documents that
I released last week raise questions about the credibility of
the industry's arguments.
These documents show that just a few years ago the industry
was concerned that there was too much refinery capacity.
Internal industry documents reveal that the industry wanted to
reduce capacity and supply in order to boost their profit
margins. Casting further doubt and relevant especially to
today's discussion, is the fact that there were no requests
made to the Environmental Protection Agency by any refinery for
a determination of whether a new source review was required
under the Clean Air Act during the past 10 years. These
applicability determinations are the first step in determining
whether these Clean Air Act requirements apply to changes in
refinery operations.
In my opinion, it is hard for the industry to claim that
the clean air standards prevented refineries from making
changes to expand capacity when the oil companies never even
asked the Environmental Protection Agency if they were covered.
It is my view, Mr. Chairman, and I will conclude with this,
that the industry's own documents and their failure to take
even the first step towards getting EPA clean air approvals
raise serious doubts about the oil industry's efforts to blame
environmental requirements for supply shortages and high
prices.
I, like you, Mr. Chairman, have a hectic morning, and I
hope to be able to come back and ask some questions of Linda
Fisher, who we know from years past, and appreciate her
involvement. I thank you very much for this chance to make this
brief statement about the concerns I have.
The Chairman. Thank you very much. Let me make some general
statements about the committee's agenda at this point and then
make a few statements about this morning's hearing.
Two weeks ago, when I became chair, I indicated that I
thought it made sense for us to look at the possibility of a
short-term energy bill that would focus on a couple of
significant issues. The ones that were crying out for attention
most were: 1) the dysfunctional energy market in California, in
the West, which we have all spent a lot of time focused on; and
2) the need for in creased funding for the LIHEAP, the low
income home energy assistance program. It seemed to me that
both of those were near-term problems. They required some
urgent attention and we thought we would pursue a markup this
next week on those issues.
We have now, of course, seen a new order out of FERC with
regard to the problems in California and the West generally.
Senators Feinstein and Smith have observed that in their view
we should postpone any further consideration of legislation in
this area until we see how well that FERC order works. I think
that is wise.
In addition, the President has reversed his position on the
LIHEAP funding and has requested additional funds in that area
as part of this urgent supplemental appropriation bill. I
understand the President has requested $150 million of
additional funds as part of that bill. The House has indicated
a higher figure, $300 million, and we are trying to get an even
higher figure agreed to here in the Senate, but clearly there
is action taking place and there is an opportunity in the
supplemental appropriation for us to deal with that.
In light of those changes, it is my thought that we should
move on to the longer term issues that were the subject of the
bills that were produced earlier this year. Senator Murkowski
introduced a bill and I introduced a bill with many Democratic
cosponsors. I believe there is a lot of common ground between
those two bills. We have a summary document that our staff has
prepared that I will distribute today to members of the
committee and to anyone interested. The document tries to
identify the common ground between our two approaches on a
long-term bill. It contains over 30 specific provisions that we
seem to have pretty good agreement on. I would ask that all
members of the committee look at that and come back and give us
a sense before the recess next weekend, or whenever we do go
into recess, about whether they would feel comfortable
including those and having those provisions as the beginning
for a chairman's markup on a long-term bill.
My own view is that this list of sections by itself does
not add up to a balanced and comprehensive energy bill. There
are other topics in both bills that might be fairly
noncontroversial that are not on this list because one side
thought of them and the other did not. The research and
development provisions of the democratic bill are one example
of that. There are also some very controversial issues that we
need to do further looking into before I think we can come to
closure on what we should include in a comprehensive bill.
Examples in that area would be electricity restructuring,
vehicle fuel efficiency and global climate change. We need to
determine what provisions or accommodations can be made in this
comprehensive bill to deal with those issues and, I am sure,
others as well.
I hope that before we leave next week, or before we leave
for the July 4 recess, if we are fortunate enough to finish our
work and be able to leave, I hope that by then we can identify
a tentative schedule of hearings that we will pursue in July,
leading to a markup. I welcome suggestions on what that should
include.
I know Senator Murkowski has indicated that there have been
a great many hearings in the committee. That is true. We have
had 15 hearings on various aspects of oil and gas production,
for example, in the last Congress and in this Congress. I do
think, though, there are some gaps in the record and I would
like to see us fill those gaps. We have yet to really focus on
energy efficiency. I hope we can do that in the hearings coming
up. There are some other hearings as well. Obviously, we have a
very thin record on the issue of global climate change. That is
another issue.
This next Tuesday, I believe Senator Murkowski has agreed
to the suggestion that we go ahead and have the hearing on the
Price-Anderson reauthorization, as well as some of the nuclear
incentive provisions in the Republican energy bill. We had a
number of potential witnesses who came to an earlier hearing to
address those issues, but due to the fact that both parties
were having special caucuses that particular morning, we were
not able to really have that hearing. Therefore, there are a
couple of important issues related to Price-Anderson that we
need to air if we are to have credibility in putting forward a
comprehensive energy package, so I hope we can identify a
subject that we can agree to pursue next Thursday in the
hearing before we go into recess.
I wanted to make those general statements. Let me now go on
to a statement regarding this particular hearing this morning.
I think it is a very important hearing and I was commenting to
Bob Simon this morning that I think this is an issue that may
be a little bit over the horizon, in that a lot of people here
in official Washington have not yet recognized the importance
of it and the impact that it is going to have on gas prices and
gas availability in various parts of the country. I think it is
very important and I think it is a topic that we need to focus
on, and very soon.
The subject, of course, is fuel specifications,
infrastructure constraints and their impact on gasoline supply
and price. We had a first hearing on this issue April 26. The
administration was still working on its energy policy at that
time, so we were not able to hear their testimony. Today we are
happy to have witnesses from both the Department of Energy and
the Environmental Protection Agency.
As we have all noted, gasoline prices have become
increasingly volatile in recent years. There are a number of
factors that have contributed to the increasingly tight and
inflexible market. Let me mention a couple of those. Escalating
consumption by light duty passenger vehicles is one. It is led
by the growth in the number of SUV's, which the Energy
Information Agency projects to increase over 2 million barrels
a day within the next 10 years.
The number of different fuel specifications is another
factor that has added to this tight and inflexible market.
These are really the subject of this hearing.
Third, the difficulty of siting new facilities, whether due
to environmental permitting difficulties or just plain
community opposition. Refineries and pipelines are now
operating virtually at capacity, with little down time for
repairs and maintenance. U.S. refining capacity has not grown
as fast as the demand for fuels has grown, especially the
highly sophisticated refineries needed to produce clean fuels.
In addition, refining capacity is not evenly dispersed
around the country. The gulf coast refineries produce a great
portion of the fuels used in the Midwest and in the East. The
need to transport those fuels hundreds of miles increases the
opportunity for something to go wrong somewhere in the system,
as we saw last summer in the Midwest.
Another complication is the concern with groundwater
contamination from MTBE. California has banned MTBE effective
in 2003. Eleven other States are pursuing efforts to do the
same thing. Daniel Greenbaum, who is the chair of EPA's blue
ribbon panel on oxygenates, testified before this committee at
the April hearing that due to changes in refining capacity,
oxygenates are no longer needed to produce reformulated
gasoline. The Clean Air Act is obviously not under the
jurisdiction of this committee, but clearly the
administration's recent decision to deny California's request
for a waiver of the oxygenate requirement does raise some
serious supply concerns. I hope the witnesses will be able to
clarify the administration's position and the anticipated
effect that they see from that decision.
In the energy bill that I introduced earlier this year,
with a number of colleagues, we proposed streamlining the
number of fuel specifications. The administration's energy plan
also recognizes the need to create greater flexibility in the
fuels market, so I hope that the administration's witnesses can
give us more detail about how the administration believes we
should proceed to do this.
I have serious concerns that unless we act to both limit
demand growth and to increase the flexibility of the system--
and that is what we need to figure out how to do--we are going
to see even higher and more volatile gasoline prices. The
public expects us to develop policies to prevent that from
happening and I look forward to hearing testimony from the
witnesses about how we should proceed.
Let me defer to Senator Murkowski for any statement he has
before we hear from the witnesses.
STATEMENT OF HON. FRANK H. MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman. I listened with
interest to your announcement that you would not seek a short-
term bill, and I think that is an appropriate procedure,
recognizing the reality of the calendar we are on. As you know,
we had anticipated previously to have an energy bill out of the
committee prior to the July 4 recess, but as a consequence of
the turnover of the Congress, why, obviously that process went
awry.
In any event, it would have been very difficult, I think,
to try and move significant legislation, recognizing that the
patient's bill of rights will be before us for an unknown
period of time, and we have not had any advice from the
leadership relative to when they intend to take up energy on
the floor, and I have, as you know, asked the Leader to
identify a time on the calendar.
I think it is most appropriate, recognizing that, on the
polls at least, energy has surpassed education as the number 1
issue in the minds of the public, so the fact that you have
seen fit to indicate your willingness to circulate some 30
topics that we can begin hearings on, or review hearings that
have already been held, I think is noteworthy, and I want to
assure you of my support in that regard.
As indicated to you in my conversation, it would have been
very difficult to try and keep any short-term fix, so to speak,
clean and free of amendments. I know members on my side are
supportive of a comprehensive bill, would have amended any
short-term effort in the committee, and certainly would have
offered amendments on the floor, and I think we would have had
kind of a runaway comprehensive bill, as opposed to something
that would have been more representative of the prevailing
attitudes on the committee as a consequence of the orderly
hearing process.
So be assured of my support in moving towards hopefully the
development of something you and I can agree on, a chairman's
mark, and take up the items that we cannot agree on and resolve
them by a vote within the committee and through the process on
the floor as well.
As you indicated, this is the second of our Energy
Committee hearings looking at gasoline specifications and
infrastructures, and the impact they have on the energy supply
and price. We had a hearing in April. We had Gary Heminger of
Marathon Ashland Petroleum, we had Tom Roberts of National
Convenience Stores, Daniel Greenbaum, Health Effects Institute,
Don Dagle, Exxon Mobil Refining Company, and Craig Moyer,
Western Independent Refiners Association.
One of the issues, of course, is the necessity of having so
many different types of reformulated gasoline, is it necessary.
It was kind of interesting to be reminded of where the
responsibility lay.
We were advised by the expert witnesses that we were the
ones who passed the Clean Air Act of 1990 that required
oxygenated fuels, and we were the ones who ignored the warnings
from those who knew something about the business of making and
delivering affordable and clean fuels to America, and those
warnings were not adhered to, and as a consequence, when we got
in trouble in this area, we began to accuse the industry of
some sinister plot to make some witches' brews of 13 to 15
different types of reformulated gasoline.
In any event, I think we have found ourselves to blame as
opposed to lashing out at EPA or other agencies, which we, by
law, directed them to execute, so I hope in your testimony you
do not hesitate to remind us that any time Congress attempts to
mess around in the recipe business and we do not know what we
are doing, why, God help the public.
Now, in the last hearing, I asked our witnesses to provide
the committee with specific recommendations on how to change
the law, if necessary, to reduce balkanization of fuel supply,
and in what may have been a first for this committee, there was
near-unanimity that removing the oxygenate standard Congress
issued in the 1990 Clean Air Act would help greatly.
If we look at the problem--of course, California is the
best current example--it is my understanding that oxygenates
now make up at least 8 percent of California's gasoline supply.
By banning MTBE, as California decided to do, 2 years ago,
California will at least need 8 percent of something, something
to replace it, when the ban takes effect in 2002, otherwise it
will be a reduction of 8 percent in supply of gasoline.
Ethanol is an additive, of course, that would help, but it
is difficult to transport. California wants to be exempt, as
you know, from the ethanol as well. Well, that was not
possible. We are seeing requests from the Northeast States as
well.
The fact is, gasoline refinery capacity is not adequate to
make up for the shortfall in California if they do not use
oxygenate, that is MTBE, or ethanol, and price spikes could
result.
These problems, of course, are not easy to resolve, but I
want to relate in my concluding reference, during the last
hearing I asked specifically what we could do to add more
flexibility into the fuel system, which is what the previous
witnesses requested. Unanimously they responded that, quote,
``the refiners' flexibilities are enhanced when they are
allowed to meet emission reduction goals in the form of
performance standards rather than product specifications.''
In other words, they asked us to tell them what want them
to make, and let them determine the best recipe. Well,
obviously, that has to meet the Clean Air Act, but I think one
of our witnesses, Daniel Greenbaum, probably stated it the
best, and I quote.
He said, ``we have two paths we can follow for clean fuels
to continue clean-burning fuels with legislated mandated fuel
additive requirements and risk potential market distortions and
increases in price, or to keep the strong clean air performance
requirements for these fuels, but to free the market to make
them in the most cost-effective way possible with a minimum of
specific fuel-additive requirements.''
To achieve these, the witnesses offered two potential
solutions. One is to keep the clean air standard in place, and
delete the oxygen mandate, and the second was to keep the clean
air standard in place and give States the ability to weigh the
oxygenate mandate. They all believe they could meet the clean
air standard with either of these solutions, and I recognize
that our witnesses today may have different views, and I look
forward to those views, but to sum up the testimony, and this
is from the gentleman representing Exxon-Mobil, Don Dagle, but
the other group, I am told, agreed with this statement,
additionally, new scientific data that became available after
the 1990 Clean Air Act amendment demonstrates that oxygenates
are not needed--not needed--not needed to provide the requisite
environmental benefits of reformulated gasoline.
Further, technological advancements in newer vehicles
obviate any earlier justification for mandating oxygenates in
reformulated gasoline in order to address environmental
concerns. I would certainly appreciate your evaluation and
comments relative to that statement, because if there is
another alternative than ethanol and MTBE, this appears to be
that alternative, and whether it is suitable, practical, is
what obviously we are interested in.
Thank you.
The Chairman. All right. Why don't we start with Ms.
Fisher. We appreciate you being here. We understand this is
your first testimony and we are anxious to hear it, so jump
right in. Thank you.
STATEMENT OF LINDA FISHER, DEPUTY ADMINISTRATOR,
U.S. ENVIRONMENTAL PROTECTION AGENCY, ACCOMPANIED BY ROBERT D.
BRENNER, ACTING DIRECTOR OF AIR AND RADIATION PROGRAM
Ms. Fisher. Thank you very much, Mr. Chairman. I appreciate
the opportunity to be with you today, and I am joined today by
Rob Brenner, who is our Acting Assistant Administrator for the
Air and Radiation Program at EPA.
I appreciate the opportunity to discuss with you this
morning the vital role cleaner-burning gasoline plays in
America's air quality, and to comment on an initiative related
to the boutique fuels program that is contained in the national
energy plan.
I also want to explain to you EPA's recent decision
regarding the State of California's request for a waiver of the
oxygen content requirement in reformulated gas.
First and foremost, Mr. Chairman, EPA is concerned that
consumers receive the air quality benefits of cleaner burning
gasoline at a reasonable price. When Congress passed the Clean
Air Act amendments of 1990, it established a number of
successful programs to achieve cleaner motor vehicles and
cleaner fuels. The RFG program was designed to serve several of
these goals. These included improving air quality and extending
the gasoline supply through the use of oxygenates.
The Federal RFG program is required by Congress in 10
metropolitan areas which have the most serious air pollution
levels. Other areas have chosen to opt in to the RFG program as
a relatively cost-effective measure to help combat air
pollution problems. Today, roughly 35 percent of this country's
gasoline consumption is cleaner-burning reformulated gas.
The Clean Air Act amendments also require RFG contain a 2-
percent minimum oxygen content by weight. Both ethanol and MTBE
are used in the RFG program, with fuel providers choosing to
use MTBE in about 87 percent of the reformulated gas. Ethanol
is used in 100 percent of reformulated gas sold in Chicago and
Milwaukee. These are areas that are much closer to ethanol-
producing centers.
The Clean Air Act requires States to regulate fuels through
State implementation plans if the EPA finds such regulations
are necessary to achieve a national air quality standard. This
has resulted in a number of different formulations being
required by States which are often referred to as boutique
fuels.
EPA understands the challenges that State and local
boutique fuel requirements place on production and distribution
of gasoline in the United States, particularly if any
disruption in supply occurs. If the number of special fuels
could be limited, while maintaining needed air quality
benefits, greater flexibility within the distribution system
could possibly result. It is important to note that these State
clean fuel programs are providing significant air pollution
reductions.
The national energy policy that was issued in May directs
the EPA to study the opportunities in consultation with DOE and
USDA and other agencies to maintain or improve the
environmental benefits of State and local boutique fuel
programs while exploring ways to increase the flexibility of
the fuel distribution system. We have begun that boutique fuel
assessment. We are consulting various stakeholders, including
the States and the refiners, and we expect to make
recommendations later this year that we will share with this
committee.
I would now like to talk about the decision that was
recently made by Administrator Whitman to deny the State of
California's request for a waiver of the oxygen requirement in
reformulated gas. That decision was a very difficult one, but
it was the only one we felt we could make, given the
information that was before us.
I also would like to take the opportunity to acknowledge
that our communication of that decision to Governor Davis and
other California officials had not gone the way we planned.
Unfortunately, they turned out to hear about it in the press,
rather than from us personally, and we regret that that had to
happen.
The criteria for granting a waiver such as that requested
by California is clearly set forth in the Clean Air Act. The
Statutory language states that the Administrator may waive in
whole or in part the oxygen requirement upon determination by
the Administrator that compliance with that requirement would
prevent or interfere with attainment by the area of the
national primary ambient air quality standard.
Our decision regarding California's request for a waiver
was therefore limited to only one criteria that the statute
provides, and that is, California's request could only be
granted if EPA had determined that compliance with the oxygen
content requirement would actually interfere with its ability
to attain an air quality standard.
Congress set a very high hurdle for granting such waivers.
It does not allow the agency to consider the risks of MTBE in
drinking water in California. It does not allow the agency to
consider the effect on gasoline prices or on energy supplies
that the oxygenate requirement and the California ban on MTBE
might have.
After extensive analysis of the information that California
provided, the agency concluded that there was significant
uncertainty over the change in motor vehicle emissions that
would result from a waiver of the oxygen mandate. California
had not clearly demonstrated to us what the impact of a waiver
would be on the formulation of smog.
It seems to be well-known that, late in 2000, EPA staff
presented to agency management at that time a proposal to grant
the California waiver in partial. The previous administrator,
however, chose not to sign this proposed partial waiver before
she left office.
In the initial briefings of Administrator Whitman and our
staff, EPA technical staff were further asked to evaluate
issues relating to the uncertainty of any of the assumptions
and estimations that would be needed to reach a decision on the
waiver. One of the major uncertainties results from the
significantly increased evaporation of gasoline vapors due to
commingling. Commingling refers to the mixing in the vehicle
fuel tanks of ethanol-blended gasolines and gasolines without
ethanol, a situation that would occur if we had granted the
waiver.
The possibility of commingling arises because, as both EPA
and California's analysis showed, a significant portion of
gasoline in California would be blended with ethanol, even if
they were not required to use the oxygenates.
In its technical submissions, California acknowledged the
uncertainty of the actual occurrences of commingling, and it
was a result of the analysis around this that demonstrated the
high degree of certainty in the overall emission effects,
depending on which assumption one makes about commingling.
As a result of this uncertainty, we believe California did
not clearly demonstrate the impact on vehicle emissions that
would occur from a waiver of the oxygen mandate. Administrator
Whitman could not grant the waiver, since there was no clear
evidence that a waiver would help California reduce harmful
levels of air pollutants.
As I stated earlier, our evaluation of California's request
for a waiver can only be based on a demonstration that the
oxygen requirement would prevent or interfere with the
attainment of an air quality standard. We therefore did not,
and could not under the Clean Air Act, consider the effects of
the oxygen requirements on the energy supply or the price of
gasoline.
Mr. Chairman, and members of the committee, the clean fuels
program that I have talked about today are critical to our
Nation's efforts to reduce the harmful effects of air
pollution. They are also important to the production and
distribution of gasoline at a fair price to consumers, but we
have learned an awful lot about clean-burning fuels since 1990,
when the Clean Air Act was first passed.
We now know that MTBE, if leaked or spilled, can
contaminate water supplies far more readily than other
components of gasoline. We know that a number of States have
exercised the authority granted to them by the Clean Air Act to
establish different fuel formulations that are now called the
boutique fuels. A proliferation in the number of boutique fuels
has created challenges to fuel producers and distributors and,
through the process I described, EPA will develop some
recommendations to address this issue.
In 1990, the RFG oxygen requirement was established by
Congress to meet multiple goals. One was to improve air
quality, a second was to enhance energy security, and a third
was to encourage the use of renewable fuels. We now know that
some refiners can produce clean fuels without the use of
oxygenates. Thus, there may be better, more flexible ways to
achieve all three of these goals.
As I have stated earlier in my testimony, our authority to
address many of these issues is limited. We are committed to
working with the Congress to explore ways to maintain or
enhance the environmental benefits of clean fuel programs while
increasing the flexibility of the fuel distribution system.
This concludes my oral statement, Mr. Chairman, and I would
appreciate it if you would put in the record my full statement,
and I would be pleased to answer any questions that you might
have.
[The prepared statement of Ms. Fisher follows:]
Prepared Statement of Linda Fisher, Deputy Administrator,
U.S. Environmental Protection Agency
Thank you, Mr. Chairman and Members of the Committee, for the
invitation to appear here today. I appreciate the opportunity to
discuss the vital role cleaner burning gasoline plays in improving
America's air quality and to comment on an initiative related to
``boutique fuels'' contained in the National Energy Policy. I also will
explain the Environmental Protection Agency''s decision regarding the
state of California's request for a waiver of the oxygen content
requirement in reformulated gasoline (RFG).
Mr. Chairman, first and foremost, the Environmental Protection
Agency is concerned that consumers receive the air quality benefits of
cleaner burning gasoline (also called RFG) at a reasonable price.
Before discussing other gasoline issues, I will review the history and
development of the RFG program, and document the air quality benefits
derived from the program. I will also discuss our on-going actions to
address water contamination resulting from leaks or spills of the
gasoline additive MTBE.
Let me begin with a history of the RFG program.
HISTORY OF RFG
When Congress passed the Clean Air Act Amendments of 1990, it
established a number of programs to achieve cleaner motor vehicles and
cleaner fuels. These programs have been highly successful in protecting
public health by reducing harmful exhaust from the tailpipes of motor
vehicles. In the 1990 Amendments, Congress struck a balance between
vehicle and fuel emission control programs after extensive
deliberation. The RFG program was designed to serve several goals.
These include improving air quality and extending the gasoline supply
through the use of oxygenates.
Congress established the overall requirements of the RFG program by
identifying the specific cities in which the fuel would be required,
the specific performance standards, and an oxygenate requirement. The
oil industry, states, oxygenate producers and other stakeholders were
involved in a successful regulatory negotiation that resulted in the
development of the RFG regulations in 1991. EPA published the final
regulations establishing the detailed requirements of the two-phase
program in early 1994. Thus, the oil companies and other fuel providers
had six years to prepare for the performance requirements of the second
phase of the program that began last year. In addition, the oil
industry has been involved in an EPA RFG implementation advisory
workgroup since 1997.
The first phase of the federal reformulated gasoline program
introduced cleaner gasoline in January 1995 primarily to help reduce
vehicle emissions that cause ozone (smog) and toxic pollution in our
cities. Unhealthy smog levels are a significant concern in this
country, with over 53 million people living in counties with air
quality above the 1-hour ozone standard.
The federal RFG program is required by Congress in ten metropolitan
areas which have the most serious air pollution levels. Although not
required to participate, some areas in the Northeast, in Kentucky,
Texas and Missouri have elected to join, or ``opt-in,'' to the RFG
program as a relatively cost-effective measure to help combat their air
pollution problems. Today, roughly 35 percent of this country's
gasoline consumption is cleaner-burning reformulated gasoline. The
Clean Air Act Amendments of 1990 also required that RFG contain 2.0
percent minimum oxygen content by weight. Neither the Clean Air Act nor
EPA requires the use of any specific oxygenate. Both ethanol and MTBE
are used in the RFG program, with fuel providers choosing to use MTBE
in about 87 percent of the RFG. Ethanol is used in 100 percent of RFG
in Chicago and Milwaukee, which are closer to major ethanol production
centers.
BENEFITS OF RFG
Ambient monitoring data from the first year of the RFG program
(1995) indicated that RFG had a positive impact on reducing toxic
emissions. RFG areas showed significant decreases in vehicle-related
tailpipe emissions. One of the air toxics controlled by RFG is benzene,
a known human carcinogen. The benzene level at air monitors in 1995, in
RFG areas, showed the most dramatic declines, with a median reduction
of 38 percent from the previous year. The emission reductions which can
be attributed to the RFG program are equivalent to taking 16 million
cars off the road. About 75 million people are breathing cleaner air
because of RFG. Since the RFG program began six and one-half years ago,
we estimate that it has resulted in annual reductions of VOC and
NOX combined of at least 105,000 tons, and at least 24,000
tons of toxic air pollutants.
As required by the Clean Air Act, the first phase of the RFG
program began in 1995 and the second phase began in January of last
year. As an example of the benefits, in Chicago, EPA estimates that the
Phase II RFG program results in annual reductions of 8,000 tons of VOC
and NOX combined and 2,000 tons of toxic vehicle emissions,
benefitting almost 8 million citizens.
BOUTIQUE FUELS
The Clean Air Act authorizes states to regulate fuels through state
implementation plans if EPA finds such regulations necessary to achieve
a national air quality standard. This has resulted in a number of
different formulations being required by states which are often
referred to as boutique fuels. EPA understands the challenge that state
and local ``boutique fuel'' requirements place on the production and
distribution of gasoline in the U.S. These state fuel programs could
limit flexibility in the fuel distribution system, particularly if a
disruption occurs. If the number of special fuels could be limited,
while maintaining needed air quality benefits, greater fungibility
within the distribution system could possibly result.
The National Energy Policy report issued on May 17, 2001 includes a
recommendation that directs EPA to study opportunities, in consultation
with DOE, USDA and other agencies, to maintain or improve the
environmental benefits of state and local ``boutique'' fuel programs
while exploring ways to increase the flexibility and fungibility of the
fuels distribution infrastructure, and provide added gasoline market
liquidity. We have begun our boutique fuel assessment; we are
consulting various stakeholders, including the states, and expect to
make recommendations later this year.
REDUCING THE USE OF MTBE
There is significant concern about contamination of drinking water
in many areas of the country. Current data on MTBE in ground and
surface waters indicate widespread and numerous detections of MTBE at
low levels. Data from the U.S. Geological Survey indicates a strong
relationship between MTBE use as a fuel additive in an area and finding
detections of low levels of MTBE. A number of states have taken action
to ban MTBE. Accordingly, EPA published last year an Advance Notice of
Proposed Rulemaking requesting comments on a phase down or phase out of
MTBE from gasoline under Section 6 of the Toxic Substances Control Act
(TSCA). EPA believes that TSCA is the best regulatory process available
for limiting or eliminating the use of MTBE. TSCA gives EPA authority
to ban, phase out, limit or control the manufacture of any chemical
substance deemed to pose an unreasonable risk to public health or the
environment. We expect to have a proposal prepared for inter-agency
review later this summer. Actions taken by a growing number of states
to ban the use of MTBE as a gasoline additive is the single biggest
factor that threatens to proliferate boutique fuel requirements around
the country. Eleven states have banned MTBE, one as early as the end of
2002. At least a dozen more states are considering similar bans.
PRODUCTION COSTS FOR RFG AND THE PRICE OF GASOLINE
There are many factors that contribute to the price of gasoline.
These include: the cost of crude oil; refining costs and profits;
refining capacity utilization; distribution and marketing costs; the
size of inventories; the size of demand for gasoline and other
petroleum products; the balance between this demand and readily
available supplies; and the availability of alternative supplies in
tight markets.
Most of the factors that affected prices last year have been again
at work this year: relatively tight crude oil markets; relatively tight
spring gasoline supply/demand balance, compounded by extensive refinery
maintenance and unplanned outages; high refinery capacity utilization;
unique regional and seasonal products, many of which are referred to as
``boutique fuels"; and dependence on distant supplies. I would also
like to highlight a few specific points to amplify on this list:
Fuel demand continues to increase as Americans continue to
travel more. Although recently there have been signs of
slowing, vehicle miles traveled (VMT) have been increasing.
Over the past twenty years, as the economy has grown, VMT has
increased by 114% while population has only grown by 24%.
In addition, the fuel economy of the vehicle fleet is the
lowest in 20 years and is declining, as Americans have
purchased many more pickup trucks, minivans and sport utility
vehicles. By 2000, nearly half of the new vehicles purchased in
the U.S. fit into these categories.
Finally, it is worth noting that prices this spring rose in
areas that do not use clean fuels as well as those that do.
Against this backdrop, the manufacturing cost of RFG II has
contributed relatively little to the overall price of gasoline. EPA has
estimated that the incremental manufacturing costs of RFG II are four
to eight cents per gallon.
As I stated earlier, EPA is concerned that consumers receive the
benefits of the RFG program at a reasonable price. Across the country,
hundreds of communities are benefitting from RFG II for pennies per
gallon. Since prices peaked in mid-May, wholesale prices have fallen by
about 30 cents per gallon. Retail prices at the pump are also easing.
Most analysts are predicting no further rise this summer, barring
unforeseen problems.
CALIFORNIA'S REQUEST FOR A WAIVER FROM THE OXYGEN REQUIREMENT
I would like to turn now to EPA's recent action concerning the
state of California's request to waive the federal oxygen requirement
for RFG. In March 1999, Governor Davis signed an executive order
banning the use of MTBE beginning in 2003. In April 1999, California
requested a waiver from the oxygen requirement. California's waiver
request was based on the assertion that additional oxides of nitrogen
(NOX) reductions are needed in California in order to attain
the National Ambient Air Quality Standards (NAAQS) for ozone and
particulate matter. California claimed that without the oxygen
requirement, greater NOX reductions would be achieved with
their California RFG Phase 3 (CaRFG3) fuel. Last week Administrator
Christie Whitman announced that EPA could not approve California's
request.
The criteria for granting such a waiver is established in the Clean
Air Act, and is the only basis that EPA has for such actions. The
statutory language states:
The oxygen content of the gasoline shall equal or exceed 2.0
percent by weight . . . except as otherwise required by this
Act. The Administrator may waive, in whole or in part, the
application of this subparagraph upon a determination by the
Administrator that compliance with such requirement would
prevent or interfere with attainment by the area of a national
primary ambient air quality standard.
Our decision regarding California's request for a waiver was
therefore limited to the one criterion that the statute provides. That
is, California's request could be granted only if EPA had determined
that compliance with the oxygen content requirement would interfere
with attainment of a primary National Ambient Air Quality Standard
(NAAQS). Congress set a high hurdle for granting such waivers. It does
not allow the Agency to consider the effects of MTBE in drinking water
in California and other states. It also does not allow the Agency to
consider the effect on gasoline prices or energy supplies that the
oxygenate requirement and California's ban on MTBE might have.
After an extensive analysis of the information that California
provided, the Agency concluded that there is significant uncertainty
over the change in motor vehicle emissions that would result from a
waiver of the oxygen mandate. California has not clearly demonstrated
what the impact of a waiver of the oxygen mandate would be on the
formation of smog.
EPA began its analysis in July 1999 upon receipt of California's
initial submissions of technical information in support of Governor
Davis' original letter of intent which he had sent to EPA in April
1999. EPA responded to California in August 1999, asking for
clarification on several issues. Between August and December of 1999,
EPA and the California Air Resources Board (CARB) staff conducted
several meetings in which CARB presented new technical information.
In December 1999, two important developments occurred which
significantly affected the course of EPA's work to evaluate
California's request. First, on December 9, the California Energy
Commission completed an analysis which presented information regarding
how refineries in California might reformulate their gasolines in order
to meet CARB fuel standards if there were no federal oxygen
requirement. Almost simultaneously, CARB adopted new California RFG3
standards. Shortly thereafter, on December 24, 1999, California
submitted to EPA a major new analysis and technical justification for
its waiver request.
In January 2000, EPA staff traveled to California and met with CARB
staff to discuss the state's new analysis. In response, in early
February, CARB submitted additional information to EPA. In a February
14, 2000 letter to California, EPA stated that the application was
complete and the State had submitted sufficient information for EPA to
evaluate the waiver request.
In late spring of 2000, EPA staff concluded that further Agency
analysis was needed in order to fully evaluate California's request.
EPA performed an independent analysis of the effect of a waiver on
gasoline properties and emissions in California. EPA's analysis
included refinery modeling performed by the same independent refinery
modelers utilized by the California Energy Commission in their December
analysis. This analysis compared the properties of California gasoline,
with and without a waiver of the oxygenate requirement, assuming a
California MTBE ban. EPA's technical and legal staff then began to
integrate the various results into a complete and comprehensive
analysis which we used to draft a proposed decision on the California
waiver request.
Late in 2000, when the various analyses were near completion, EPA
technical and legal staff presented the Agency management with a
proposal to grant California a partial waiver; that is, a waiver for a
year-round oxygen level of 1.0 percent by weight. The previous
Administrator chose not to sign this proposed partial waiver before she
left office.
In this current Administration, we continued to examine the
proposal that had been prepared. In initial briefings of Administrator
Whitman and her staff, EPA technical staff were asked to further
evaluate issues relating to the uncertainty of any relevant assumptions
and estimations that would be needed to reach a decision.
Although many aspects of our analysis required assumptions and
estimations, one of the major uncertainties results from significantly
increased gasoline volatility (that is, increased evaporation rate of
gasoline) due to commingling. Commingling refers to the mixing in
vehicle fuel tanks of ethanol-blended gasolines and gasolines without
ethanol, a situation that would occur should a waiver be granted. In
regard to whether such a situation would exist if a waiver were
granted, we note that every analysis that we are aware of has shown
that significant amounts--up to 65 percent--of California gasoline
would contain ethanol even if a waiver were granted. This is because
only a limited number of refinery streams like ethanol are available to
make clean gasoline and maintain the octane performance properties
needed.
In its technical submissions, California identified commingling as
a factor that must be considered in the design of its clean fuel
program and acknowledged the uncertainty of the actual occurrences of
commingling. Upon the request of EPA management, EPA staff conducted
new analysis of other plausible scenarios of commingling. It was the
results of this new analysis that demonstrated the high degree of
uncertainty in the overall emissions effects depending on the
assumptions one makes about commingling.
Under the new scenarios analyzed earlier this year by EPA,
commingling would result in increased VOC emissions. Depending on the
level of the increase associated with commingling, the total emissions
of VOC associated with a waiver may increase or decrease, resulting in
an uncertain impact on ozone. As a result of this uncertainty, we
believe California has not clearly demonstrated the impact on vehicle
emissions that would occur from a waiver of the oxygen mandate. While
we agree with California that the waiver would likely result in a
decrease in NOX emissions, we note that a waiver would
increase emissions of carbon monoxide (CO). As stated above, there is
also significant uncertainty about whether ozone-forming emissions of
VOCs would increase or decrease if a waiver were to be granted.
As I stated earlier, our evaluation of California's request for a
waiver can only be based on a demonstration that the oxygen requirement
would prevent or interfere with attainment of a primary ozone NAAQS. We
therefore did not and could not under the Clean Air Act--consider the
effects of the oxygen requirement on energy supplies or the price of
gasoline. Our decision not to grant California's request for a waiver
maintains the status quo with regard to federal RFG requirements.
CONCLUSION
Mr. Chairman and Members of the Committee, the clean fuel programs
I have talked about today are critical to our nation's efforts to
reduce the harmful effects of air pollution. They are also important to
the production and distribution of gasoline at a fair price to
consumers. We have learned a great deal about cleaner burning fuels
since 1990. We now know that MTBE, if leaked or spilled, can
contaminate water supplies more readily than other components of
gasoline. We know that a number of states have exercised the authority
granted them by the Clean Air Act to establish different fuel
formulations that are now referred to as boutique fuels. A
proliferation in the number of boutique fuels create challenges to fuel
producers and distributors and, through the process I have described,
EPA will develop recommendations to address this issue.
In 1990, the RFG oxygen requirement was established by Congress to
meet multiple goals: improve air quality, enhance energy security, and
encourage the use of renewable fuels. We now know that some refiners
can produce clean fuels without the use of oxygenates. Thus, there may
be better ways to achieve these goals.
As I have stated in my testimony, EPA's authority to address many
of these issues is limited. We are committed to working with Congress
to explore ways to maintain or enhance environmental benefits of clean
fuels programs while exploring ways to increase the flexibility of the
fuels distribution infrastructure, improve fungibility, and provide
added gasoline market liquidity.
This concludes my prepared statement. I would be pleased to answer
any questions that you may have.
The Chairman. Thank you very much. We will include your
full statement in the record. Mr. Card, why don't you go ahead
with your testimony before we ask questions.
STATEMENT OF ROBERT CARD, UNDER SECRETARY,
DEPARTMENT OF ENERGY
Mr. Card. Mr. Chairman, members of the committee, good
morning. I would like to ask that my written testimony be
submitted for the record as well.
The Chairman. It will be included.
Mr. Card. You have asked me to comment on the following
three topics. First, the ways of streamlining the array of
fuels to reduce price volatility while protecting environmental
goals, second, the implication for gasoline markets of the
efforts to ban certain fuel additives, and finally, the
implications of EPA's decision to deny waivers of the Clean Air
Act oxygen mandate.
Before addressing those specific items, let me say that we
are encouraged by the recent gasoline price information that
shows Nationwide prices 8 cents a gallon less than a year ago,
and trending down. California prices are also trending down,
but less so due to refinery operating difficulties in the
State. We are hopeful that the supply situation remains stable,
which should support continued price relief.
With regard to the committee's first question, on fuel type
streamlining, DOE certainly supports this as an important
objective. We look forward to working with EPA on the national
energy policy study on this subject. The study is still
underway, but some policy issues that would be important to us
would include the following.
First, the equity of forcing higher fuel prices on a
consumer group to support fuel fungibility with a nearby fuel
area, as compared with the commensurate benefits of a common
fuel.
Second, the effective decisions on key fuel volume
additives which impact the total gasoline supply.
Third, the effect of market signaling of our intentions to
refiners and fuel additive produces to provide them clear
investment parameters for capacity or quality adjustments.
Finally, the opportunity to take advantage of planned
future vehicle and fuel standards to eventually move more
toward a national fuel specification.
With regard to the second question of the implications of
banning certain fuel additives, we share the environmental
concerns regarding the reported effects of certain additives in
the environment. However, we would encourage the stakeholders
to ensure their considering two issues in both the decision to
ban and the timing of the phaseout if the decision has to be
made: First, these additives currently make up 5 to 10 percent
of our total fuel capacity, which is beyond the reserve
capacity currently available in the system; and secondly, have
all reasonable controls been imposed to keep these additives
and other gasoline constituents out of the environment?
Lastly, with regard to the implications of the waiver
denial, we note that the primary impact of the decision was the
ban on the additives. Once the decision to ban was made, the
relative impact of the waiver denial, while still of concern,
is relatively minor. However, with appropriate caveats,
including implementation timing for market adjustments, we
support EPA's evaluation of both MBTE's environmental impacts,
and the possible need for increased flexibility in the Clean
Air Act standards.
Thank you.
[The prepared statement of Mr. Card follows:]
Prepared Statement of Robert Card, Under Secretary,
Department of Energy
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to present testimony addressing the
important national energy policy topic of the impacts of fuel
specifications and infrastructure constraints on energy supplies and
prices. The Committee specifically asked that the Department of Energy
address questions relating to impacts on gasoline markets from possible
reductions in the number of different gasoline types, state actions to
limit the use of certain gasoline additives like methyl tertiary butyl
ether (MTBE) and the recent decision by the Environmental Protection
Agency (EPA) to deny California's request for a waiver of the
reformulated gasoline oxygenate requirement under the Clean Air Act. I
will address each of the Committee's concerns, but would like to start
with the broader National Energy Policy context, and recent energy
markets experience, as a framework for these issues.
The early focus of this Administration on the development of a
comprehensive National Energy Policy was motivated to a significant
degree by the rising concerns over the adequacy and cost of energy
supplies, not the least of which is gasoline and other petroleum
products on which much of our economic activity depends. We have
observed over the past few years a tightening of the supply/demand
balance in the petroleum product market in general and gasoline in
particular. Recent events in the world oil markets have contributed to
the high and volatile prices we have experienced this summer and last
year, and they need to be understood before trying to come up with
solutions. Dr. Cook of the Department's Energy Information
Administration addressed these near term issues in testimony before the
House Committee on Government Reform, Subcommittee on Energy Policy,
Natural Resources and Regulatory Affairs last week and I will not
repeat that here. More relevant to this Committee's interests at this
hearing are some of the underlying refinery capacity and fuel
specifications issues that have been developing for a much longer time.
These include:
The poor investment climate throughout the 1990s associated
with the refining industry's historic over capacity and
competition from foreign refineries;
The subsequent closure of uneconomic refineries some of
which were also unable to meet new environmental requirements;
and
High investment requirements simply to maintain existing
capacity due to the imposition of a range of new clean fuel
requirements starting with reformulated gasoline in 1995 and
continuing through at least 2006.
Having experienced a decade of poor returns, facing legal
challenges related to permitting on previous expansion, and having to
comply with significant new requirements for cleaner fuels that will
demand large stay-in-business investments, it is not surprising that
the financial decision making in the refining industry has responded
very cautiously to the recent strong growth in gasoline (and other
transportation fuels) demand. We also believe that efforts to
significantly improve vehicle fuel economy and introduce or require use
of non-petroleum fuels, while potentially valid in and of themselves,
further raise the financial risk associated with investment in
additional capacity. Other parts of the petroleum product supply
system, including pipelines and terminals, have faced similar financial
situations that have discouraged investment and have left us with
limited capacity.
Assuring adequate capacity to meet future demand in an
environmentally responsible manner in the longer term is not an easy
matter but we must take on this challenge. In the short term, our
choices are even fewer and any changes that have been proposed must
carefully consider impacts on price and supply. Under this framework, I
will take each of the three questions raised by the Committee in order.
STREAMLINING THE ARRAY OF GASOLINE SPECIFICATIONS
Concern has been expressed about the wide range of gasoline types
used in the United States and their impact on system flexibility. In
response to the National Energy Policy recommendations we are working
with the Environmental Protection Agency in an interagency effort to
examine the current situation surrounding what has come to be called
``boutique fuels'' and to explore possible alternatives. However, I
think it is important to understand that the current situation of using
different fuels to meet the differing air quality needs of various
urban areas has economic benefits, at least at this time. Under this
approach, areas that do not need the more expensive clean fuel do not
have to bear the cost of that fuel.
Problems arise with this localized fuel approach when there is an
upset in the supply system and fuel supplies need to be brought in from
alternative sources that may not normally store or make the particular
fuel needed. In the past, such as last summer in St. Louis, EPA and the
Department have dealt with these supply disruption situations by
considering fuel supplier or state government requests to allow the
sale of non-conforming gasoline (typically conventional gasoline) on an
as-needed basis. This system has worked well and continuing it is
certainly one option. Other approaches may be possible and will be
considered as part of this NEP review of the ``boutique'' fuels.
In the meantime, we need to be sure that what we do to attempt to
``fix'' the perceived problems doesn't make the overall situation
worse. For example, some stake holders have proposed a near-term move
to widespread use of federal reformulated gasoline, or regional fuels,
in lieu of the current mix of clean and conventional gasolines. While
this might help make for a simpler distribution system, it would reduce
the total volume of gasoline that today's refineries could produce and
place significant additional investment requirements on refineries.
These changes and additional investments would have to be addressed
at the same time refineries are making investments to meet important
new fuel quality requirements for gasoline and diesel fuel. A loss of
additional refining capacity is an almost certain result of such a
near-term change. Again, a longer term change may be possible and will
be considered in this NEP review.
STATE LIMITATIONS ON GASOLINE ADDITIVES
The Department has been involved for some time with EPA, other
Federal agencies and state organizations like the Northeast States for
Coordinated Air Use Management (NESCAUM) in addressing the issue of
MTBE, an oxygenate used in clean gasoline formulation, affecting water
supplies. This problem arises primarily from leaking underground
gasoline storage tanks and there is an ongoing, federally-mandated
effort to fix and upgrade most of these tanks. Individual states have
made additional efforts to address these leaking gasoline tanks and
their potential impacts on water supplies. However, some states have
made the choice to resolve the problem by banning the use of MTBE in
gasoline. This clearly is one option for addressing the problem and we
can appreciate that some states, like California and New York, believe
that it is the best option. However, we believe addressing these water
quality concerns with near-term bans of gasoline additives represents a
major threat to the adequacy of gasoline supplies in those states and
potentially on a more widespread basis.
As refiners face additional requirements to meet even tighter clean
fuel standards for their gasoline, like the recently promulgated
standards for Tier II low sulfur gasoline, and anti-backsliding toxic
emission control requirements for conventional and reformulated
gasolines, and address commercial considerations like the Unocal
patent, they will find oxygenates such as MTBE even more necessary and
valuable to increase volume, make up for lost octane and address other
property changes such as distillation characteristics. The availability
of oxygenates also provides valuable immediate gasoline blending
flexibility to refiners trying to meet tight product specifications;
the oxygenates are aromatic-free, high octane, virtually sulfur-free
blendstocks that can be put in almost any shipment of gasoline to
offset performance shortfalls in other parts of the refinery. This is
particularly true for MTBE which can be blended at the refinery,
shipped in pipelines and which has little negative impact on vapor
pressure. The effect of being able to readily blend even small amounts
of MTBE into gasoline is to help assure product deliverability,
reliable supplies and affordable gasoline prices to consumers.
If a sufficient number of States were to restrict use of MTBE,
refiners and distributors might choose to remove MTBE from all gasoline
to protect the fungibility of the gasoline distribution system and
avoid even more ``boutique'' fuels. MTBE's contribution to gasoline
supplies nationally is equivalent to about 400,000 barrels a day of
gasoline production capacity or the gasoline output of four to five
large refineries. Additionally, a loss of ability to use MTBE may also
affect the ability of the US gasoline market to draw gasoline supplies
from Europe, the major source of our price-sensitive gasoline imports,
since those refiners widely use MTBE, albeit typically at lower
concentrations than in the U.S.
Alternatively, gasolines with and without MTBE could be produced
but with less flexibility and fewer exchange opportunities in the
distribution system. In addition to the ongoing supply problems one
could expect from trying to produce both reformulated and conventional
gasolines without MTBE, regional refinery or distribution supply
problems could lead to additional short-term difficulties under state-
by-state bans. One would expect these situations to contribute to
regional gasoline shortfalls and longer periods of price volatility as
markets struggle to re-balance on a state-by-state basis. In addition,
for Northeast states, which depend heavily on imported reformulated
gasoline, MTBE bans and the subsequent need for special gasoline
blendstocks for ethanol blending could be even more problematic.
EPA'S DENIAL OF CALIFORNIA'S REQUEST FOR A REFORMULATED
GASOLINE OXYGENATE WAIVER
The first step in assessing the implications of the EPA decision to
deny California's waiver request is to understand the full range of
factors affecting California's gasoline supply and price.
California, like the rest of the nation, has experienced strong
growth in gasoline demand.
This has come at the same time that clean fuel standards were
tightened to meet important air quality needs.
These product quality requirements as well as limitations on the
emissions from the refineries themselves have limited gasoline capacity
and have contributed to closure of some of the economically weaker
refineries.
Together with events in the broader world oil market, these factors
have caused a severe tightening of the supply/demand balance in the
California gasoline market. The unique nature of California's clean
gasoline requirements and its distance from, and lack of ready access
to, the major U.S. refining center in the Gulf Coast make outside
supply of gasoline to California very difficult, further contributing
to the higher and more volatile prices in that market.
It is against this background that California made its decision to
eliminate MTBE from gasoline at the end of 2002 and to increase use of
ethanol and other gasoline components produced outside the California
refining system. With or without an oxygenate requirement for Federal
reformulated gasoline in California, a very large amount of ethanol and
other outside components will have to be used to meet California's
quality and volume requirements. While an oxygenate waiver may have
increased refinery flexibility at the margin, its affect would have
been minor relative to the basic decision to eliminate MTBE and the
pre-existing, very tight supply/demand balance that has developed in
California.
The Department of Energy remains very concerned about our current
and longer-term energy supply situation. We will continue to work with
EPA and others to better understand the energy supply implications of
all our actions and look for additional ways to improve the current
capacity situation. While we fully support the various clean fuel
requirements that are necessary to achieve our air quality goals and we
share a strong desire to protect the nation's water quality, we believe
that it is important that these initiatives are implemented in a way
that has the least negative impact on fuel supplies. As we move
forward, the National Energy Policy provides important guidance and
Executive Order 13211, ``Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use,'' will
appropriately focus our attention on these impacts in future rule
makings. Assuring adequate supplies of energy, gasoline in this case,
in an environmentally responsible way and at reasonable prices to
support continued, strong economic growth is a key goal of this
Administration.
Mr. Chairman, that ends my testimony and I would be happy to answer
any questions the Committee may have.
Thank you.
The Chairman. Well, thank you very much. Let me see if I
can understand better some of the testimony that we just heard.
Ms. Fisher, my impression is your position at EPA is you had no
choice but to go ahead and deny this waiver.
Ms. Fisher. That is correct, based on the information
supplied by California. We did not believe they met the
threshold set in the law.
The Chairman. And the threshold set in the law, as you see
it, is the requirement that in order for you to grant a waiver
you have got to show that it adds to the, or that it
contributes--let us see, what was the phrase you used there?
Ms. Fisher. It inhibits the ability of the State to meet
the clean air quality standards, so they would have to
demonstrate that the 2-percent oxygenate requirement actually
interfered with their ability to meet the quality standard.
The Chairman. Okay, so you believe that you were legally
obligated to go ahead and deny their request for a waiver. Now,
is that true with--I guess that is true with the other States.
You did the same thing in New Hampshire, is that right, I mean,
the previous administration did?
Ms. Fisher. Let me have Mr. Brenner answer that.
Mr. Brenner. Mr. Chairman, New Hampshire is in the midst of
preparing an application for us. They are asking for the
opportunity to develop an alternative to reformulated gasoline
and to opt out of the program before 2004, which would normally
be the date by which they could first opt out.
The Chairman. So theirs has not been ruled upon yet?
Mr. Brenner. It has not been formally submitted to us, I do
not believe.
The Chairman. Okay.
Ms. Fisher. And Mr. Chairman, let me clarify something,
because I know you have representatives from the State of
California. Their petition demonstrated that the oxygenate
requirement would interfere with their ability to meet the
standard for NOX.
If we had granted the waiver, we were concerned that they
would increase levels of carbon monoxide, and the petition
information gave us great uncertainty as to whether, if we
granted the waiver, levels of ozone would increase or decrease,
so it is a little bit complex, but for one of the air
pollutants it actually would have improved the situation in
California, for another air pollutant it made it worse, and for
a third, there was a lot of uncertainty about what the relative
impact was going to be, and it was all of that that led us to
the denial.
The Chairman. Now, is the administration proposing to
Congress that we change the law that has constricted you, or
caused you to make this decision?
Ms. Fisher. We are definitely looking at whether
legislative fix is needed. Based on what we know today, which
is significantly different than where we were in 1990 when the
Congress passed the Clean Air Act, we know that refiners can
produce very clean-burning fuel without the oxygenate
requirement, and through the boutique fuel study and others, we
are going to look at what kind of legislative fixes you might
need to make a program that is more flexible, that still
provides significant clean air benefits to us.
The Chairman. Mr. Card, you are a part of the
administration. You had a part of the administration that is
not prohibited from looking at energy supplies or price of
gasoline and I am interested in understanding better--I could
not tell from your testimony whether you believe that this
decision, the combined decision, the decision of California to
ban MTBE and the decision of EPA to deny their waiver
application, whether those two decisions together are going to
cause supply problems or cause increases in prices of gasoline
in California or elsewhere in the country. Do you have a
judgment on that?
Mr. Card. Well, our position on that, as was pointed out
earlier, is that the supply and demand situation is very tight,
and if you take 5 to 10 percent of the supply out of the system
suddenly, without a period for adjustment, it certainly could
create a problem. Whether the marketing signaling has been
adequate in this instance to create additional capacity remains
to be seen for us. We cannot predict one way or the other.
The Chairman. Well, I guess the concern that I have is that
California, whether their decision was right or wrong on
banning MTBE in the beginning of 2003, they did give some lead
time. They sort of made the decision. They advised everybody of
the decision. I am concerned that in trying to meet the
requirements of the Clean Air Act, given the denial of the
waiver request, we are going to have real problems getting the
ethanol in California at a reasonable price to do this without
a dramatic increase in the price of gas. Am I wrong about that?
Mr. Card. Well, the way we would see it is, if you take
MTBE out, you have taken out 5 to 10 percent. You have got to
put something back in, so in a way we would hope that the
ethanol system can respond and do that, otherwise you have to
have a basic increase in refining capacity, so the issue here
is less the fuel composition than the total quantity of fuel
available, so even though the refiners might be able to meet
the standard without the oxygenate, they do not have the
capacity right now today to do so. It is a capacity issue.
The Chairman. You are saying you hope the ethanol can be
provided to meet the need.
Mr. Card. Yes. If nothing else, it will be needed for
quantity.
The Chairman. Well, I guess my concern is that I do not
know if it is adequate for us to be sitting here saying we hope
there will be enough to meet the need. We have a chart around
here that I could show which demonstrates where the ethanol in
the country is produced and you can see that most of it is not
produced in California. Most of it is produced in the Midwest
and not only is there a problem in producing enough, there is
also a problem in transporting it to the West Coast and I do
not know if any study has been made of that, as to whether or
not we have got enough tankers or whatever it is that is going
to transport that.
You see, that chart there shows the production capacity for
ethanol and you can see that almost all of it is in the
Midwest. Have you looked at that?
Mr. Card. We have not studied it specifically, but at this
time we do not have conclusive evidence that the ethanol system
cannot rise to meet this demand. We would just point out that
with already a sticky situation in California under the current
system, we are certainly imposing a whole series of new
challenges, and a large new infrastructure has to be put in
place in a short period of time, but I do not want to
presuppose here that it cannot be done.
The Chairman. I think if the standard is that we need
conclusive evidence that the system cannot respond, that is not
the right standard. We are going to be held to a higher
standard than that, those of us in Congress and, I think, the
administration as well.
We are going to have to either be able to demonstrate with
some assurance that this is likely to be achievable at a
reasonable price, or we have got to move on to plan B, and I do
not hear any plan B being discussed or even thought about. Am I
wrong on that?
Mr. Card. I guess what I would like to do is submit an
answer for the record on that.
[The information referred to follows:]
California's decision to ban the use of MTBE will significantly
increase the difficulty and cost of producing adequate volumes of the
gasoline required in California. Having to use ethanol as an oxygenate
in that portion of California gasoline covered by the Federal
reformulated gasoline program may further increase the difficulty and
cost because of ethanol's price and the actions refiners have to take
to reduce gasoline volatility during the summer to accommodate
ethanol's impact on vapor pressure. The Energy Information
Administration's Annual Energy Outlook 2001 estimated that the price
increase in California gasoline, as a result of the MTBE ban and
retaining the oxygenate requirement, will be on the order of five cents
per gallon in constant 1999 dollars. This figure is consistent with
estimates of cost increases made by other analysts. However, higher
prices are possible if greater volumes of ethanol are used, ethanol
supplies are inadequate or overall gasoline supplies are inadequate.
California has several options to address its fuel supply needs, if
it views the current situation as unacceptable. Obviously, it can
reconsider the timing and severity of the limitations imposed on MTBE
use. Alternative sources of gasoline, such as the U.S. Gulf Coast and
Asian refining centers, as well as alternative sources of ethanol (such
as Brazil) can be engaged. Reducing demand for gasoline, such as we
have seen for electricity this summer, is possible.
The Chairman. Okay. That is good.
Senator Murkowski, did you have some questions?
Senator Murkowski. Thank you. This is for Ms. Fisher. Can
you give us an idea why the previous administration chose not
to sign the waiver that would have cut the oxygenate standards
in half for California? It is my understanding that this waiver
was on Ms. Browner's desk for sometime, and the Clinton
administration, I gather, at the end decided not to sign it,
but EPA has had California's waiver request for, good heavens,
2 years. That is an awful long time for a State to have to wait
for an answer.
Ms. Fisher. A couple of things, Senator. First of all, it
is my understanding that the previous administrator,
Administrator Browner, also had some concerns about the effect
that granting the waiver would have on smog--ozone--which were
the same areas of uncertainty that led to Administrator Whitman
finally denying the waiver. That was Administrator Browner's
primary area of uncertainty. It was ours as well.
With respect to why it took 2 years, we actually spent a
lot of that time working with California to get more
information and to run different various scenarios on what the
impact of the waiver would be.
Senator Murkowski. But there was no time limit on it, is
that correct?
Ms. Fisher. There is not a time limit in terms of when we
have to make a decision to grant or deny a waiver? I do not
believe there is, no.
Senator Murkowski. So you know, can you not just go on? You
have done it for 2 years now. California has had a waiver, and
nobody's acted on it. Now, you have acted on it, right?
Ms. Fisher. Correct.
Senator Murkowski. California was never granted the waiver.
They requested it, were never granted it, and you have denied
it.
Ms. Fisher. Correct.
Senator Murkowski. As a first order of business. I am
curious, you know, one administration lets it sit for 2 years,
the next administration comes in and makes a decision, when
there is no time, evidently--it is not an issue that has to be
done by a certain time frame.
Ms. Fisher. Well, in some ways it was very ripe for
decision, in that we had, from our perspective, completed the
analysis that needed to be done, and secondly, California, in
order to plan its own fuel supply issues, did need to know
whether they were going to have the waiver granted or not.
Senator Murkowski. Well, I agree with you, and I think it
was appropriate that you make a decision. I am just pointing
out a contrast here. One administration for various reasons
decides not to make a decision. The next one, it is the first
thing they do when they come in.
I am concerned also about, you mentioned in your statement
that EPA is not allowed to consider any of the impacts on fuel
supply and price when deciding issues under the Clean Air Act.
Ms. Fisher. When deciding whether or not to grant a waiver
of oxygenate requirement.
Senator Murkowski. Now, it is my understanding the
President issued an executive order requiring that an energy
impact study be done on agency decisions which affect energy
supply and price. I am wondering how you reconcile the limits
placed on EPA by the Clean Air Act, on the one hand, with the
demands of the executive order on the other.
Ms. Fisher. Well, the executive order directs us to
understand the impacts. It does not override the statutory
requirement. Therefore, energy imports were not something that
we could actually take into account as we made the decision.
The Chairman. Now, Mr. Card, relative to your statement, I
am going to move into a general area of concern relative to
refinery capacity. I met with some of the small refiners the
other day and my understanding is that the number of small
refiners in this country contribute about 5 percent of the
total contribution of refined product, primarily diesel.
They are faced with an inability to comply financially with
the requirements of a retrofit that would address the removal
of sulphur from diesel. You know, some refineries that cost $20
to $25 million are suddenly faced with $40 to $50 million in
retrofit and no way to meet that kind of a requirement. The
reality is that if they go out of business, we are going to
have a further shrinkage of refining capacity, which in the
absence of eliminating MTBE and the difficulty associated with
more ethanol production suggests that this crisis of inadequate
supply could be with us for some time. Do you have some
comments on how the Department of Energy is looking at the
dilemma that these small refiners are faced with?
Mr. Card. Well, I think that would have to be rolled over
into the overall evaluations as part of the national energy
policy that we are deliberating right now. Certainly, there is
a delicate balance, and we need to do what we can to keep all
the refineries that are able to perform according to the permit
requirements in business.
Senator Murkowski. Do they not have to conform by, what,
2004?
Mr. Card. Linda would know much better, but I think it is
2005 or 2006, the sulphur standard implementation.
Senator Murkowski. Maybe Mr. Brenner can help us. Senator
Bingaman and I have addressed this in our comprehensive general
considerations about what we do with the refiners, but we would
like you to highlight the significance of what it means if some
relief is not provided, either some kind of tax incentive,
accelerated depreciation, something, because otherwise my
understanding is they are simply going to go out of business.
Mr. Brenner. Senator Murkowski, the sulphur in gasoline
requirement begins in 2004, and the sulphur in diesel fuel
begins in 2006. We added some provisions to the rule to help
refiners facing financial hardship, and to give small refiners
some additional time. We did address relief to refiners in the
rule.
Senator Murkowski. How, again? The first part, how are you
relieving them?
Mr. Brenner. First, there is a waiver provision to help
provide additional time for those refiners that are facing a
financial hardship. In fact, we just recently granted that
extra time in the case of the sulphur in gasoline requirement
for a couple of refiners recently.
Senator Murkowski. Is it not more of an economic reality,
though? I mean, you give more time, well, time, they are still
faced with the dilemma, unless there is new technology that
comes along and makes the process less expensive.
Mr. Brenner. Well, the goal is that with more time, then
they have an opportunity to increase the capital they need to
make the investment through their profits. It gives them more
time to accrue the funds needed for the investment.
Senator Murkowski. My last question--well, the staff
indicated concern over the problem associated with the small
refiners being one of overlapping requirements and timetables
for compliance and so forth. In my conversation yesterday, they
appear to be grasping straws to try and stay in business,
recognizing that as they get an extension of time, they still
have to plan to comply, and the economics of their operation
suggests that it is not in the cards to comply, because the
costs cannot be amortized based on the volume that they are
capable of producing.
Mr. Brenner. Senator Murkowski, in the rule we did provide
them with up to 4 additional years, and we have committed to
monitor the implementation of this program.
Senator Murkowski. What I am telling you is, the
conversations I had with some, time is not the issue. Granted,
they can stay in business for another 4 years, but their
ability to meet the requirements based on the economics in the
industry and the economics if you do not expand that refinery.
My last question is relative to fuel standards which would
simplify the distribution system. My question is, would it also
reduce the total volume of gasoline that today's refineries
could produce? In other words, how do you streamline fuel
specifications to reduce the total gasoline volume, and we have
seen enough alleged price spikes to know what the effects of a
short supply can mean under a regional fuel system, where price
spikes become more likely, so would it not be more responsible
for regional fuel standard increased prices to be at the pump
for consumers who do not live in nonattainment areas?
Ms. Fisher. Senator Murkowski, we are looking at the impact
throughout the country of all of these different fuels on
demand, on supply, and on price, and we hope to come back to
the Congress in the early fall or late summer, with our report.
The report will better clarify both the impact the different
fuels are having on price and will also provide recommendations
on how we can modify our fuels program to reduce any
disbenefits.
Senator Murkowski. Finally, and I know my time is up, but
the question that was posed to you in my opening statement by
Mr. Dagle that oxygenates are not needed to provide the
requisite environmental benefits for reformulated gasoline, do
you concur with that?
Ms. Fisher. Today, we can produce much cleaner fuels
without the use of oxygenates than we could when the Act was
first passed. We do not disagree with that.
Senator Murkowski. Then why is that not a solution?
Ms. Fisher. The reformulated gas program was designed for
several reasons.
Senator Murkowski. I know.
Ms. Fisher. Eliminating that and not addressing the fuel
supply and the renewable fuels program leaves two of the goals
of the reformulated gasoline program unaddressed.
Senator Murkowski. Well, then, would you recommend to the
committee some specifics on how you would take the statement
recommendation, which you concur with that they are not needed,
to provide us with an alternative that is other than the two
that we have, which are ethanol and MTBE, and we are throwing
out MTBE and putting more pressure on ethanol.
I have no problem with ethanol at all, other than it is
very difficult to transport, and it is going to be tough to
move out to the west coast, and the east coast as well. Maybe a
Senator over from the farm State could figure that out, but we
need an answer, or a recommendation of changing laws or
whatever, and still comply.
Thank you.
The Chairman. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
I want to come back, Ms. Fisher, to this question I touched
on in my opening statement about the oil industry position,
which is that much of the problem today, the shortages and the
high prices, is due to the lack of refinery capacity and the
restrictive environmental standards.
The documents that I have gotten and made public last week
indicate that there were reductions in refinery capacity for
the purpose of increasing profit, and they said that
repeatedly, and then there were reductions in the refinery
capacity, and I want to ask you now about the environmental
aspect of this issue.
Under the new source review provisions of the Clean Air
Act, a refinery can ask your agency for an applicability
determination whether changes in operations that boost
production would be subject to a permitting requirement. Given
that there are no request by refineries for applicability
determinations by EPA during the past 10 years, does this mean
that there was either no intent to expand refinery capacity, or
else that folks were increasing output without first getting a
permit, in violation of the law?
Ms. Fisher. Well, as you know, Senator, we have brought
several cases against refiners because we are concerned that
they may have expanded capacity beyond what is anticipated
without coming in and asking us, applying for a new source
review permit, so there are a number--we have had a few
settlements already. We have had a number of other cases
pending on this exact point.
Senator Wyden. My understanding is that those lawsuits are
being reviewed right now, is that correct?
Ms. Fisher. As part of the national energy plan.
Senator Wyden. There have been a lot of national news
articles with folks in your agency and elsewhere, veteran
lawyers concerned about how those things are being handled.
Ms. Fisher. We settled one just a few weeks ago. The others
are being reviewed by the Justice Department, and we expect
that review to be done shortly.
Senator Wyden. Now, are you all going to be the lead agency
under the Bush energy effort with respect to evaluating the
impact of the new source review on refinery capacity?
Ms. Fisher. Yes, we are.
Senator Wyden. How do you see your expertise with respect
to how you are going to be able to make decisions on this
issue? Other than asking the industry, how are you going to go
about it?
Ms. Fisher. Well, let me tell you a little bit about our
review. EPA has invited the participation of other Federal
agencies, DOE, DOI, Justice Department and others, to
participate in the study. We are in the process of issuing a
white paper on the new source review program, which will serve
as the basis for several public stakeholder meetings that we
intend to hold with people that are affected by the new source
review program.
We are going to go into communities that have a lot of
these plants in them. We are going to have one hearing in
California, so hopefully we want to provide an opportunity to
get not only the various affected industries' involvement, but
also communities that live around these plants, as well as
environmental and other groups that are concerned.
After that, we will issue some recommendations for next
steps. As you probably know, the agency has done a lot to look
at what we can do to make the new source review program more
flexible. Through this review program we hope to be able to
implement some of those changes that we have already
identified. It might be at the end that we will need to come
back to Congress and talk about changes as well, but we do
anticipate a very open process.
Senator Wyden. Well, I hope that you will keep the
committee, and I just speak for myself, up on this, because I
think it is a central question with respect to the whole debate
about refinery capacity. We have got documents now on Mobil e-
mail saying that a full court press was warranted to keep a
refinery down, a refinery that is still down, for price
reasons. Now, that is part of the equation, and we are going to
continue to explore that.
But the environmental issue is equally as important, and
given the fact there were not any requests by refineries for an
applicability determination under this statute during the past
10 years, as I read it, one of two things was happening. Either
there was no intent to expand refinery capacity, which is
certainly in line with the documents that I have obtained, or
else folks were doing it without first getting permits.
So I am sure my colleagues have a lot of areas they want to
explore, and I do not want to chew up any more time, Mr.
Chairman, but I would like to keep me posted on this
personally.
Thank you.
The Chairman. Thank you.
Senator Kyl.
Senator Kyl. Thank you, Mr. Chairman. It appears to me that
we have the makings for a bipartisan compromise here, because
you have essentially made the point that we need to act sooner
rather than later, and provide more flexibility in the statute.
I agree with that, and that appears to be a fundamental tenet
of the Bush administration recommendations generally with
regard to the fuel problem, more flexibility, fewer boutique
requirements and so on.
But I think time is of the essence here, and waiting until
this fall may not, frankly, work. Congress may move before the
administration, if it does not move before then, because not
only is there a crisis now, as we are all well aware, but there
are decisions and investments being made which require some
degree of certainty, and therefore I would urge the
administration to move forward very quickly with
recommendations.
If the statute is outmoded, if it puts too much of a
straitjacket on the EPA, for example, in its decisionmaking
process, then that ought to be removed immediately, and we can
deal with other issues later. We do not have to wait until we
have a perfect solution for every problem and put it all in one
great big bill. We can begin to move, so I think we ought to
move on that.
There are a couple of other issues. Given the fact that the
denial of this waiver, as well as other factors that have been
alluded to here, are going to significantly advance the ethanol
market, I wonder whether the administration is also willing to
reconsider the ethanol subsidy. I understand it is at 54 cents
a gallon right now.
Clearly, there is going to be a much stronger market for
it. The question that Mr. Card put to us is, are they even
going to be able to meet that demand, because we are not going
to be able to expand refinery demand, and MTBE's are not going
to be able to make up the difference in those States where they
are not banned, so the question is, will ethanol be able to
fill that, what was it, 5 to 10 percent gap?
So it does not seem to me that a subsidy of that amount is
required to cause people to produce something that presumably
they are going to try to produce as much of as they possibly
can in order to meet the demands of the market. Therefore,
question, will the administration reconsider the amount of the
ethanol subsidy?
In that regard, I would like to put into the record, Mr.
Chairman, an article from the New York Times dated June 21,
2001, and read a couple of paragraphs from it and ask for your
response to it, both Mr. Card and Ms. Fisher.*
---------------------------------------------------------------------------
* The article has been retained in committee files.
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The headline is ``Administration Seeks to Retain Aid for
Ethanol'' and the first paragraph reads, ``a report prepared
for Congress by the Bush administration recommends continuing
Federal incentives for ethanol-fueled vehicles, but it does so
despite finding that the program has failed to live up to
either of its goals, reducing gasoline consumption, and
substantially increasing the use of alternative fuels.''
I am going to skip a couple of paragraphs and just read a
couple more here.
``Because burning gasoline produces large quantities of
carbon dioxide, a gas linked to global warming, the 1998--
excuse me, 1988 law promoting ethanol use actually increased
American emissions of global warming gases by 1.46 million
metric tons last year, the report says. This meant that the
rule accounted for about a tenth of the increased output of
such gases by American vehicles, which have been the fastest-
growing source of global warming gases.''
It seems like maybe we are working at cross-purposes, Mr.
Chairman. We are promoting the use of something that is
creating something that we are trying to get rid of, and it
seems to me that the administration has got to come to grips
with this, despite the politics.
Regarding that, another bipartisan approach to this, it
seems that both political parties score by promoting the
ethanol subsidy. Let me quote further from the article. ``The
ethanol program has bipartisan backing among corn State
officials. Marlys Popma, the executive director of the
Republican Party of Iowa, said that supporting the broader use
of ethanol was crucial to the electoral successes of any
presidential candidate seeking votes in the State's caucus
every 4 years, the first of each presidential campaign.''
Quote, ``ethanol is hugely important in Iowa, because it
drives up the cost of corn,'' she said. But as I said, it is
bipartisan. According to the State's Democratic Governor, Tom
Vilsack, ethanol, and I am quoting, ``is a lifeline, and it is
a real ray of hope to family farmers that creates not only
economic opportunity but preserves a way of live that is
important to preserve.''
Mr. Chairman, I was born in Nebraska, grew up in Iowa, and
I understand that there is a real challenge to the family farms
in those regions, but the question is whether it ought to be
government policy to promote the production of something and
the use of something which has deleterious side effects in
terms of global warming, and drives up the cost of gasoline,
and makes it more difficult for people out West--you will note
on that map we do not have any ethanol production. It makes it
more difficult for us to drive.
Ethanol does not work in the hot climate of Arizona. That
is one reason that I am concerned about its required use here,
which is the effect of not granting the waiver. I read the law,
too, and I agree, I do not understand how you could have
granted the waiver, given the law, but that leads me to the
conclusion that we need to do something about the law.
Mr. Chairman, without making this point any further, I
think it is clear, I would like to get the response of the
witnesses to what I have just said, and urge the administration
to very quickly review these matters so that at least in those
areas where there is some bipartisan consensus, and we
understand the need for greater flexibility, and because of the
change in science, and capability here, we now perhaps have the
luxury of doing some things that we did not have 13 years ago,
that we need to move forward with alacrity.
Senator Johnson. Will the gentleman yield for just a brief
question?
Senator Kyl. Sure, but I would like the witnesses----
The Chairman. And then we will go, obviously, immediately
to the agencies.
Senator Johnson. Would you agree that the New York Times
article, read in its entirety, does not suggest that the use of
ethanol contributes towards global warming? The problem is the
lack of access to ethanol, is in the vehicles and our lower
mileage standards for vehicles that are dual use as a
consequence of lack of access to ethanol. That is the reason we
are burning more fuel, gasoline than was earlier projected, and
again, contributes towards global warming and emissions.
Senator Kyl. In responding to my colleague and, of course,
we can all read the article, I could quote here the comments
from the Sierra Club spokesman that is very critical of the
continued use of ethanol, and talks about the increase in
price.
It is correct that part of the problem is lack of
availability for these dual use kind of vehicles, but it is
also absolutely true that the article points out the fact that
this particular fuel produces large quantities of carbon
dioxide, which contributes to global warming. That is
absolutely clear from the article, and I do not think it is a
matter of scientific contention.
The Chairman. If the witnesses have any comment in
response.
Senator Kyl. And I would very much appreciate the comments.
We are here to hear the administration's position, and I think
we need to hear it.
The Chairman. If the witnesses could go ahead and comment,
and then we will take other questions.
Ms. Fisher. All right. I will jump in first.
First of all, it is a DOT report that is in draft, and we
really have not had a chance to fully review it, so with that
caveat, let me say a couple of things. First of all, the report
is talking about a specific program that allows automobile
manufacturers to get relief from their fuel efficiency--CAFE
standards--that making cars that use ethanol and gasoline, to
get some relief from so if they make these dual-fuel cars, at
the same time they can also sell other cars that do not achieve
high gas mileage.
It is that relief, and the fact that people have not been
using as much ethanol as originally expected in the duel fuel
vehicles as that the report attributed to an increased use of
gasoline. Also, it is that increased use of gasoline that
contributes to global warming. Ethanol itself does not produce
carbon dioxide at the same level as gasoline, so the ethanol is
not contributing to global warming. The way this program is
structured is why we are not getting as much of a clean fuel
benefit as originally expected. The report is a little
confusing on this issue.
The second thing, I just to be sure you understand, is that
the DOT report is focused on a separate program from what we
are talking about today regarding the California waiver. When I
saw the headline in the Times, I thought it was talking about
the oxygen waiver that we are discussing here today. It really
is a separate part of the Clean Air Act.
The Chairman. Did you have any comment, Mr. Card, before we
go to the next question?
Mr. Card. I would just support EPA's comments, and our
position would be that all fuel sources should be considered,
notwithstanding some legitimate concerns raised and, again, I
want to reiterate in the short term we have a general capacity
concern that needs to be considered in whatever our policy
would be.
The Chairman. Thank you very much.
Senator Landrieu.
Senator Landrieu. Thank you.
Ms. Fisher, you might be the one that could answer this.
Kind of following up, but in a little different vein than the
Senator from Oregon, would there be in your mind any reason for
a refinery to be in business, other than to make money?
Ms. Fisher. Probably that is the main reason to be in
business.
Senator Landrieu. I thought so, so I was confused about the
conversations about refineries making money. I mean, just like
any business, that is why they are in business, to make a
profit, and I would just like to say on the record that I hope
not this administration or the previous administration would
question a legitimate business in the United States for making
money, unless there is some extraordinary circumstance to
indicate that they are doing so in an illegal fashion.
Secondly, I want to ask about how many, if, on this record,
you could put on this record, or maybe it has been put on our
record previously and, if so, I am not knowledgeable of it, but
how many refineries are currently under construction in
California, if you know that? How many have been permitted, but
are not yet under construction, and how many are in the
pipeline in terms of how many requests by the industry that
have not yet been acted upon? Does anybody know that?
Mr. Brenner. We can provide that for the record.
There are no permits in or requests for permits for new
refineries. There have been no requests for new refineries to
be built anywhere in the country for a couple of decades now,
however.
Senator Landrieu. So even in California today, there is not
a permit request to build a new refinery. How about permits for
expanding existing refineries?
Mr. Brenner. There are probably requests in for expanding
existing ones. I know of at least one request to restart a
refinery that had been shut down.
Senator Landrieu. Are you aware of any requests that would
have come from Governor Davis' office to the industry, since he
has a problem there--we all do, but particularly to try to
increase this capacity for the people of this State? Are you
aware of any requests that he either informally made to the
industry to try to expand their capacity, or those--are you
aware of anything he might have asked along those lines?
Mr. Brenner. We are not aware of that, but perhaps some of
the panelists on the next panel may know about that.
Senator Landrieu. Well, let me ask about something that you
all might have some information about for the record. This
transportation logistics problem, ethanol I believe is
transported primarily by rail car and barge, is that correct?
Has California taken any steps to determine if there is rail
car capacity to move some of this fuel into California if this
change is made that we are talking about, the supplanting
change?
Mr. Brenner. I know that the California Energy Commission
has done some work to look at potential ethanol supplies in the
State, but I do not know all the details of the analyses they
have done.
Senator Landrieu. Because we ship a lot of things out of
Louisiana, as you know, and I asked--I do not know, Mr.
Chairman, if we ever put a graph up there of the pipelines in
this Nation, but I think we have got more pier square inch, or
square foot than anybody in the country, because we can build
them and permit the pipelines, but ethanol cannot move through
pipelines, I understand, because of the moisture content.
It has to move in a different way, and it cannot be moved
like other types of gasoline, or blended gasolines, and so
California and other places that need additional supplies
should look at their own rail situation and their own barge
situation as well as their refineries, and then in addition, it
is not just the transportation issues, but it is the vehicles
are not--not only that the vehicles maybe created, but the gas
stations do not allow for these new vehicles to be able to
access a higher blend of ethanol, so it is not just the makeup
of the fuels, but it is the transportation and the barging of
the fuels, and the capacity issue, and I just think this
committee would be all well-advised to stop trying to find out
whose fault it is, and just try to get down to getting a system
where people can get the gasoline they need, the power they
need to get this economy off of stall and into a fast motion,
and we spend too much energy, I think, trying to investigate or
decide who got into a room and decided to get the price up. It
is not that. It is a combination of things, and so I just
wanted to go on the record with that.
The last thing we need to do is worrying about people who
are in business to make money. That is why they are in
business, and it is not their fault that the rules and
regulations that lie at the feet of this Congress and this
committee were written improperly sometimes, or not without
enough foresight, as well as what has happened in California.
Thank you.
The Chairman. Thank you very much.
Senator Hagel.
Senator Hagel. Mr. Chairman, thank you. I am pleased to
note my friend and colleague, Senator Kyl's new-found interest
in global warming.
[Laughter.]
The Chairman. We liked his quoting the Sierra Club, too.
[Laughter.]
Senator Hagel. He has found a new reference point, the
Sierra Club. I do not often hear him use the Sierra Club as a
reference for anything other than something that is draconian.
Senator Dorgan. Senator, I would ask you to yield on that
point. I actually made a note, global warming, Sierra Club, and
New York Times.
[Laughter.]
Senator Dorgan. It is a red letter day here in Washington,
D.C.
Senator Hagel. Well, he will be getting some cards and
letters here, I assure you. He has gone off the reservation
completely, Senator. That is notwithstanding his grounding in
his early days in Nebraska and Iowa of shaping his normally
good judgment on these things and his sharp and precise
intellect.
But nonetheless, I think they are important questions, and
I know we have witnesses following in the next panel that I am
sure will address these in some detail, but I wanted to ask a
question, but before I do that, there were some questions that
came up and probably will be more come up regarding ethanol,
and one the Senator from Louisiana referenced, shipping.
I think one of the things we point out on ethanol, it is
more flexible in its shipping capacity and potential, certainly
more flexible than MTBE, so we start with that as a plus, but a
couple of other issues I think need some clarification. Again,
I will allow the next panel of witnesses to get into this in
more detail, but a question about demand.
As is pointed out here in the paper that the chairman has
distributed regarding the capacity, current capacity in
ethanol, somewhere in the area of 2 billion gallons today, it
is projected by the industry and government that over the next
year-and-a-half that capacity will go to about 3\1/2\ billion
gallons, and the reason for that, of course, is new ethanol
plants now coming online. In my State of Nebraska they are
coming online. I suspect the Senator from South Dakota will
address this as well, so I think the capacity issue, an
appropriate question, a relevant question is going to be dealt
with as it is being handled now.
Second, the issue of the oxygenate properties of ethanol
itself, and the Deputy Administrator of EPA clarified one of
those points I think it needs again to be made, and that is
that ethanol itself is not a global warming gas, or property,
but it has not been stated yet, as far as I know, that ethanol
has twice the oxygen content of MTBE.
Now, that is important to point out, because refiners only
need to blend half as much ethanol to meet the oxygen
requirement as is the current situation with MTBE, and there
are other dynamics to this that I think will come out in the
second panel, but those are important points to make, and I
think that leads me, then, into my question, because as the
Senator from Louisiana accurately points out, we should be
about finding solutions, and how do we deal with the challenges
that we have in this country on preserving our environment, and
the issue of reformulated transportation fuels and why we are
in the box that we are, or at least I think we are in some box,
and I suspect others do.
I have a document in front of me here that talks about 14
different types of gasoline, 42 when all three octane grades
are considered. The U.S. fuel market has indeed become
balkanized, and that I suspect is much of the focus on your
review, your interagency review.
I would like to get your sense, both from Energy and EPA,
as to timing. I know you have addressed some of the dynamics of
that review here this morning. When do you think it would be
complete? Are we talking about the possibility of less
balkanization? How can we do that? Where are we now? What do we
know now?
I know that one of the problems we have that rarely gets
mentioned is the fact that some States and cities opt out for
their own standards, and their own creative ways to deal with
this, so we should not be surprised that we have got this
balkanization, and I would hope that the Department of Energy
and EPA under this President will bring some sanity and some
common sense to this, so with that, have at it.
Ms. Fisher. First of all, Senator, you are correct, the
benefits of using clean fuels to assist cities to meet their
air quality standards is tremendous. It is one of the more
cost-effective ways that cities can actually achieve their air
quality standards, and that is why so many have come to us to
ask for approval to go ahead and use these kind of fuels, and
it has created probably a lot more different fuel blends than
anybody ever anticipated.
For that reason, under the direction of the national energy
plan we have begun a study on the boutique fuel program, and I
walked in here this morning knowing that we would have a draft
ready for the Congress in September. Based on earlier
discussions earlier with the staff, however, the opening
comments by the chairman, release in September is not
necessarily going to be helpful given when the Senate wants to
act. We have been shoving notes back and forth to each other up
here trying to figure out what we can do to speed that up and
at least get a draft to you as quickly as we can.
So what I would like to do is try to get back to the
committee with an accelerated schedule, with the understanding
that an earlier release may not be quite as informative, or
solid. I am respectful of your time demands, however, and the
interest of the public on this, so we will try to get it to you
as soon as we can.
Senator Hagel. Thank you.
Mr. Card.
Mr. Card. Well, EPA is lead on the study, and I would just
say we look forward to working with them on it and supporting
whatever schedule they think we can meet.
Senator Hagel. Very precise.
That is, I guess, as good as we are going to get this
morning.
Ms. Fisher. I need to find out more about the steps we need
to go through, whether it is putting more bodies and money on
it, or whether there is information that we are just not going
to be able to get, and get analyzed over a certain period of
time, so that is why I am hesitating.
Senator Hagel. All right. Well, I know under the very able
leadership of Chairman Bingaman you will not be without
guidance and counsel from this committee.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Hagel.
Senator Johnson, did you have questions?
Senator Johnson. Yes. I am encouraged that there seems to
be a growing broadbased agreement, I think that is bipartisan
in nature, that we need to move with some urgency with the
administration relative to streamlining the multiplicity of
gasoline formulations that are out there. I think there is a
general agreement on that, and that that would have some
significant help.
I think Senator Bingaman has done some good work, along
with Senator Murkowski, on things that we might be able to do
to facilitate greater refining capacity, and we need to look at
that.
One of the areas, of course, of concern to me is with the
utilization of ethanol. As the New York Times, my good friend
from Arizona pointed out, noted in their article, virtually all
vehicles can utilize up to 10 percent blends of ethanol. That
is not a problem. The unique concern we have here is the
Federal program where auto companies are allowed lower CAFE
standards in a certain number of their vehicles if they
manufacture dual use, dual-fuel technology vehicles which can
utilize 85 percent blend ethanol, or E-85, as we refer to it in
our part of the country.
They have produced over a million of these vehicles, then
authorized them to produce more lower-CAFE-standard vehicles,
pickups and SUV's and so on. Unfortunately, as the Times notes,
only 101 of the 176,000 service stations in the United States
sell E-85, and not a single gas station in all of the State of
California sells E-85, so the problem has been the chicken-and-
egg problem, I suppose, in terms of coming up with a technology
for vehicles that can have this dual-fuel capability, and yet
at the same time making sure that there is access to that fuel.
If there is not the access to the fuel, then clearly the
program is not going to work.
Again, this is a draft study, and we have already made some
comment about it, but it does concern me that if we are going
to be serious about E-85 and other kinds of alternative fuel
utilization, we are going to have to work more closely than we
have, obviously, with the gasoline distribution industry to see
to it that, in fact, it is in place.
I think that we are producing enough, and the production
level is going up, and so we have that issue to contend with,
and any comments, again, that you might have about how do we
address that other side of the equation in terms of making sure
that ethanol, or biodiesel, for that matter, is available with
the access that ought to exist that it is really going to work,
would be of interest to me.
Also, if we now move quickly away from MTBE in California
and, in fact, an oxygenate is required, I am advised that is
about a 600-million gallon ethanol requirement. We have the
ethanol. There has been some question raised about
transportation issues, and I would be interested if the
administration is doing anything to address how do you get the
ethanol from what is primarily the Western Great Plains to the
State of California in their particular case, with the decision
made not to grant a waiver?
Ms. Fisher, any comments that you might have?
Ms. Fisher. At EPA we have not really looked at the
transportation challenges.
Senator Johnson. Right.
Mr. Card. I am not aware of what we are doing, but I will
be glad to submit an answer for the record.
[The information referred to follows:]
If California implemented their MTBE phase-out plan, the
infrastructure to transport, store, and handle ethanol for that market
would need to be expanded, particularly if the oxygen requirement for
reformulated gasoline (RFG) was retained. For the bulk terminals that
receive and blend ethanol, the infrastructure modification costs are
expected to be small. The costs of new tankage, blending system, piping
modifications, and adding a rail spur to a gasoline terminal are
estimated to add up to only a half-cent per gallon of ethanol shipped.
In order to minimize transportation costs, it is crucial to have
good coordination and planning among the ethanol distribution industry,
state governments, refiners, ethanol producers, and others in order to
minimize potential supply and price impacts. For those states that are
relatively distant from the Midwest producers, such as California, good
coordination among the various involved parties will greatly diminish
the potential for supply difficulties associated with long
transportation distances. However, even in these markets, distribution
is not expected to be a ``make or break'' issue. Ethanol would likely
be delivered to California by a combination of water and rail
shipments. A 1999 industry survey of fuel distribution companies found
that most gasoline distribution terminals could add ethanol storage
capability in six months or less and that the transportation costs
would be 18 cents per gallon of ethanol. Factors used in determining
the cost of blending ethanol in California RFG include addressing the
loss of low vapor pressure gasoline blending components and the cost of
the ethanol itself. Since each gallon of California RFG would contain
5.7 percent ethanol by volume, the transportation costs alone would be
one cent per gallon of RFG. Since this survey was conducted, the
industry has begun activities aimed at augmenting the distribution
infrastructure for California. For example, Williams Energy announced
on June 14, 2001, it has entered into an ethanol storage agreement
which will come on line by the fourth quarter of 2001.
Senator Johnson. Any feedback on that would be helpful, and
I would appreciate it. Some of this is more apt for the second
panel coming up. I am going to have to excuse myself here very
quickly to go to an appropriations markup, and I am going to
miss valuable discussion at that point, but both of those
points are somewhat the same in terms of, how do you get it
from the Midwest affordably to other parts of the country, and
then secondly, how do you get more stations to actually carry
these fuels, whether it is an ethanol blend or otherwise?
I have been working with my good friend, Senator Hagel from
Nebraska, on legislation which would go beyond the oxygen
additions with our Renewable Fuels for Energy Security Act of
2001. As you say, there are multiple goals we are trying to
accomplish here. Certainly, clean air is a very dominant issue,
but we are also trying to make some strides in terms of energy
security in this country, and I would say that while there is a
tax break available for ethanol, our friends in the oil
industry are not without their particular tax benefits as well,
and we need to keep that in mind.
This may be more a comment than a question, but it does
seem to me that the thrust of the hearings here today need to
be what we can do relative to implementing common sense
environmental standards in this country, but we also need to
keep in mind that there is an energy security issue in play
here, and to the degree that we can displace petroleum, which
we now import at a higher level even than we did during the
1970 shortages, we all gain from that, and we want to work with
your agency to see that we can arrive at that point.
Senator Kyl. Mr. Chairman, would my colleague from South
Dakota just yield for a quick comment?
Senator Johnson. Certainly.
Senator Kyl. One of the reasons that I am so concerned
about ethanol, and this goes directly to the point you made
about lack of facilities in California, and I think the same is
true in Arizona, is that the ozone which is produced naturally
by the burning of ethanol is one of the most pernicious air
pollution issues in the hot climates of Arizona, and, I suspect
in California. That may also be one of the reasons why, in any
look at that issue, I think there does have to be some regional
consideration of the byproducts of the burning of these
different kinds of fuels.
Senator Johnson. Well, the gentlemen may very well be
correct that there are some regional modifications that are
appropriate. I think the second panel is going to be probably
in a better position to talk about those issues of what we do
in hot climates relative to the ethanol.
Mr. Chairman, I yield back.
The Chairman. Thank you. There are two other Senators
waiting to ask questions of this panel, and then as soon as
they are complete we will move to the second panel.
Senator Dorgan.
Senator Dorgan. Mr. Chairman, I, too, have to go to the
markup of the supplemental appropriations bill, as I believe
Senator Johnson is going there, so I am going to just take one
minute and say thank you to the witnesses.
I regret I am not going to be able to be here for the
second panel, but I do want to clarify, again, this issue with
Senator Kyl. His use of the New York Times piece I think
sounded as if the Times piece was a rap on ethanol. In fact, it
was not at all.
The New York Times piece was being critical, implicitly, of
the automobile industry, not the ethanol industry, so I think
it is very important--I forgot who answered the question, but I
believe, Ms. Fisher, that when you responded, it took you a
while to respond, but it boiled down, you were essentially
saying Senator Johnson was correct in his assessment, is that
correct?
Ms. Fisher. Yes, that is correct.
Senator Dorgan. All right. I just think it is very
important. I believe that this was put in the record in its
entirety, was it not, but I just think it is very important
that we understand this piece was not a rap on the ethanol
industry at all. It was about the automobile industry.
I am a big supporter of the ethanol industry and renewable
fuels. I also believe we need to increase production and so on
and so forth, but you know, if our entire energy policy is
simply yesterday forever, it is not much of a policy. Let us
find ways in which we develop fuels that are limitless.
One final point, Mr. Chairman. I have said this before, but
my first car when I was a young boy, it was an antique car that
my father pointed out to me and I bought for $25. It was a 1924
Model T Ford, and I restored it, but in the process of
restoring as a very young boy this 1924 Ford, I learned how a
1924 car worked, and it worked just like today's car in terms
of putting gas in it.
You take the gas hose at the pump and you stick it in the
tank and you put gasoline in the engine, and 76 years later,
nothing has changed. We are still driving up to a pump and
sticking a hose in the tank and filling the car, and my point
is, as we develop this energy policy we need to do a lot of
things, we need to do them right, but let us also think in the
long, long term as well about renewable and limitless energy
sources.
I think one step here that is important is this hearing.
The chairman has described a hearing here that I think is also
a very important part of these questions that we must deal
with, the many different standards of fuels and the boutique
fuels, and all of the supply issues that relate to them and
relate to various regions of the country.
So again, my regrets at not being able to stay, but I must
go over to the Appropriations Committee for a markup of the
supplemental.
Mr Chairman, thank you.
The Chairman. Thank you very much.
Senator Fitzgerald.
Senator Fitzgerald. Well, thank you, Mr. Chairman, and I am
pleased to be here, and I want to be on the team that is
congratulating the EPA on your decision. I think you absolutely
did the right thing.
A couple of years ago, working with Senator Boxer from
California, I sponsored a resolution calling upon the EPA to
ban MTBE and replace it with ethanol. Subsequently, the two
Senators from California I guess changed their mind on ethanol,
but at one point just 2 years ago they were supporting banning
MTBE and replacing it with ethanol.
The EPA, under the previous administration, did institute
an administrative ban Nationwide of MTBE, am I correct?
Ms. Fisher. Senator, they began an action under TSCA, the
Toxic Substances and Control Act, to look at both a ban and
phase-down of MTBE. We have continued work on that and hope to
propose something I think sometime this late summer/fall.
Senator Fitzgerald. So you are still going through the
process of banning it Nationwide, and within a few years MTBE
will be banned Nationwide.
Ms. Fisher. Well, TSCA is one of the more interesting
environmental statutes, and there is a huge amount of analysis
that the agency has to put forth in order to effectively ban a
substance. It requires the agency to look at all different ways
to manage a toxic chemical, including a ban, and so we have to
go through the proposal process, and in that, we will
undoubtedly consider some kind of phase-down and ban.
We are not through with the process yet, so it is hard for
me to predict kind of over what time period it would actually
happen.
Senator Fitzgerald. Okay, but it should theoretically--I
think Administrator Browning had thought that the ban would be
complete within about 3 years after she began the process.
Mr. Brenner. Our expectation is that if we were to use
TSCA, it would probably take longer than 3 years to complete
that full process.
Senator Fitzgerald. Oh, really? Okay. So in the absence of
a congressional act to ban MTBE--do you think Congress should
step up and ban MTBE? I know that they are doing a geologic
survey, that everywhere they look they are finding MTBE in
underground drinking water supplies.
In Illinois, we do not even use MTBE, but we have had 25
communities that have detected it in their drinking water
supplies, and their wells have had to be shut down. I know 60
Minutes did a big report about MTBE contaminating underground
drinking water supplies in California.
What would you think if Congress stepped up to the plate
and banned MTBE?
Ms. Fisher. Well, first of all that is probably the most
expeditious way of dealing with MTBE, because the TSCA rule-
making process is long.
I cannot provide a precise answer to your question. There
are some components that we really would need to look at with a
ban, as was said earlier. It currently makes up a significant
part of the fuel supply of the country, and one of the reasons
California has phased it down over a few years is to be able to
address that, so I think there are some issues we would want to
look at.
Certainly we have many environmental concerns with it. It
is leaking in underground storage tanks. Perhaps more
importantly, the cleanup of it is very expensive and very
difficult to do, so I think while we proceed on our
administrative rulemaking under TSCA, we would like to work
with you to come up with the right solution.
Senator Fitzgerald. I know that some oil companies are
already starting to switch over to ethanol to meet the Clean
Air Act requirements and to get sufficient octane in their
fuel, and I think some were concerned about liability they were
potentially facing for cleanup.
I know that in Illinois and in New York there are large
class action suits against refiners and petroleum producers, or
gasoline producers, for the cleanup of MTBE-contaminated
waters. Am I correct to say that some oil producers were
already starting to switch, or petroleum producers were already
starting to switch off of the MTBE?
Mr. Brenner. I believe it is correct that some of the oil
producers have begun to move away from MTBE and use more of
other oxygenates such as ethanol.
Mr. Card. I am not aware of exactly what is happening
there, but I guess I would just reiterate our concern on
timing, and as EPA has stated, being stated to the volumetric
effects of whatever we do here, which has to be balanced, and
also, as I said on my opening statement, to assure ourselves
that we have done everything we can to contain it before we
decide it needs to be eliminated.
Senator Fitzgerald. I guess MTBE started out back in the
seventies, when the EPA banned lead. The oil producers or the
refiners had to find a way to get sufficient octane out of
their fuel, and they started adding additives, oxygenate
additives, and that is when MTBE started being used, and then
it was discovered that there was a clean air benefit to having
an oxygenate.
Now, some people are criticizing ethanol and saying that it
increases the volatility, which I guess is true, in warm
climates, but my question is, doesn't the EPA regulate volatile
organic compound emissions out of gasoline so that they are
capped at a certain level, and so whether it is refined with
MTBE or ethanol, there would be a VOC cap?
Ms. Fisher. Yes. When gasoline is blended with ethanol, the
underlying volatility of the base fuel lowered to account for
the higher volatility of ethanol, so that it can meet the
overall limit for VOCs. So refiners must adjust the base
gasoline fuel's volatility. They lower that to account for the
increased volatility that the blending with ethanol will cause.
Senator Fitzgerald. Now, I know some of the other Senators
were raising the issue of the transportation of ethanol, and it
is true, because of its propensity to evaporate, we have never
been able to ship it in pipelines and the like, and most of it,
as the map shows, is produced in the Midwest, but for a long
time it has been transported to certain areas around the
country such as Denver, Las Vegas, and Anchorage, Alaska, as I
understand it, and it could be manufactured right where it is
going to be used. An ethanol plant, for example, could be set
up and running in the Los Angeles area, or not far from Los
Angeles. Would that not be a way to address the transportation
issue?
Mr. Card. I guess there would be a question of feedstock.
Normally, economically you would want to put the plant close to
the feedstock, since that is the higher volume component. There
is no technical reason why that could not exist, but I would
wonder about the economics of it.
Senator Fitzgerald. Well, you would just have to transport
the grain, the corn, for example. Corn typically is what is
used for manufacturing ethanol, and you could just transport
the corn to wherever the plant is. I mean, there is no
prohibition against having ethanol plants on the west coast, is
there? I mean, that map could change over the next 10 years so
that we have some plants closer to the West and the east coast.
Mr. Card. There would certainly be no technical reason why
not. Perhaps the next panelists could comment on the economics
of transporting corn versus ethanol. I think that is probably
what it would come down to.
Mr. Brenner. Senator Fitzgerald, I know that the State is
also looking at opportunities to produce ethanol, and other
oxygenates--well, oxygenates from some of the agricultural
products in their State.
Senator Fitzgerald. My staff just pointed out to me that we
already have some plants on the west coast, one in California,
one in Washington, both that make ethanol out of beverage
waste, or brewery waste.
Ethanol can be manufactured out of any plant product that
has a lot of starch content in it, so we should have plentiful
sources of it.
Well, I will not take any more time of the committee, but I
did want to compliment the administration. I think you made the
right decision.
Ms. Fisher. Thank you.
Senator Fitzgerald. It took a lot of courage. I think it
will be good for our Nation's clean air, and it will not have
an adverse impact on our Nation's water supply. Ethanol, as I
understand it, evaporates, or is eaten by the microbes in soil
very quickly if it ever inadvertently leaks out of an
underground storage tank, and we should not have the problems
that we have with MTBE, so I want to congratulate the
administration on a job well done.
Ms. Fisher. Thank you.
The Chairman. Thank you very much, and let me thank the
witnesses. I think this has been a useful discussion. We will
dismiss this panel and ask the second panel to please come
forward.
Mr. Brenner. Mr. Chairman.
The Chairman. Yes.
Mr. Brenner. As we leave the table, I would like to just
clarify what I told you about New Hampshire's submission. We
are still talking to New Hampshire about the details of their
plan, but we do have a formal petition for them, and have begun
the review process for that petition.
The Chairman. Okay. Thank you.
The second panel will come forward.
I am informed that Mr. Grumet has another obligation, and
would like to go first. After his testimony he will have to
leave before we ask questions, so let us just start on the
left-hand side here with Mr. Jason Grumet, who is the executive
director of the Northeast States for Coordinated Air Use
Management. Go right ahead, please.
STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR, NORTHEAST
STATES FOR COORDINATED AIR USE MANAGEMENT (NESCAUM)
Mr. Grumet. Mr. Chairman, thank you very much for that
indulgence, and I can stay until about 12 o'clock, so I will
speak even faster than usual.
Mr. Chairman, again, my name is Jason Grumet, and I am the
executive director of NESCAUM, which for the past 30 years has
been representing the air quality programs in the Northeast
States.
On behalf of our eight member States, Mr. Chairman, I
welcome the opportunity to testify here today in support of the
proposition that legislative options do exist to improve the
environmental performance, the cost-effectiveness, and the
resiliency of our Nation's gasoline supply. We would like to
applaud this committee, Mr. Chairman, the Environment and
Public Works Committee, and the administration for focusing
necessary attention on these opportunities.
Mr. Chairman, to address any problem, of course, we have to
first start with its diagnosis, and what I would like to do in
the bulk of my testimony is to identify the forces that drive
States away from consistent Federal requirements to what we are
calling boutique fuels, and then I would like in the final
minute or so to outline the parameters of what we believe could
be a solution that would provide the national or broad regional
clean fuel I think we all desire.
At the outset, Mr. Chairman, I think it is worth noting
that few governors bounce out of bed in the morning exuberant
in the hopes of navigating the labyrinth of Federal preemptions
necessary to adopt their very own fuel specifications. It is
the unequivocal preference of the Northeast States to have
access State-wide and region-wide to clean fuels that are
adequately protective of public health, and rationally
designed.
There are two reasons why States leave the Federal program.
Those two reasons are inadequately protective or irrationally
designed Federal programs, or successful efforts by some
petroleum companies to limit State access to the clean fuel we
desire. These inadequacies, Mr. Chairman, are numerous and,
sadly, they are increasing, and I will only summarize a few and
skip the rest, lest that would be the totality of my testimony
here today, but a couple that are worth noting, first, as
Senator Murkowski pointed out, the Clean Air Act itself is in
part to blame.
The Clean Air Act fundamentally bars many States from
having a single fuel. In New York State, the downstate New York
City Metropolitan Area is compelled by the Clean Air Act to
sell Federal RFG. In the attainment areas, Mr. Chairman, the
State is absolutely legally barred from access to Federal RFG,
so we have one boutique established under law, which we suggest
Congress reconsider.
Secondly, Mr. Chairman, a substantial inadequacy in the
Federal fuel program is its failure to effectively address air
toxic emissions. Air toxics pose a national health problem in
this country. Attached to my testimony are several charts which
lay a couple of key points. They note that there are four
toxins, several known human carcinogens which exceed the
appropriate health standard Nationwide, and in many urban areas
they exceed the health standards by a factor of 10. I am
speaking of the pollutants benzene, 1,3-butadiene,
formaldehyde, and acetaldehyde. These are known carcinogens, or
asthma irritants, and they are well in excess of health-based
levels.
Mr. Chairman, 80 percent of these priority compounds are
emitted by mobile sources, and even taking into account all of
the EPA regulations that are adopted or proposed, these
compounds will continue to exceed health-based thresholds
through 2030. Recognizing the national scope of the air toxics
problem calls us, Mr. Chairman, to question the rationale of
excluding two-thirds of the Nation from the 40 percent benzene
reductions provided by Federal RFG.
Moreover, any serious efforts, we would submit, to address
the boutique fuels problem must provide access to entire
States, and must provide toxic benefits to all Americans, not
just those who are unfortunately living in nonattainment areas
for ozone.
The final category relating to the rationale for States
leaving the Federal program apparently tends dynamically to
relate to decisions that favor ethanol at the cost of clean
air. First, Mr. Chairman, I would like to mention the issue
that Senator Fitzgerald raised, which is the volatile organic
compounds. While the fuels are required by law to meet a
certain VOC level, ethanol-blended fuels are given waivers. In
conventional gasoline, they are given a 1-pound waiver from
this requirement, which results in a 15-percent increase in VOC
emissions.
States like New York that do not want to suffer those
increased VOC emissions are driven, again, away from the
Federal program, and just recently, citing concerns about
rising fuel costs in Wisconsin and Illinois, Administrator
Whitman relaxed the RFG standards, creating a waiver of the
volatility requirements in Federal RFG. Not only does this
drive States away from RFG, but it foreshadows, Mr. Chairman,
weakening of standards, and the increases in prices that we in
the Northeast will experience if the administration's decision
to mandate ethanol is not reconsidered.
If it is not possible for the States where ethanol is
produced to cost-effectively use ethanol without weakening
environmental standards, we shudder at the potential
implications for the cost where ethanol is not produced.
I would like to touch on EPA's recent decision to deny the
California waiver, and I am sure my colleague, Mr. Keese from
California, will go beyond my discussion. EPA's recent decision
is in direct conflict with the desire to harmonize fuels, and,
Mr. Chairman, it falls more than a few notes flat of the desire
to reduce prices at the pump.
For those concerned with supply and price issues, Mr.
Chairman, I would submit, respectfully, that boutique fuels are
the deck chairs on the ethanol mandate Titanic. Under the
current ruling, States are left with three unacceptable
choices. We can perpetuate the harms caused by MTBE, which I
fear, in fact, will happen, and Connecticut, in fact, has
already asserted that their legislature should delay their MTBE
ban because of how unworkable an ethanol mandate will become.
Our second choice is to propel States to abandon the
Federal RFG program, creating more boutique fuels, and this I
also believe will happen. I will submit that every State not
statutorily bound by the program will seek every available
means to get out of it, in lieu of an ill-designed ethanol
mandate.
Or finally, we can simply force consumers to pay more for a
higher-polluting fuel.
Mr. Chairman, while the Northeast recognizes the important
national benefit that ethanol has to offer--Senator Johnson
touched on these benefits to the farm economy--energy
diversity, national security, reductions in greenhouse gases,
urban air quality is by far the weak link upon which to base
the desire for expanded ethanol use. Therefore, we will
continue to urge the Senate Environment and Public Works
Committee to lift the ethanol mandate and lift the oxygen
mandate, and we will continue to urge our friends in the
ethanol community to design proposals that shift away from the
false pretext of urban air quality towards the legitimate
attributes that ethanol has to offer.
If I can move now to the second reason why States are drive
away from the fuel program----
The Chairman. Why don't you do that quickly?
Mr. Grumet. I will give you just a moment, Mr. Chairman--
and that is the effective efforts by some petroleum companies
to discourage the use of Federal clean fuels. Since 1995,
petroleum companies have consistently, systematically, and
successfully worked to discourage or even legally bar States
from reformulated gasoline, urging instead the adoption of the
very boutique fuels that they are now complaining about, and I
am simply submitting that we need to better understand this
dynamic and the evolution in their thinking so that we can
address this problem rationally.
In conclusion, Mr. Chairman, let me just outline the
parameters of the solution, and they are brief. In terms of
program design, all areas of the country that desire clean fuel
must have access to clean fuel.
Secondly, Mr. Chairman, the clean fuel must be based on
environmental performance standards, not on product mandates.
Third, Mr. Chairman, we must balance the legitimate needs
for lead time and stability of the oil interests with the
legitimate needs of States to adopt more protective programs if
the Federal programs fail to adequately protect public health.
And lastly, with regard to environmental specifications, we
should build upon EPA and California's low sulphur standards,
we should address toxicity Nationwide, we should address the
legitimate drive-ability concerns raised by the auto industry
so they can optimize cars to achieve low emissions, and
finally, efforts to promote renewable fuels must be based on
the true advantages of ethanol, not on the false pretext that
we need it to clean up the air.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Grumet follows:]
Prepared Statement of Jason S. Grumet, Executive Director, Northeast
States for Coordinated Air Use Management (NESCAUM)
Thank you Mr. Chairman. My name is Jason Grumet and I am the
Executive Director of the Northeast States for Coordinated Air Use
Management (NESCAUM). NESCAUM is an association of state air pollution
control agencies representing Connecticut, Maine, Massachusetts, New
Hampshire, New Jersey, New York, Rhode Island and Vermont. NESCAUM
provides technical assistance and policy guidance to our member states
on regional air pollution issues of concern to the Northeast. On behalf
of our eight member states, I would like to express our appreciation
for this opportunity to address the Committee regarding opportunities
to improve the environmental quality, economic efficiency and
resiliency of our nation's fuel supply.
The Northeast states appreciate the concerns voiced by
representatives of the petroleum industry that the proliferation of
state fuel specifications constrains market flexibility and exerts
upward pressure on fuel prices. Moreover, we believe that the
environmental quality of gasoline must continue to improve if we are to
provide our citizens with the public mobility they desire and the
public health protection they deserve. Both these concerns can be
addressed through the development of a consistent national clean fuels
program. We applaud this Committee and the Administration for focusing
public attention on the opportunity to simultaneously strengthen the
reliability and environmental quality of our nation's gasoline supply.
Already, staff at EPA have reached out to the states and to a host of
interest groups to garner our input in pursuing the recommendation from
the National Energy Policy report to explore the boutique fuels issue.
We greatly appreciate their efforts and look forward to working with
EPA, DOE and USDA as they conduct this inter-agency process.
At the outset, it is important to note that few Governors wake up
in the morning exuberant to navigate the labyrinth of statutory pre-
emptions necessary to adopt and enforce their very own fuel
specifications. On behalf of the NESCAUM member states, I wish to
express our unequivocal preference for a well-designed, environmentally
adequate, regional or national fuel that provides Northeast consumers
with a reliable supply of clean, low-cost gasoline.
In charting a course toward the desired harmony of a low cost clean
fuel, it is necessary to explore the dynamic that has encouraged states
to regulate the environmental properties of gasoline. There are two
dynamics that lead to the patchwork of fuel standards present in our
nation: 1) environmentally inadequate or poorly designed federal
requirements and 2) successful efforts by petroleum companies to limit
access to clean fuels.
INADEQUACIES IN FEDERAL FUEL PROGRAMS
States bear the ultimate responsibility to protect the health of
our citizens. While we strongly prefer effective federal regulation to
individual state requirements, states must maintain and responsibly
exercise the ability to adopt environmental regulations necessary to
protect public health.
Inadequacies in the current federal program are numerous and sadly
appear to be increasing. The Clean Air Act restriction barring
attainment areas from the federal reformulated gasoline (RFG) program
is the first inadequacy we would ask Congress to reconsider. This
federal requirement absolutely precludes states like New York from
having a single fuel. The New York City Metropolitan area is mandated
under the Clean Air Act to sell only RFG while the majority of the
remainder of the state is legally barred from participating in the
federal RFG program. Beyond supporting the exclusion of attainment
areas under statute, the American Petroleum Institute (API) and
National Petrochemical and Refiners Association (NPRA) successfully
litigated in 1999 to bar the states of Kansas and Missouri from
extending RFG into the Kansas City ozone maintenance area. The
intensity with which API and NPRA worked to prevent these states from
taking advantage of the federal fuel template must be better understood
before we can fairly and effectively address these same organizations'
concerns over the multiplicity of different fuel requirements.
A second inadequacy of the current federal fuels program is its
failure to address air toxics emissions in the two thirds of the
nation's fuel supply that is satisfied by conventional gasoline. Mobile
source air toxic emissions pose a very real health threat across
virtually the entire nation. EPA's National Air Toxics Assessment
(NATA) indicates that four pollutants resulting primarily from the
combustion of gasoline, benzene--1, 3 butadiene, formaldehyde and
acetaldehyde--exceed 1 in 1 million cancer and/or non-cancer health
benchmarks across the country. Benzene, 1, 3 butadiene and formaldehyde
also each exceed one in one hundred thousand cancer risk thresholds in
all major population centers in our region. In the Northeast, motor
vehicles are responsible for over 80 percent of the emissions of these
priority toxic compounds. I have attached several graphs that 1)
illustrate ambient levels of air toxics in our region; 2) depict mobile
source contributions to these ambient levels; and 3) demonstrate that
even with all the regulations EPA has adopted or proposed to adopt,
many areas of the country will continue to experience unhealthy levels
of mobile source toxics for the next thirty years.* The national scope
of this problem leads us to question the public health basis for
excluding two-thirds of the nation from the 40 percent reduction in
benzene levels provided by the RFG program.
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* The attachments have been retained in committee files.
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Unfortunately, EPA failed to act as required under Section 202(l)
of the Clean Air Act to reduce emissions of benzene and the other
mobile source air toxics. Several weeks ago, New York State,
Connecticut and several national environmental and public health
organizations challenged EPA recent mobile source air toxics rulemaking
in the D.C. Circuit Court. The substantive basis of this challenge is
EPA's failure to require any actual reductions in mobile source air
toxics despite its clear obligation under section 202(l) to promulgate
regulations ``containing reasonable requirements to control hazardous
air pollutants from motor vehicles and motor vehicle fuels.'' Such
requirements must reflect ``the greatest degree of emission reduction
achievable through the application of technology which will be
available, taking into consideration the standards [already established
for motor vehicles], the availability and costs of the technology, and
noise, energy, and safety factors, and lead time.'' 42 U.S.C.
Sec. 7521(l)(2). Finally, the statute required EPA to issue regulations
no later than the beginning of 1995 that, ``at a minimum, apply to
emissions of benzene and formaldehyde. Id.'' A fuller explanation of
the inadequacies in the Agency's rule is attached.
The strong state interest in achieving reductions in the toxicity
of motor vehicle fuels argues that any serious effort to reduce the
number of state fuel specifications must enable entire states to access
the same federal requirements and must provide air toxic benefits to
all Americans, not just those living in ozone nonattainment areas.
An additional environmental inadequacy in federal fuel
specifications is the federal relaxation of volatility (RVP)
requirements in conventional gasoline containing ethanol. Here again,
states that are concerned about evaporative pollutant emissions are
forced to adopt state specific standards to correct this weakening of
federal fuel requirements. The recent federal decision to relax RVP
requirements in Midwest states for ethanol-blended gasoline foreshadows
the relaxation of environmental quality and/or the increase in price
that the NESCAUM region will face if a de facto ethanol mandate is
imposed in our region as a result of continued adherence to the current
RFG oxygen requirement.
In fact, the problem of ``boutique fuels'' is certain to get much
worse unless EPA reconsiders its decision to deny states relief from
the RFG oxygen mandate. With the mandate in place, states have three
unfortunate choices. We can allow our water supplies to remain
vulnerable to the unacceptable harms posed by continued MTBE
contamination. We can pay higher prices for the more polluting fuel
that will result from a summertime ethanol mandate in the Northeast and
California or we can seek every means possible to abandon the federal
RFG program and adopt state fuel specifications. Already, Maine and New
Hampshire have been driven to abandon federal RFG in lieu of state fuel
specifications absent the oxygen mandate. Unless the decision to
mandate ethanol in RFG areas is revisited, I predict that those states
not statutorily bound to the RFG program will soon follow suit.
The Administration's expressed concern over fuel price increases
and its call for states to harmonize fuel specifications is in conflict
with the Administration's proposed denial of the California waiver
request. We find the analysis behind the Agency's action unconvincing,
to say the least. The concern it asserts over the co-mingling of
ethanol and non-ethanol fuels--while legitimate--seems thoroughly
overwhelmed by the increases in volatile organic compound (VOC)
emissions caused by substantially increasing the ethanol content of
summertime fuel. Moreover, EPA seems to conveniently ignore the fact
that California's request was based on interference with both ozone and
particulate matter (PM) National Ambient Air Quality Standards (NAAQS).
EPA agrees that emissions of nitrogen oxides (NOX) increase
when ethanol is mandated and has long acknowledged that NOX
is a key precursor to PM formation. Regardless of whether one agrees or
disagrees with the EPA's co-mingling analysis, the consensus that
NO emissions increase under an ethanol mandate clearly meets
the requirements set forth to grant states relief from the oxygen
mandate.
NESCAUM interest in this decision is far from academic. New York
State and Connecticut have banned MTBE and are actively considering
filing waiver requests seeking similar relief from the oxygen mandate.
We believe that denying state requests for relief from the oxygen
mandate is contrary to the environmental and economic interests of our
region. In the context of this discussion, it is fair to think of
boutique fuels as deck chairs on the ethanol mandate Titanic. The price
impacts from an ethanol mandate in RFG are staggering. Equally
concerning are the inevitable requests to weaken environmental
standards that are certain to follow. Any serious effort to address
fuel infrastructure concerns, supply constraints, cost increases and
environmental quality must begin by lifting the oxygen mandate in RFG.
While the Northeast states recognize that ethanol presents many
important national benefits including farm income, fuel diversity,
energy security and reduced greenhouse gas emissions, urban air quality
is without question the weakest link upon which to base an expansion of
ethanol use. Until advocates of renewable fuels abandon the pretext
that ethanol is needed to address ozone nonattainment and focus on
ethanol's legitimate attributes, our nation will fail to capitalize on
the potential benefits ethanol has to offer.
SUCCESSFUL EFFORTS BY PETROLEUM COMPANIES TO LIMIT ACCESS TO CLEAN
FUELS
Stated concerns over boutique fuels resonate with an ironic ``dog
catches car'' ring to those who have actively participated in the
debate over fuel quality standards. As noted above, a central factor in
state decisions to adopt separate boutique fuel requirements has been
the aggressive and successful lobbying campaigns by some petroleum
companies to discourage adoption of federal RFG. The detailed
specifications and requirements that define federal RFG were
established through a lengthy and ultimately successful regulatory
negotiation (reg neg). Of course the petroleum industry participated
actively in this process, as did states and the environmental
community. Within weeks of the successful conclusion of the reg neg,
while the hand-shakes remained warm, some petroleum companies initiated
active campaigns to discourage states from opting their nonattainment
areas into the RFG program. With catchy slogans such as ``Only Fools
Opt-in to RFG,'' a number of petroleum refiners and distributors worked
to convince a host of regions to adopt separate low RVP boutique fuel
requirements in lieu of federal RFG. A request for input from
environmental regulators in Atlanta, Phoenix, Pittsburgh, St. Louis,
Detroit, Birmingham and Kansas City would reveal that in every instance
some, if not all, of the petroleum interests involved in these
discussions urged states to adopt the very state-based fuel
requirements about which they now voice concern.
The purpose of this review of recent history is not to discourage
the pursuit of harmonized clean fuel standards, but rather to try and
determine what has changed in the last few years. Having worked with
representatives of API, NPRA and their member companies closely over
the past several years, I have come to respect their professionalism,
intelligence and ability to enhance corporate profitability. Therefore,
it seems necessary to dig deeper in an effort to better understand the
dynamics that led these companies to consistently advocate for separate
state fuel standards in lieu of a consistent federal program since the
inception of the RFG program in 1995.
Superficially it would appear that petroleum interests have worked
rather systematically to circumscribe the use of clean fuels to the
narrowest geographic scope. If this view is accurate, I fear that the
effort to limit state fuel standards is unlikely to succeed. In the
absence of more effective and protective federal requirements, states
will undoubtedly strive to continue to improve the environmental
performance of motor fuels. However, if changing circumstances provide
an opportunity to reconsider the environmental and economic benefits of
extending clean fuels to broader reaches of the nation, then I am very
optimistic of our ultimate success.
PROPOSED NATIONAL CLEAN FUEL STANDARDS
In closing, I would like to outline the essential parameters of an
effective national fuels program.
Program Design: The program must: 1) be accessible to all areas of
the country that desire clean fuel; 2) be comprised of environmental
performance standards and not burdened with poorly designed product
specifications; 3) provide adequate lead time for fuel refiners and
suppliers and adequate market stability to enable effective planning;
and 4) maintain the rights of states to adopt more protective state
standards if such standards are necessary to protect public health and
or the natural environment.
Fuel Quality Specifications: The program should: 1) build upon EPA
and California Air Resources Board (CARB) low sulfur requirements; 2)
address the toxic emissions of--at a minimum--benzene, formaldehyde, 1,
3 butadiene and acetaldehyde; and 3) address driveability issues to
enable the automobile industry to optimize vehicle emission control
systems. In addition, any efforts to promote renewable fuels must
provide the fuel industry with the flexibility to determine where and
when to sell ethanol, must maintain all environmental performance
standards and must be grounded in the legitimate national benefits that
ethanol has to offer. Efforts to perpetuate further price supports and/
or to mandate the sale of renewable fuels nationally should be
justified by a demonstration that ethanol provides national value that
is not captured in the free market.
In closing, I would like to again thank the Committee for the
opportunity to appear before you today and offer the commitment of the
Northeast states to continue working with Congress and the
Administration to develop a federal fuels program that meets the
environmental and economic needs of our region and the nation.
The Chairman. Thank you very much. We appreciate that
excellent testimony.
Mr. Segal, why don't you go right ahead. This is Scott
Segal, who is a partner with Bracewell and Patterson, speaking
on behalf of the Oxygenated Fuels Association.
STATEMENT OF SCOTT SEGAL, PARTNER, BRACEWELL AND PATTERSON, ON
BEHALF OF OXYGENATED FUELS ASSOCIATION
Mr. Segal. Thank you, Mr. Chairman, Senator Fitzgerald. I
want to thank you for the opportunity to appear on behalf of
OFA. OFA is the national trade association of manufacturers of
oxygenates, principally MTBE. For a variety of environmental,
commercial, and performance-related reasons, MTBE is now used
in 80 to 85 percent of all the RFG in use today. As the
Department of Energy has pointed out, it contributes over
400,000 barrels of gasoline production, which is equal to the
output of five U.S. refineries.
By contrast, boutique low RBP fuels sap the conventional
gasoline supplies by as much as 5 percent, particularly during
the summer months. Lately, and in fact just a few seconds ago,
we have heard a lot about the concept of boutique fuels. The
President's national energy plan called for an exploration of
ways to increase the flexibility of the fuel distribution
infrastructure to improve fungibility and to provide added
gasoline market liquidity.
Whatever we may say about the use of MTBE in reformulated
gasoline, such RFG cannot be usefully described as boutique
fuel. Indeed, RFG is about one-third of the current mix of
gasoline used in the United States, and given its volume and
performance, use of MTBE adds to fuel fungibility and
liquidity.
While some criticize the administration's recent decision
to comply with the Clean Air Act in denying the California
waiver request, that decision is by no means inconsistent with
the national energy plan. As EPA's own blue ribbon panel put
it, MTBE is currently an integral component of the U.S.
gasoline supply both in terms of value and octane. It is equal
to about 5 percent of the U.S. gasoline supply but, more
importantly, it represents nearly 15 percent of the RFG supply
in the United States. The folly of banning MTBE lies in the
reduction of gasoline fungibility. A ban on MTBE implemented by
some States poses unacceptable problems in fuel segregation,
pipeline transportation, and the serving of remote markets like
the State of California.
The ultimate boutiques fuel market is one in which some
States, in a haphazard fashion, ban the most useful fuel
additive in the RFG program. That is the ultimate boutique fuel
market. Of course, there are those that would have the Federal
Government ban MTBE while allowing the oxygenate standard to
remain in place. This, of course, is a mandate for ethanol.
While the current market includes a healthy share for
ethanol, further mandates are likely to be counterproductive.
An ethanol mandate simply makes it harder to provide cleaner
fuels at acceptable prices. According to the California Energy
Commission--I am sure we will hear more about this today--the
cost of substituting ethanol-blended gasoline in that State
could increase refinery production costs by up to 7 cents per
gallon. If that figure upholds Nationwide, that is a $10
billion cost to consumers.
One OFA member who actually refines in California estimated
that in California an MTBE ban, coupled with ethanol blending,
reduces production volume at that facility by 8 percent.
Research on price elasticity of gasoline, which has been
accepted in over 300 studies, means that high prices in
California will pull gasoline from the rest of the country,
creating short supply in the country, and potentially upping
retail prices significantly.
Some have argued that phasing out MTBE is necessary to
maintain water quality. With all due respect, that appears to
be an outdated view. In light of the implementation and
enforcement of new underground storage tank requirements. A
March 2001 study indicates that the average MTBE concentrations
in California have steadily declined over 1995 to 1999 time
frame. Indeed, after 9 years of widespread MTBE use in
California and other RFG areas, the level of detects in
drinking water are less than 1 percent of water supplies, and
even in those instances are barely detectable.
Congress and the States are to be commended for
implementation thus far of the UST program, and current
statistics regarding MTBE do not constitute a principal basis
to eliminate it from the marketplace.
Regarding health impacts, a consensus has emerged. Reviews
of scientific panels from the U.S. Government, even
California's own Carcinogenic Identification Committee, indeed,
from the World Health Organization, and the European Community,
all have declined to list MTBE as a human carcinogen.
The Health Effects Institute--you quoted, Mr. Chairman, Mr.
Greenbaum at the beginning of the hearing--which chaired the
EPA blue ribbon panel, released a report only last week, on
June 15, which analyzed three independent studies, and
concluded MTBE would be considered less likely to have adverse
effects than previously sought.
Administrator Whitman, in denying the California waiver,
stated that EPA was, quote, ``committed to working with
Congress to develop legislation that addresses the concerns
about MTBE, while maintaining air quality and other benefits of
the RFG program.'' Administrator Whitman's concerns are well-
founded, because the air quality benefits of RFG with MTBE are
significant. EPA's own analysis of phase 1 RFG shows that fuel
reduces ozone-forming compounds such as VOC's by over 28
percent. That is 144 percent compliance with the law.
Air toxics are reduced by about 30 percent. That is almost
twice as much required by law. Testing shows that benzene
levels, which Mr. Grumet just spoke of, have declined 31
percent between 1994 and 1997 in areas using Federal RFG, so
how, then, to meet the Administrator's commitment of addressing
water quality while not diminishing air quality? By supporting
Federal legislation to address underground storage.
While the UST record is good, we can make it even better.
Recently, OFA has been in active discussions with gasoline
marketers and convenience store owners on shared principles for
achieving greater benefits from the UST program. We believe
that a bipartisan national consensus exists to recognize the
allocation of funds from the UST fund and to target resources
to high remediation need areas. In this way, the broad energy
supply and environmental benefits of the RFG program on the one
hand can be maintained in a cost-effective manner while ground
water is simultaneously addressed.
In conclusion, a word to our friends in California. We hope
that California will carefully reexamine its position regarding
the status of MTBE, which represents about 11 percent of the
volume of the State's gasoline, and Mr. Chairman, you see very
few gold triangles in the State of California--11 percent of
the volume coming from MTBE.
New data on reduced levels of contamination, coupled with
even more targeted UST resources, could give consumers in
California and elsewhere clean water and clean air for the
foreseeable future.
Thanks for this opportunity to testify. We look forward to
answering your questions.
[The prepared statement of Mr. Segal follows:]
Prepared Statement of Scott Segal, Partner, Bracewell and Patterson,
on Behalf of the Oxygenated Fuels Association
Chairman Bingaman, Senator Murkowski, and other Members of the
Committee, I want to thank you for this opportunity to appear on behalf
of the Oxygenated Fuels Association to address issues related to
national energy policy with respect to fuel specifications. OFA is the
national trade association of manufacturers of oxygenates, principally
MTBE. For a variety of environmental, commercial, and performance-
related reasons, MTBE has become the oxygenate-of-choice for making RFG
outside the Midwest. MTBE is used in 80-85 percent of all the RFG
produced today and comprises significant volumes of the national
gasoline supply. As the Dept. of Energy points out, MTBE is valuable
not only from the standpoint of it's benefit to cleaner air, it is
contributing over 400,000 barrels of gasoline production which is equal
to the output of 5 US refineries.
This hearing is a timely one, for even as gasoline prices have
recently declined somewhat, this country faces significant structural
problems related to supply and distribution. Consumers, as well as
businesses dependent on motor transportation, demand that our leaders
take a reasoned and responsible approach to addressing fuel issues.
It is the difficult task of this Committee to resist the temptation
to embrace easy solutions, and instead to travel the path dictated by
the facts. Today, I hope to clear away some of the underbrush
surrounding the use of oxygenates and the role they play in maintaining
a clean and secure source of octane as well as insuring an adequate
supply of gasoline at reasonable prices.
Lately, we have heard much about the concept of ``boutique'' fuels.
The President's National Energy Plan called for an exploration of
``ways to increase the flexibility of the fuels distribution
infrastructure, improve fungibility, and provide added gasoline market
liquidity.'' Whatever else some may say about the use of MTBE in
reformulated gasoline, such RFG cannot be described as a boutique fuel.
Indeed, RFG with MTBE is a very significant portion of the current mix
of gasoline used in the United States; and given its volume and
performance, use of MTBE adds to fuel fungibility and liquidity. While
some criticize the Administration's recent decision to comply with the
Clean Air Act in denying the California waiver request, that decision
is by no means inconsistent with the National Energy Plan.
As EPA's own Blue Ribbon Panel put it, ``MTBE is currently an
integral component of the US gasoline supply both in terms of volume
and octane.'' Because MTBE has such premium blending qualities, EIA
estimates that MTBE use in the US is contributing over 400,000 barrels
per day of gasoline production which is equal to the output of five
U.S. refineries. This production is equal to about 5% of the U.S.
gasoline supply, but more importantly it represents nearly 15% of the
RFG supply in the U.S.
Without careful examination and appropriate planning, the severe
energy and environmental consequences of ill thought government action
will further increase our dependence on imports and force prices on the
spot market to increase rapidly. It is incumbent on those who would
eliminate MTBE, or any other component of our gasoline supply to
identify with precision the way in which lost volume would be recovered
particularly given refinery utilization and capacity restraints.
The folly of banning MTBE lies in the reduction of gasoline
fungibility. A ban on MTBE implemented by some states poses
unacceptable problems in fuel segregation, pipeline transportation, and
the serving of remote markets. The ultimate boutique fuels market is
one in which widely used additives are actually banned in a haphazard
and ill-conceived manner.
Of course, there are those that would have the states or the
federal government ban MTBE, while allowing the oxygenate standard to
remain in place. This, of course, is a mandate for ethanol. Actions
like this tend only to compound supply problems, not alleviate them.
While the current fuel market includes a healthy share for ethanol,
further mandates are likely to be counterproductive. An ethanol mandate
will make it harder for refiners to provide cleaner fuels to consumers
at acceptable prices. Due to ethanol's high blending vapor pressure,
pentanes are backed out of the gasoline pool, further decreasing
supply. An ethanol mandate will hinder refiners' ability to optimize
the quality and volume of cleaner-burning gasoline. This will increase
refining costs, and negatively impact both gasoline supplies and price.
According to the California Energy Commission, the costs of
substituting ethanol-blended gasoline in that state could increase
refining production costs by up to 7 cents per gallon. One OFA member
estimated that in California an MTBE ban, coupled with ethanol
blending, reduces production volume by 8%.
What would this approach mean in real terms for the price of
gasoline? Noted petroleum economist Phil Verleger puts it this way:
removal of MTBE from the California market could push the retail price
of gasoline to levels previously unseen across the United States.
Research on price elasticity of gasoline--confirmed in over 300
studies--means that high prices in California will pull gasoline from
the rest of the country, leaving everyone short of supply. This is the
real potential price impact of eliminating MTBE in favor of ethanol in
California.
The worst part about this dire scenario is that it is all
avoidable. Some have argued that phasing out MTBE is necessary to
maintain water quality. With all due respect, that appears to be an
outdated view in light of the implementation and enforcement of the new
underground storage tank requirements. A study in the March 2001
edition of Soil, Sediment & Groundwater indicates that the average MTBE
concentrations in California have steadily declined over the 1995 to
1999 time period.
Regarding health impacts, a consensus has emerged. Reviews by
scientific panels from the U.S. Government (the National Toxicology
Program), state governments (such as California's own Carcinogenic
Identification Committee), and even international health organizations
(such as the World Health Organization's International Agency for
Research on Cancer and, more recently, the European Community) all have
declined to list MTBE as a human carcinogen.
Indeed, the Health Effects Institute, which chaired the EPA Blue
Ribbon Panel, released a report only last week (June 15) based on three
new, independent studies. HEI stated that ``effects of MTBE exposure
are likely to be no more, and may be less, that the effects seen in
previous studies.'' Therefore, they concluded that ``MTBE would be
considered less likely to have adverse effects than previously
thought.''
Administrator Whitman, in denying the California waiver, stated
that EPA was ``committed to working with Congress to develop
legislation that addresses concerns about MTBE, while maintaining the
air quality and other benefits of the RFG program.''
Administrator Whitman's concerns are well founded, because the air
quality benefits of RFG with MTBE are significant. EPA has compiled
data for the United States showing that Phase I RFG has surpassed the
requirements of the Clean Air Act. An analysis of the Phase I RFG
produced by refiners shows that the fuel reduces ozone-forming
compounds, such as VOCs, by over 28 percent--that's 44 percent above
the requirement of the law. Air toxics are reduced by approximately 30
percent--that's almost twice as much as required by law. Ambient air
monitoring confirms that the RFG program is working. Testing shows that
benzene levels have declined by 31 percent between 1994 and 1997.
So, how then to meet the Administrator's commitment of addressing
water quality while not diminishing air quality? By supporting federal
legislation to address the mechanism by which any component of gasoline
reaches groundwater: underground storage. EPA's own Blue Ribbon Panel
bluntly stated, ``The major source of groundwater contamination appears
to be releases from underground gasoline storage systems.'' Recently,
OFA has had serious discussion with gasoline marketers and convenience-
store owners on shared principles for achieving greater benefits from
the UST program. We believe that a bipartisan, national consensus
exists to regularize the allocation of resources from the underground
storage fund and to target resources at the highest priority
remediation needs. In this way, the broad energy supply and
environmental benefits of the RFG program can be maintained in a cost-
effective manner, while groundwater needs are simultaneously addressed.
A variety of classical treatment processes and proven technologies are
readily available. Furthermore, increasing evidence is being found and
reported on the biological natural attenuation of MTBE in gasoline
impacted water sources.
Further, we would hope that California will carefully re-examine
its position regarding the status of MTBE, which represents about 11
percent of the volume of the state's gasoline. We would hope that new
data on reduced levels of contamination coupled with even more targeted
UST resources could give consumers in California and elsewhere clean
air and clean water for the foreseeable future.
Thank you for this opportunity to testify. I look forward to
working with the Committee on these difficult issues.
[Note: Additional material submitted with this statement has been
retained in committee files.]
The Chairman. Thank you very much. Next is Mr. Robert
Dinneen, who is the vice president of the Renewable Fuels
Association. Go right ahead, please.
STATEMENT OF ROBERT DINNEEN, VICE PRESIDENT, RENEWABLE FUELS
ASSOCIATION
Mr. Dinneen. Thank you very much. Mr. Chairman and Senator
Fitzgerald, I want to thank you very much for the opportunity
to present testimony today at this hearing to discuss the
gasoline price volatility situation in this country and EPA's
recent decision denying California's request for waiver from
the oxygen content requirement.
In the near term, we believe that ethanol supply is
important as the Nation addresses gasoline price volatility by
adding important supply to a tightly constrained market. In the
long term, as the United States develops a more responsible and
proactive energy policy, ethanol offers the promise of a
stable, renewable energy supply.
First of all, I should note that the Renewable Fuels
Association is the national trade association for the domestic
ethanol industry. There are 56 ethanol production plants across
the country, operating in 20 different States, including
California and other places on the west coast. Last year, we
produced about 1.6 billion gallons of ethanol. We have a
capacity to produce over 2 billion gallons of ethanol today,
and the industry continues to grow significantly, particularly
among farmer-owned coops, as farmers attempt to receive the
direct benefits of the value-added benefits of ethanol
production.
I should also note that ethanol is sold in virtually every
State in the country, and I wish Senator Kyl was here, because
I would tell him that ethanol is not only used in Arizona, the
State actually requires ethanol to be used in Arizona in terms
of its government oxide program in the winter months.
Ethanol is also used extensively in Alaska. Several years
ago, when Alaska had experienced some problems with MTBE,
virtually all of the refiners in the State converted to
ethanol. It has not been a challenge to get ethanol from the
Midwest all the way down the Mississippi River and through the
canal and passing California and waving as it goes by, and
landing in Alaska. We can absolutely transport ethanol to any
market in this country today.
With regard to the gasoline price volatility issue, which
is a significant one, and the committee is very rightly looking
at it, I would only add that we agree with the FTC's comments
that the fundamental problem is a chronic lack of refining
capacity in this country. Indeed, no refineries have been built
in the last 25 years. Refiners have chosen to use capacity
cushion to meet gasoline demand, operating at more than 95
percent of capacity. That creates significant problems whenever
there are disruptions in production or supply.
There have been, however, 56 ethanol refineries built in
the last 25 years. We have been adding supply to the U.S. motor
fuel market, and we will continue to do so. We think we ought
to be adding more, which is exactly why the Renewable Fuels
Association is strongly supportive of legislation introduced a
couple of weeks ago by Senators Hagel and Johnson, that will
require increasing percentages of renewable fuels used in
gasoline, 3 percent of the market by 2011, 5 percent of the
market by 2016. That is an achievable goal, and one that we
think would be critical to having a more sustainable energy
policy for our country.
We have heard a little bit about boutique fuels today.
Indeed, I want to make a couple of comments. First of all, the
Federal Government only requires two fuels, reformulated
gasoline and conventional gasoline. The balkanization that has
occurred in the U.S. fuel markets is a direct result of oil
companies lobbying the States to have a clean fuel program that
is not reformulated gasoline, because they have not wanted to
use oxygenated fuels.
There is actually a memo that Senator Wyden referred to
earlier today that specifically notes that eliminating the
oxygen requirement would reduce gasoline supply. That has been
the objective of the oil companies for quite sometime. It does
not make any sense. The oxygen requirement was included for a
number of different reasons, including security and fuel
diversity, that continues to make sense today. Simply adding
oxygen to gasoline does not make a boutique fuel. You have got
conventional gasoline and you add oxygen to it, refiners are
not doing anything different to that fuel blend.
Yesterday, Representative Blunt from Mississippi introduced
legislation that would address the boutique fuel issue, because
if you really want to address it, there is only one way, and
that is to eliminate the States' authority to create these
separate and distinct fuel programs.
I am not certain, quite frankly, that boutique fuels create
gasoline price increases. They clearly exacerbate them when
there are differences in supply and distribution, which has
occurred at an ever-increasing rate lately, but to the extent
that the Congress wants to look at boutique fuels, I think you
need to look at the States' authority to create this balkanized
system that is out there.
Now, I guess there are some questions about the California
waiver, and I am glad that I am here to address it, because I
think there has been a lot of information out there.
I would first of all like to commend the Environmental
Protection Agency and the administration for deciding this
issue on the basis of the law and the science. Everybody says
this is a political decision that was made, as if all of a
sudden the influence of the refiners on the Bush administration
had just gone away. The fact of the matter is, the Bush
administration had to make this decision based on what the
Clean Air Act allowed them to do and the science that they had
before them.
I would like to submit for the record, if you would, Mr.
Chairman, the numerous studies that the Renewable Fuels
Association and the Corn Growers and others have submitted to
EPA supporting the scientific conclusion that the agency
ultimately made.* Ms. Fisher earlier today was absolutely
right, the administration was prohibited from granting the
waiver on the basis of water contamination or on the basis of
supply. They could only grant the waiver upon a conclusion that
there would be a negative impact on an air quality standard.
That is not the conclusion that was supported by the facts.
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* The studies have been retained in committee files.
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Now, I would like to quote just for a moment from a
grassroots environmental organization in California, who notes
that the data clearly shows that the best way to protect
California's air quality and the economy is to maintain the
oxygen requirement. Another California environmental group, the
Renewable Action Project, noted after the waiver was denied
that this decision by the Bush administration will actually
reduce more than 529,000 tons of carbon dioxide from the air,
because ethanol use absolutely has a very positive impact on
greenhouse gases.
Will there be enough supply? Mr. Chairman, Senator, yes,
there will. The demand created by the California waiver is
about 580, maybe 600 million gallons of ethanol. We produce 2
billion gallons of ethanol today, but there is 400 million of
underutilized capacity. There are 34 expansions to existing
facilities going on today, which will add an other 235 million
gallons. There are 11 plants under construction today that are
going to add another 250 million gallons of production.
Mr. Chairman, I spoke at a conference yesterday where there
were 700 people, and I asked them at one point if they would
raise their hands if they knew of ethanol expansion plans that
were going on. Mr. Chairman, every single hand in that audience
went up.
Farmers are excited about the potential opportunities that
will be created by the market. We are committed to satisfying
the demand created in California and elsewhere, as other States
look to reduce MTBE water contamination and try to address
fuels issues.
The concerns about transportation and how we can get
ethanol all the way from the Midwest, where all those ethanol
plants are, to California, misses an important point. 90
percent of the MTBE used in California today is not produced in
California. It is imported. It is imported from the gulf coast
or, a lot of it, from Saudi Arabia.
Now, Mr. Chairman, I am sorry, but if it is easier to get
MTBE from Saudi Arabia than it is to get ethanol from the
Midwest, my geography is just awfully bad.
The Chairman. Let me just ask, MTBE can be transported by
pipeline, ethanol cannot, is that right?
Mr. Dinneen. Well, that is--ethanol is not. It can be. But
the fact of the matter is, MTBE is not being shipped to
California via pipeline today. There are not pipelines that go
from the gulf coast to California that are in operation today.
MTBE is being shipped to the State by vessel, because ethanol
has twice the oxygen content of MTBE, we only need half as many
vessels in order to supply the same amount of oxygen content.
But there is another advantage. MTBE is typically not
shipped by rail car. Ethanol can be. We have got more avenues
of transportation to get the product there. We do not have to
go as far, and we do not have to use as much. There is
absolutely no transportation problem associated with getting
ethanol to the great State of California or any place else.
I have taken up a lot of time already, and maybe I will
just close with something that Governor Jesse Ventura noted
yesterday, who spoke just before me, and it is just such a good
slogan, I have to throw it out here just for you to ponder.
Jesse Ventura, as only he can say, closed his comments with,
ethanol kicks gas.
[The prepared statement of Mr. Dinneen follows:]
PREPARED STATEMENT OF ROBERT DINNEEN, VICE PRESIDENT,
RENEWABLE FUELS ASSOCIATION
Mr. Chairman and Members of the Committee, I would like to thank
you for the opportunity to provide comments on the rising cost of
gasoline, and particularly the positive role that ethanol plays on
stabilizing gasoline prices. The causes for the unacceptable volatility
in gasoline markets are numerous, but the primary factors are crude oil
prices and supply of finished gasoline. Ethanol as a gasoline-blending
agent reduces the demand for crude oil and increases gasoline supply
for a given refining capacity. In the near term, ethanol supply is
important as the nation attempts to address these soaring gasoline
prices. In long term, as the United States develops a more responsible
and proactive energy policy, ethanol offers the promise of a stable,
renewable energy supply.
The Renewable Fuels Association is the national trade association
for the domestic ethanol industry, located in Washington, D.C. Our
membership includes ethanol producers, gasoline marketers, farm
organizations and state agencies dedicated to the continued expansion
and promotion of fuel ethanol. Today's domestic ethanol industry
consists of 56 production facilities located in 20 states with an
annual production capacity of 2.1 billion gallons. In 2000, the U.S.
ethanol industry produced a record 1.6 billion gallons of high quality,
clean burning fuel ethanol. Production capacity continues to expand,
particularly among farmer owned cooperatives, the fastest growing
segment of our industry.
BACKGROUND
The United States has experienced severe price volatility in
gasoline markets for more than a year. This price volatility has
impacted both reformulated gasoline (RFG) markets and conventional
gasoline, and has been the subject of numerous investigations. Because
last year's price crisis occurred at a time of ample crude oil
supplies, public officials questioned whether collusion or price
gouging was the cause. A U.S. Federal Trade Commission report on the
issue uncovered no such criminal activity, but did note ``conscious,
(but independent) choices by industry participants to engage in profit
maximizing strategies.'' The FTC also pointed to the chronic lack of
refining capacity in the U.S. as the principle reason for systemic
price volatility in gasoline markets across the country.
When releasing the Commission's report on gasoline prices earlier
this year, FTC Chairman Robert Pitofsky stated, ``the underlying lack
of U.S. refining capacity threatens similar price spikes in the future
in the Midwest and elsewhere.'' Unfortunately, Mr. Pitofsky has proven
to be prescient as gasoline prices spiked again this year.
Figure 1 (not shown) shows average crude oil, spot and U.S. retail
gasoline prices \1\ over the past four years. Generally, gasoline
wholesale and retail prices track the price of crude oil. However,
imposed on top of the general trend is an increased volatility in
gasoline prices. During the spring of 2001, Gulf Coast spot wholesale
(pretax) prices of gasoline were well over $1.00 per gallon.\2\ I would
note that MTBE prices across the country have been near record levels
for much of this year, topping $1.60 per gallon.\3\ Importantly, while
gasoline prices have been rising, ethanol prices have remained fairly
constant. Recent average net contract prices for ethanol have hovered
between $0.90 and $1.00 per gallon. Indeed, ethanol is less expensive
than gasoline in most markets across the country today and is helping
to extend gasoline supplies and reduce consumer costs.
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\1\ EIA
\2\ www.eia.doe.gov/emeu/international/gas2.html
\3\ www.eia.doe.gov/emeu/steo/pub/special/mtbecost.html
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THE REASONS FOR HIGH FUEL PRICES
According to the recent FTC report of Midwest gasoline prices,
there are several key reasons for the high gasoline prices. These may
be divided into factors that directly impact the variable cost of
production of gasoline and gasoline supply constraints.
VARIABLE COST
The price of gasoline is directly impacted by crude oil prices and
taxes. In particular, every $10 per barrel increase in the cost of
crude raises the cost of production of gasoline by about 24 cents per
gallon. State and federal gasoline taxes amount to about $0.40. With
crude costs averaging near $25 per barrel, these two factors alone
account for $1.00 per gallon. Additional costs passed on to the
consumer include refining, transportation, and marketing and, of
course, an acceptable amount of profit.
GASOLINE SUPPLY
The refining industry is also directly contributing to higher
prices by how it is controlling the supply and distribution of
gasoline. In terms of supply, refineries are operating at historically
high rates of utilization, exceeding 95% on an annual basis. Refiners
have limited investment in recent years, using much of their existing
refining capacity cushion to meet increased gasoline demand. No new
refineries have been built, many small refineries have been closed, and
merger has lessened competition. Additionally, refiners are now
practicing ``just in time'' distribution techniques to lower inventory
costs. Furthermore, price volatility is exacerbated by low inventory
because any upset in the system, such as protracted outages of
refineries or pipelines.
WHO ARE REFINERS BLAMING?
It is evident that the refining industry is currently enjoying
record profits. The American Petroleum Institute \4\ suggests that the
reasons for higher prices are:
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\4\ www.api.org/consumer/61900gasolineoverview.htm
High crude oil prices
High refinery utilization
Increasing demand for gasoline
Boutique fuels
Refiners also argue that the oxygen requirement for reformulated
fuels is an important factor and its elimination would lower the cost
of production of gasoline.
It needs to be stressed that record profits are a result of record
high sales margins, that is, the spread between price and cost. It is
in the refiners interest to limit supply by discouraging the expansion
of ethanol and other alternative fuels since less ethanol will mean a
greater demand for both crude and refined products. This translates to
higher prices for refined products, and greater income to the companies
who produce and sell large quantities of crude oil.
Rather than blaming everything else for the high price of gasoline,
refiners should reinvest some of their profits into expanding refining
capacity and debottlenecking the distribution system.
CONSUMER BENEFITS OF ETHANOL
Ethanol is blended directly into gasoline. Thus, using ethanol
reduces gasoline prices two ways. First, to meet gasoline demand, less
crude must be refined resulting in overall lower crude prices. Second,
since ethanol is directly blended into gasoline, it increases the
supply of finished gasoline for a given refining capacity. The quantity
of ethanol produced today is equivalent to the gasoline production of a
180,000-barrel per day refinery.
But gasoline prices don't tell the whole story. Consumers also need
to pay other costs resulting from the public health and environmental
damage caused by the use of gasoline. Ethanol doesn't pollute the water
like MTBE and BTX. Blending oxygenates reduces the need for aromatics
to meet octane demand. EPA now lists not only benzene, but also other
light aromatics including toluene, xylene and ethylbenzene as mobile
source air toxics. Aromatics in gasoline are converted to benzene in
the exhaust. Toluene, often cited by refiners as a preferred blending
material for non-oxygenated RFG is more likely to produce benzene in
the exhaust of motor vehicles than the mixed aromatics generally
blended into gasoline. Additionally, a portion of the aromatics in
gasoline exhaust and evaporative emissions is converted to cancer-
forming diesel-like particulate. It is now recognized that aromatics
are also converted to additional fine particulate in the air during the
ozone forming process. Oxygenates reduce ozone, carbon monoxide and
fine particulate pollution and can greatly reduce the cancer risk
associated with motor vehicle emissions.
ETHANOL SUPPLY
The nameplate capacity for ethanol production is currently 2.1
billion gallons per year. According to EIA, during the first 5 months
of 2001, the ethanol industry production averaged 113,000 barrels per
day or 1.732 billion gallons per year. Thus, the industry average
stream factor is about 82.5%. The industry continues to add capacity.
Thirty-four existing facilities are undergoing significant expansions
today, adding an additional 235 million gallons of capacity, and
another 11 plants, with a combined capacity of 250 million gallons, are
currently under construction.
There is ample corn to greatly expand ethanol capacity. USDA has
estimated that, in the shorter term, corn could be used to produce
about 6 billion gallons per year of ethanol without shocking the
system. DOE and USDA have projected that 10 billion or more gallons per
year of ethanol could be produced from crop residues and dedicated
biomass crops produced on idled land.
How much corn and biomass ethanol is actually produced is a
function of market conditions and public policy. To greatly increase
the supply of ethanol, there needs to be some market certainty.
Recently, Senators Chuck Hagel (R-NE) and Tim Johnson (D-SD) introduced
legislation, S. 1006, to expand domestic liquid fuel production by
requiring that renewable fuels like ethanol and biodiesel supply an
increasing percentage of the U.S. motor gasoline market. The bill
requires that renewable fuels be used to meet 3% of the nation's fuel
supply by 2011 and 5% of the transportation fuel supply by 2016. That's
the equivalent of about 600,000 barrels per day of imported crude oil.
The Renewable Fuels Association is strongly supportive of S. 1006,
and other similar renewable fuels requirements, and we commend the
leadership of Senators Hagel and Johnson for advocating making such a
dramatic step toward moving this country away from greater and greater
imports of oil and toward a sustainable energy future for this country.
BOUTIQUE FUELS
API collectively calls RFG with ethanol, RFG with MTBE, California
oxygenated RFG, California non-oxygenated RFG, CO oxygenated gasoline,
Minnesota oxygenated gasoline, Arizona and Nevada CBG, and various low
RVP gasoline formulations all ``Boutique Fuels''. API leads one to
believe that if all of these different fuels didn't exist, and the
oxygen requirement was removed from RFG, the market would have more
flexibility to maintain the supply of gasoline and gasoline prices
would be lower. The truth is that the oxygen requirement and ``boutique
fuels'' are not related.
In the U.S., very little oxygenated gasoline (Oxy) in non-RFG areas
is produced with MTBE because ethanol is a much less expensive source
of oxygen. Thus, essentially all CO gasoline and Minnesota gasoline
contains ethanol. Generally, the ethanol must be refinery rack or
terminal blended. To limit the number of blendstocks refiners must
supply, the basic starting material for oxygenated gasoline is
conventional gasoline. At the refinery rack, or the terminal, ethanol
and other tempering blendstocks may be added to adjust the octane level
and possibly the RVP as the gasoline is pumped to the retail delivery
truck.
Thus, non-RFG oxygenated fuels really are not ``Boutique fuels''.
The refiner does not need to make a different formulation for
oxygenate. Instead oxyfuels are merely produced from non-oxygenated
conventional gasoline by blending ethanol just prior to retail
distribution.
The only true ``boutique fuels'' are the myriad of low-RVP gasoline
programs that were advocated by the petroleum industry as alternatives
to federal RFG. Simply removing the oxygen standard will not impact
these programs at all. The Clean Air Act allows the states to create
such programs, but EPA must approve the programs after considering the
impacts of such non-air quality issues as price and supply. To date,
EPA has not disapproved a single low-RVP state-imposed program on the
basis of reduced gasoline fungibility.
It is important to note that ``boutique fuels'' are a profit center
for refiners, allowing them to maximize production efficiencies in
certain areas. But whenever there are disruptions in production or
distribution, consumers pay the price because motor fuels are no longer
fungible. Congress should look at this issue closely, and remove the
state's authority to further balkanize gasoline markets. Yesterday,
Representative Roy Blunt (R-MO) introduced bi-partisan legislation to
reduce the number of boutique fuels while preserving air quality. The
RFA supports this effort and encourage the Committee to look closely at
this issue.
THE CALIFORNIA OXYGEN CONTENT WAIVER
After more than two years of study, the U.S. Environmental
Protection Agency denied a request by the State of California to be
exempted from the requirement to use oxygenates in the reformulated
gasoline program. The Administration is to be commended for deciding
this issue on the basis of the law and science, and not bending to the
political pressure of California and the petroleum industry that sought
a waiver because of unsubstantiated fears related to supply and price.
The fact is the Clean Air Act does not allow waivers to be granted on
the basis of MTBE water contamination, or supply. The only basis upon
which the Agency could have granted a waiver is upon a demonstration
that the use of oxygenates will prevent or interfere with a National
Ambient Air Quality Standard (NAAQS). That demonstration was simply not
made.
As noted by Bluewater Network, a grass roots environmental group in
California, ``the data clearly shows that the best way to protect
California's air quality--and the economy--is to maintain the oxygen
requirement.'' Another California environmental coalition, the
Renewable Action Project concluded using ethanol in place of MTBE in
California as a result of the waiver denial will reduce statewide
carbon emissions by over 529,000 tons.
As a consequence of the decision, approximately 600 million gallons
of ethanol will be needed to meet the state's oxygen requirements
beginning in 2003. This will provide an important value-added market
for farmers. USDA estimates each 100 million bushels of corn increases
the price of a bushel of corn 3-5 cents. Thus, this decision will
increase the price of corn between 10-15 cents, adding more than $1
billion to the depressed farm economy.
It is critically important to recognize that if the waiver had been
granted, and ethanol not used in California, refiners would have to
replace 11% of the state's gasoline supply with other petroleum
products. MathPro \5\ estimated the cost of production of California
Phase 2 gasoline oxygenated with MTBE, and California Phase 3 gasoline
with ethanol and no oxygenate. The analysis was set in a timeframe that
allowed substantial capital investment to optimize the refineries for
the type of gasoline being produced. MathPro concluded that the cost of
gasoline produced with ethanol could be slightly more or slightly less
than the cost of non-oxygenated gasoline. Gasoline cost will increase
whether ethanol is used or not because the environmental specification
for Phase 3 gasoline is more difficult to meet than the specification
for Phase 2 gasoline. In fact, an important conclusion in the MathPro
analysis is that without ethanol, refiners would have to import a
substantial quantity of finished California RFG to satisfy demand. Such
an outside reliance on a large quantity of gasoline supply would
certainly put California gasoline prices in jeopardy.
---------------------------------------------------------------------------
\5\ MathPro, Inc, ``Analysis of California Phase 3 Standards'',
California Energy Commission, December 7, 1999.
---------------------------------------------------------------------------
Approximately 90% of the MTBE currently used in California is
imported. The decision to deny the oxygen waiver request, and to create
such a significant market for ethanol in the state will encourage
significant oxygenate production in the state over time. The California
Energy Commission estimates that as much as 400 million gallons of
ethanol can be produced from agricultural waste products in the state,
including rice straw. As noted by the Institute for Local Self-
Reliance, ``the President's decision may well spur California to
develop a homegrown transportation fuel industry based on its well-
known leadership in the biotechnology and bioengineering fields.''
In sum, denying the California waiver request was the right
decision for air quality, farm economies and California consumers. It
will preserve the air quality benefits of oxygenates, extend
California's fuel supply and reduce gasoline prices, and encourage the
development of a California bio-based renewable ethanol industry.
ETHANOL CAN MEET THE CALIFORNIA DEMAND
As noted above, the U.S. ethanol industry has a current production
capacity of 2.1 billion gallons. But the industry is growing at a
record pace. In anticipation of the California market, 34 existing
ethanol plants are undergoing expansion and eleven new plants are under
construction. As a result, the ethanol industry expects to have an
additional 300 million gallons of production capacity on line by the
end of this year. But there are numerous additional ethanol plants
planned and awaiting financing. The denial of the California waiver
will allow many of those plants to move forward.
The RFA is currently working with the California Energy Commission
on a comprehensive survey of the ethanol industry to evaluate potential
production capacity.
Finally, while the 90% of the MTBE used in California is now
imported via vessel only, ethanol will be moved to California by both
vessel and rail, providing a greater degree of flexibility to refiners.
Moreover, because only half as much ethanol will be needed to meet the
oxygen content requirement, only half as many vessels would be needed
for ethanol. Refiners plan to utilize the existing MTBE transportation
and storage infrastructure and to upgrade their rail unloading
capabilities. There will be ample ethanol available at an acceptable
price in California.
CONCLUSION
The problems causing chronic price volatility in the nation's
gasoline market are systemic, and will not be resolved quickly or
easily. In many cases, refiners must be convinced to put aside ``profit
maximizing strategies'' and act in the consumers' interest. First,
refinery production capacity must be increased significantly. Second,
inventories of refined products must be increased to accommodate
unanticipated disruptions in production or distribution, averting
short-term supply shortages. Third, the ability of the states to create
unique regional fuel specifications must be limited. Federal RFG should
become the only clean fuel program allowed, eliminating the so-called
boutique fuels and promoting increased fungibility. Finally, Congress
should adopt the Hagel/Johnson renewable fuels standard in an
aggressive national energy policy that promotes the increased
production and use of ethanol and biodiesel to extend gasoline supplies
and reduce consumer gasoline costs.
Thank you.
The Chairman. I can see that is a new opportunity for the
bumper sticker industry.
[Laughter.]
The Chairman. Mr. Keese, William J. Keese, who is the
chairman of the California Energy Commission, we very much
appreciate you coming and testifying at the hearing as well.
Why don't you go right ahead.
STATEMENT OF WILLIAM J. KEESE, CHAIRMAN, CALIFORNIA ENERGY
COMMISSION
Mr. Keese. Thank you, Mr. Chairman, Senator Fitzgerald.
California faces the most intractable air pollution problem in
the Nation, and as you are aware, significant energy
challenges, too. Over 90 percent of all Californians live in
areas that do not meet State or Federal air quality standards
established to protect public health. In addition, California
faces a very delicate balance between existing refining
capacity and growing consumption of petroleum products. As you
have heard, we have our own RFG. It is the single most
effective tool to combat summertime smog in California. It
provides 50 percent greater NOX reductions than
Federal standards, so it is with extreme disappointment that we
learned that the US EPA decided to deny California's request
for a waiver from the Federal oxygen requirement.
The information provided by the California Air Resources
Board provides ample evidence that granting a waiver will
reduce both oxidates of nitrogen and toxic emissions, and that
the impact of increases in carbon monoxide on ozone will be
more than compensated for by reductions in volatile organic
compounds. I believe that is what we have heard from EPA today.
Granting the waiver will clearly assist California in
reducing ozone levels and attaining the Federal ambient air
quality standard. Furthermore, CARB's analysis shows that a
waiver would result in lower emissions of toxic air pollutants,
and a decrease in fine particulate pollution. Unless we reverse
EPA's denial of California's request, it will result in higher
levels of ozone and particulate pollution and greater exposure
to toxic air pollutants.
Now I would like to discuss briefly some of our economic
consequences that have been hit on by other speakers.
California consumers will pay at least an additional $450
million per year for gasoline, in addition to the air and water
quality penalties we take because of the denial of the waiver.
Increased probability of supply disruptions and resulting price
spikes will equate to even greater cost impacts for California
consumers, due to the loss of flexibility associated with the
denial of a waiver.
According to the analysis by my staff, a temporary of
shortage of ethanol during the year 2003 could result in price
spikes of up to 50 cents per gallon for periods like to exist
for 3 to 4 weeks. The cost to California from such a spike
would be another $660 million.
If California refiners are unable to obtain adequate
supplies of ethanol, or experience problems with specialized
refinery equipment that is needed to create the different type
of gasoline to blend with ethanol, refiners will be unable to
switch to another oxygenate, and not be allowed to produce
nonoxygenated gasoline.
We have had a bad experience, I should say I guess we are
having a bad experience with a shortage of an energy commodity
in California today. With EPA's inaction on our waiver, we are
headed towards dependence on another singular energy commodity.
Finally, the real challenge in avoiding supply disruptions
and price spikes will be a reliable delivery infrastructure for
ethanol to ensure adequate deliveries, both where it is needed
and when it is needed. It is clear that the vast majority of
the ethanol will come from the Midwest, where the distribution
to either coast will be, at best, complex and difficult.
Locally, no analysis has shown that California can be self-
sufficient in ethanol production at a reasonable cost.
Regionally, there are many questions about the availability of
tank cars and the marine vessels needed to transport the
volumes needed for California.
I would like to give a brief discussion here on the
proliferation of fuel specifications, or boutique fuels. A
national fuel standard would create a gasoline that could be
sold in any market in the country. Various regions in the
United States have experience dramatic price spikes for a
period of time when supplies of fuel were temporarily
constrained.
One of the reasons that prices increase so quickly is
because fuel suppliers from adjacent markets could not be used
to cover the shortfall. Instead, adequate supplies had to be
obtained from more distant locations. A national fuel standard
would ensure that this situation was not repeated. If
California reformulated gas specifications were adopted
throughout the Nation, air quality benefits would be maintained
and actually increased.
We know that this approach would come at a cost to refiners
and consumers. It is also likely that refinery capacity would
decline because some refiners will be unwilling to make the
necessary investments, or be unable to obtain the financing to
modify their facilities. Decreased refinery capacity, coupled
with increasing fuel demand, would require additional imports
of finished gasoline and blending components. Foreign sources
of these types of refined products are currently not readily
available, and can be expensive.
Finally, if other regions of the country eliminate the use
of MTBE, or an ethanol mandate is legislated for all gasoline
in the Nation, supplies of ethanol could be inadequate.
California alone will require up to 50 percent of current U.S.
ethanol capacity. These additional demands for other uses will
cause ethanol prices to be even higher, increase the
probability that supplies of ethanol will be inadequate, and
cause fuel prices to rise.
In conclusion, now is the time to establish a
transportation fuel policy that will preserve and enhance the
environmental and public health advancements we have made,
while protecting consumers from unreasonable price volatility
and fuel shortages. Providing California a waiver from the
Federal oxygenate requirement would provide the flexibility to
meet our mutual environmental and public health mandates
without sacrificing consumers to shortages of supply and
outrageous costs. Establishing a national fuel specification
could expand these benefits to all consumers, regardless of
where they live.
I appreciate this opportunity, and I have submitted my
formal comments for the record. Thank you.
[The prepared statement of Mr. Keese follows:]
Prepared Statement of William J. Keese, Chairman,
California Energy Commission
INTRODUCTION
Mr. Chairman and members of the Committee, thank you for the
opportunity to testify today before the United State's Senate Committee
on Energy and Natural Resources regarding these important issues.
During my presentation, I ask that the Committee keep in mind that
California faces the most intractable air pollution problems in the
nation and energy challenges. Over 90 percent of all Californians live
in areas that do not meet state or federal air quality standards
established to protect public health. In addition, California faces a
very delicate balance between existing refining capacity and growing
consumption of petroleum products. This Congress is in a unique
position to establish policy relating to motor vehicle fuels that would
help to ensure that California, and other areas in the nation not
meeting air quality standards, can achieve clean air.
Today, I will focus largely on the recent denial by the U.S. EPA of
California's request for a waiver from the federal oxygenate mandate
and the significant negative consequences this action will have on
California's gasoline refining and marketing industries and air
quality.
BACKGROUND
Before I start, I want to provide some background.
California consumes about 15 billion gallons of gasoline per
year or about a truck and trailer load every 20 seconds. This
is about 11 percent of the total amount of gasoline consumed in
the United States. By 2003, demand is expected to increase to
15.8 billion gallons.
California has its own reformulated gasoline (RFG) program.
This program provides about 50 percent more reduction in
vehicle emissions of oxides of nitrogen, about 10 percent more
reduction in toxics emission and about the same VOC emission
reduction as the federal RFG program.
To obtain these benefits, Californians pay, on average, a
little more than 5 cents per gallon for their gasoline compared
to federal reformulated gasoline. For this price, ozone-forming
emissions from motor vehicles are reduced by about 15 percent
and risks from toxics emitted by vehicles are reduced by 40
percent. No other program can provide these types of emission
reductions in the near term.
Since the implementation of the California reformulated
gasoline program in 1996, the population in the South Coast has
increased by over 10 percent while the number of days exceeding
the federal air quality standard for ozone has been reduce by
nearly 50 percent. While there have been other emission
reduction programs during this time, the California
reformulated gasoline program was one of the most significant.
Refiners have been able to supply California Reformulated
Gasoline (CaRFG) at the volumes needed and at an acceptable
cost because of the flexibility built into the California
program.
Just as important, California's fuel program has allowed
vehicle manufacturers to design pollution control technologies
that meet California's aggressive vehicle emission
requirements. This would not be possible without the quality of
gasoline supplied in California. Vehicle manufacturers have
repeatedly testified to this at numerous meetings in
California.
OXYGEN REQUIREMENTS IN GASOLINE
Because of federal law, about 70 percent of the gasoline sold in
California is required to contain an oxygenate. By 2003, this
requirement will expand to 80 percent of the State's gasoline. As is
the case for most federal RFG, most California RFG produced for use in
areas subject to the federal oxygenate requirements use methyl
tertiary-butyl ether (MTBE) as the oxygenate. In areas of California
where gasoline is only subject to California RFG requirements, refiners
are free to market gasoline without MTBE with no loss in air quality
benefits. In the San Francisco Bay Area, a non-federal RFG area, more
than 50 percent of the gasoline marketed is oxygenate free.
As is the case for most federal RFG, California RFG is produced
today using MTBE to supply the oxygen required by the federal oxygen
mandate for RFG. However, MTBE use has resulted in ground water
contamination. MTBE, with its unpleasant taste and odor
characteristics, can render ground water unsuitable for drinking. In
California, a number of drinking water wells, most notably in the Lake
Tahoe and Santa Monica areas, have been closed because of MTBE
contamination; similar conditions exist in the Northeast.
In response to these concerns, Governor Davis took action to
eliminate the use of MTBE in California gasoline. Governor Davis also
requested a waiver from the federal oxygen requirement to facilitate
this phase-out and to gain additional air quality benefits from our
California RFG program. Without a waiver, MTBE cannot be phased out
until the necessary refinery modifications; blending infrastructure and
supplies of ethanol are in place.
ENVIRONMENTAL CONSEQUENCES OF DENYING THE WAIVER
It is with extreme disappointment that we learned that the U.S. EPA
decided to deny California's request for a waiver from the federal
oxygen requirement. The emissions benefits of a waiver have been fully
demonstrated in materials submitted to the U.S. EPA. Furthermore,
additional supporting materials were provided in numerous meetings and
phone conferences over the more than two years that U. S. EPA has
considered California's waiver request.
The information provided by the California Air Resources Board
(CARB) provides ample evidence that granting a waiver will reduce both
oxides of nitrogen and toxics emissions, and that the impact of
increases in carbon monoxide (CO) on ozone will be more than
compensated for by reductions in volatile organic compounds (VOC).
Granting the waiver will clearly assist California in reducing ozone
levels and attaining the federal ambient air quality standard.
Furthermore, CARB's analysis shows that a waiver would result in lower
emissions of toxic air pollutants from gasoline combustion and
evaporation and a decrease in the nitrate portion of fine particulate
pollution (PM10). Finally, CARB's analysis shows that even with a
waiver, the wintertime oxygen requirement in the Los Angeles area would
be maintained, thereby preventing CO increases and ensuring reductions
needed to attain and maintain that standard.
Numerous independent investigators have undertaken studies to
assess the need for oxygenates in gasoline. These investigations
include a University of California study; the U.S. EPA Blue Ribbon
Panel on the use of oxygenates in gasoline, and a National Academy of
Science study. Overall, these groups found that the use of oxygenates
bears little benefit in improving ozone levels. They also found that
the use of oxygenates is not needed to preserve the benefits of
California's RFG Program. A NESCAUM study concluded the same for the
northeastern states. Thomas Skinner, Director of the Illinois
Environmental Protection Agency, was quoted in the Chicago Tribune as
saying, ``From a strictly environmental standpoint, ethanol is a
wash.'' In CARB's submittals to U.S. EPA on this topic, the agency made
a very strong technical case for California RFG without the oxygenate
requirement.
In summary, CARB disagrees with U.S. EPA's conclusion that the
effect of a waiver on VOC emissions is uncertain, and that California
has not made a satisfactory demonstration that the waiver would result
in an overall reduction in the emissions of ozone forming pollutants
from the California vehicle fleet. California state law requires that
the adoption of the California Phase 3 reformulated gasoline
regulations not result in an increase in emissions. The only
uncertainty is how large the benefit for California will be; not
whether there will be a benefit. Unless reversed, U.S. EPA's denial of
California's request will result in higher levels of ozone and PM10 and
greater exposure to toxic air pollutants. And, unfortunately, it will
deny refiners the opportunity to immediately replace MTBE with an
oxygen-free gasoline, creating even a greater risk for California's
water supply to be contaminated with MTBE.
ECONOMIC CONSEQUENCES OF DENYING THE WAIVER
Now I will discuss some of the economic consequences of denying
California an oxygenate waiver.
California consumers will pay at least an additional $450 million
per year for gasoline, in addition to the air and water quality
improvement opportunities lost because of the denial of the waiver.
These opportunities will be lost because refiners lose flexibility in
their production of RFG and must use ethanol in every gallon of
gasoline sold throughout most areas of California.
Increased probability of supply disruptions and resulting price
spikes will equate to even greater cost impacts for California
consumers due to the loss of flexibility to refiners associated with
the denial of the waiver. Our distribution system will require refiners
to use ethanol in virtually every gallon of gasoline sold throughout
the State. If California refiners are unable to obtain adequate
supplies of ethanol or experience problems with specialized refinery
equipment that is needed to create the different type of gasoline that
is blended with ethanol, then refiners will be unable to switch to
another oxygenate and not be allowed to produce non-oxygenated
gasoline. Also, the need to use ethanol limits the blendstocks that can
be used to produce complying gasoline. Today, with non-oxygenated RFG,
the main criteria for acceptable blendstocks are low sulfur content.
With the mandated use of ethanol, acceptable blendstocks will have to
have both low volatility and low sulfur content. This further reduces
refiners' flexibility and increases the likelihood for shortages of
oxygenated gasoline, thereby increasing cost to the consumer.
According to analyses by my staff at the California Energy
Commission, a temporary shortage of ethanol could result in price
spikes of up to 50 cents per gallon for periods of 3 to 4 weeks. By
2003, a 50 cent price spike lasting four weeks will cost California
consumers an additional $660 million. California has experienced a
number of price spikes over the last several years ranging from 10 to
50 cents per gallon. These price spikes were attributed to a tightening
of gasoline supplies due to major unplanned refinery outages.
Even these impacts are probably underestimated because they don't
consider what will happen if both California and the northeastern
states need ethanol. The increased demand on the ethanol supply would
nearly double from a minimum of 715 million gallons per year for the
California market to over 1.3 billion gallons of ethanol per year for
the national market.
Finally, the real challenge in avoiding supply disruptions and
price spikes will be a reliable delivery infrastructure for ethanol, to
ensure adequate deliveries, both where it is needed and when it is
needed. It is clear that the vast majority of this ethanol will have to
come from the Midwest where the distribution to either coast will be,
at best, complex and difficult. Locally, no analysis has shown that
California can be self-sufficient in ethanol production at a reasonable
cost. Regionally, there are many questions about the availability of
railroad tank cars and the marine vessels needed to transport the
volumes needed for California and the Northeast.
We are hopeful that U.S. EPA will reconsider its denial of the
California waiver and we are committed to continue working with the
U.S. EPA to address any technical concerns it may have.
PROLIFERATION OF FUEL FORMULATIONS
I will now briefly comment on the national situation, where the
number of gasoline formulations is contributing to supply distribution
problems and price volatility. I believe it is in the nation's interest
to minimize the number of fuel formulations. This facilitates the
distribution of gasoline and makes production more efficient as long as
it is done in a manner that preserves the emission benefits of the
specialized blends.
Examination of the gasoline formulations currently being marketed
indicates that the dominant formulations are federal RFG, California
RFG, and a mixture of others. Outside of the federal and California RFG
areas, in addition to the national sulfur standard of 30 parts per
million, appropriate uniform standards could be established for
volatility, benzene content, and a drivability index (a function of the
temperatures at which certain fractions of the gasoline evaporates). A
correctly established drivability index would result in vehicle
performance improving and emissions being reduced.
These four specifications together could provide a gasoline that
would preserve the environmental benefits that various states have
established outside of the RFG areas and provide gasoline that would
meet the minimum needs of the automotive industry for the foreseeable
future. Although this approach would decrease some of the distribution
issues that arise, the three different types of gasoline in use under
this scenario would still not be completely interchangeable across all
the markets.
A national fuel standard would create a gasoline that could be sold
in any market of the country. Various regions of the United States have
experienced dramatic price spikes during periods of time when supplies
of fuel were temporarily constrained. One of the reasons that prices
increased so quickly is because fuel supplies from adjacent markets
could not be used to cover the shortfall. Instead, adequate supplies
had to be obtained from more distant locations. A national fuel
standard would ensure that this situation was not repeated. If
California RFG specifications were adopted throughout the nation, air
quality benefits would be maintained and actually increased.
Both approaches would come at a cost to refiners and consumers. It
is also likely that refinery capacity would decline because some
refiners will be unwilling to make the necessary investments or unable
to obtain the financing to modify their facilities. Decreased refinery
capacity, coupled with increasing fuel demand would require additional
imports of finished gasoline and blending components. Foreign sources
of these types of refined products are currently not readily available
and can be expensive.
Finally, if other regions of the country eliminate the use of MTBE
or an ethanol mandate is legislated for all gasoline in the nation,
supplies of ethanol could be inadequate. California alone will require
up to 50 percent of current U.S. ethanol capacity. These additional
demands for other uses will cause ethanol prices to be even higher,
increase the probability that supplies of ethanol will be inadequate
and cause fuel prices to rise.
CONCLUSION
In conclusion, now is the time to establish a transportation fuel
policy that will preserve and enhance the environmental and public
health advancements we have made while protecting consumers from
unreasonable price volatility and fuel shortages. Providing California
a waiver from the Federal oxygenate requirement would provide the
flexibility to meet our mutual environmental and public health mandates
without sacrificing consumers to shortages in supply and outrageous
costs. Establishing a national fuel specification could expand these
benefits to all consumers regardless of where they live. I appreciate
the opportunity to appear before you today.
The Chairman. Thank you very much. Let me thank all of you
on this panel. Let me ask just a very few questions, and then
ask if Senator Fitzgerald has some questions. Mr. Segal, as I
understand your testimony, it is in disagreement with Mr. Keese
on some of the issues, particularly on supply and difficulties
in doing the necessary transportation.
Mr. Segal. I am shocked.
The Chairman. Could you just give us your view? We seem to
have a real difference of opinion here as to whether or not we
are going to see supply problems and price increases as a
result of the decisions to eliminate MTBE and deny the waiver
on the oxygenate requirement.
Mr. Segal. Yes, sir. I am in the uncomfortable position of
having to disagree with the Renewable Fuels Association, but I
will try and do my best. Essentially, there are 300,000 barrels
a day of MTBE consumed, but because MTBE is clean octane, it
allows another 100,000--its footprint in the fuel pool is
actually about 400,000 a day.
Now, of that amount, we supply all of California, we supply
all of the Northeast, we supply all of the Midwest south of St.
Louis. They have the upper Midwest. So you have to believe, and
Senator Fitzgerald, you have to believe that capacity that is
barely adequate to satisfy the Upper Midwest is suddenly going
to magically appear in all corners of the Nation in adequate
amounts to supply the market. Let me tell you why that is not
going to happen.
Your question, Mr. Chairman, was exactly right regarding
transportation by pipeline. What happens is, if you blend
ethanol into gasoline and then place that resulting mix, which
is what we are talking about here, into a gasoline pipeline, it
dewaters and evaporates. It cannot be used, pipeline
transportation cannot be effectively used.
One of the most efficient ways of transporting ethanol,
that was described by Mr. Dinneen, is actually barge traffic,
which does, indeed, flow through the Midwest. Somewhat
problematic, however, is the fact that the Upper Mississippi is
frozen for 4 months of the year. It is not an adequate approach
to try and get this ethanol fuel supply to market.
Further, Mr. Dinneen's own statement shows you just how
difficult it would be to conform the market. He is exactly
right, there is some MTBE that comes in from Saudi Arabia, and
despite the fact that section 211 of the Clean Air Act allows
open competition between MTBE and ethanol, ethanol from the
relatively close Midwest cannot compete even with MTBE from
around the world.
Now, this is not because of some kind of cabal, or allergic
reaction to ethanol. It is because it cannot compete on a cost-
effective and availability basis, and most MTBE, Mr. Chairman,
is, of course, a domestic resource. In fact, the State of New
Mexico, as you probably know, is the number 3 source in the
United States of natural gas liquids, which is the primary
feedstock for the production of MTBE.
So we would definitely call MTBE an important domestic
resource of the United States that is easy to transport, cost-
effective, and is the cleanest part of RFG. Any alternative
formulation of RFG is made cleaner by the addition of MTBE, and
on the transportation side, there is no way that you could
possibly believe that there would be sufficient capacity
expansion for ethanol, nor could you overcome the
transportation or logistical needs to get it to the markets in
the four corners of the United States.
The Chairman. Let me ask if Mr. Keese has any comment, and
then I will give Mr. Dinneen an opportunity to respond to the
salacious----
[Laughter.]
Mr. Keese. Senator Bingaman, I would like to mention that I
served on Governor Davis' MTBE task force. We made the
difficult decision that we had to ban it. We set a time line of
the end of 2002, January 2003, and we set that time line as an
aggressive timetable when we could possibly do it. We
immediately applied to EPA for a waiver, as you have heard, 2
years ago, because we needed an immediate decision if we were
going to make our aggressive timetable of the end of 2002.
We cannot afford to develop a parallel delivery system for
product in California. We are going to have one delivery
system, and what we see here is that we are being totally tied
into one fuel method. We like ethanol. We believe ethanol use
in California is the only way we will meet our octane
requirements over the next few years, but if we are tied to
just that one fuel, and converting our whole system over to
that one fuel, we do not know how in the world we can make it
by the end of 2002.
The Chairman. In light of the decision by EPA to deny your
waiver, are you going to revisit the date on which California
will ban MTBE? It would seem to make a lot of sense, based on
what you just said.
Mr. Segal. We are researching all alternatives at this
time.
The Chairman. Mr. Dinneen, did you have any comment?
Mr. Dinneen. Oh, one or two, Mr. Chairman. Mr. Segal is a
friend, and a worthy advocate for MTBE, and a worthy adversary
for us. He is not, however, an expert on ethanol supply and
logistics.
The fact of the matter is, ethanol has no problem getting
product out of the Midwest 12 months of the year. The time when
ethanol demand is greatest is in the winter months, when we
have got to supply places like Anchorage, Alaska, Denver,
Colorado, and Missoula, Montana, that require ethanol for
carbon monoxide programs. We have never, ever missed a shipment
or created any kind of a supply disruption.
His comments about the price-competitiveness of MTBE versus
ethanol are interesting, but maybe a little bit misleading. The
fact of the matter is, petroleum companies produce MTBE, the
petroleum feedstocks, but when looked at from a gallon basis,
the cost of MTBE today is about $1.65 per gallon. The cost of
ethanol on that basis is between 90 and $1, and you only need
half as much of it, again, in order to meet the oxygen
requirements.
You can take a look at prices today in certain markets and
make some comparisons for yourself. In Los Angeles, which is an
MTBE reformulated gasoline market, the price of reformulated
gasoline is $1.97. In Chicago today, an ethanol RFG, it is
$1.76. Interestingly, and I hope the State of California is
keeping track of this, the highest priced gasoline in the
country today is in San Francisco, which has no oxygen. Their
price today is about $2.13.
Now, there are a lot of factors that go into gasoline
pricing, there is no question about that, but when looked at in
terms of relative oxygenate economics, I think they do tell an
interesting tale.
The Chairman. I believe Mr. Segal was anxious to make a
comment, if you wanted to make a comment, then Senator
Fitzgerald has a question.
Mr. Segal. Just one brief point. I wanted to agree with
something Bob just said, which is that it does take half the
volume of ethanol to achieve the same amount of oxygen that you
would have in MTBE. Sir, that is a vice, not a virtue. Let me
explain why.
Ethanol has 40 percent--because it has more oxygen in it--
yes, it has more oxygen in ethanol, which is also why ethanol
has 40 percent of the Btu content of MTBE, so even if you could
supply an equivalent amount of ethanol, or enough ethanol to
satisfy the California oxygen requirement, you still lost
volume, significant amounts of volume of gasoline.
And remember, as Ms. Fisher said, there are several reasons
why there is an oxygenate standard. Part of it is to make sure
there is oxygen in the fuel for combustion purposes, control of
VOC's, but part of it is to make sure there is adequate energy
supply, so even if Bob is correct, it only takes, quote, half
as much, you had better come up with the additional percentage
volume that is lost.
The Chairman. Let me let Senator Fitzgerald ask his
question.
Senator Fitzgerald. Well, I would like to ask Mr. Keese,
following up along the line that Mr. Segal was talking about,
if you are not using ethanol and you ban MTBE, you are going to
have to make up that volume, and I think even the California
Energy Commission, their own report concluded that a complete
ban on all oxygenates would result in the greatest average cost
increase of gasoline.
So I mean, does California not recognize that it would be a
problem if you were to lose the 11 percent of your volume that
you are now getting from MTBE and even, say, 5 percent
additional volume that you are getting from ethanol? That would
drive up your cost, would it not?
Mr. Keese. Clearly, we recognize that that is a problem. As
we heard earlier, we have 13 refineries in California. Most of
them are landlocked. There is an inability to expand them for
that reason and for air reasons. There just has not been much
talk about expansion.
We will lose the 11 percent if we get ethanol as the sole
substitute. We are probably down 5 or 6 percent in supply
already, and that will have to be imported from somewhere to
pick up the slack, so yes, that is one of the reasons that we
had hoped that we had 4 years to go and settle this issue.
We wanted to know which path, so we could guide our oil
refineries in how to get to the deadline. We have now
unfortunately--we were highly optimistic that we were going to
be granted this waiver. As you have heard, the draft suggested
we would get this waiver. As you have heard, at the last minute
there was some question about whether commingling this product
might cause a problem somewhere.
That was an issue that during our discussions, I believe,
was considered virtually irrelevant to the discussion. We were
talking about more serious things when EPA's staff visited
Sacramento, when California's staff visited EPA. That was not a
major issue.
Senator Fitzgerald. If you had been granted that waiver, it
would have driven your gasoline prices even higher, because you
would have had to make up for the lost volume by virtue of the
loss of oxygenate.
Mr. Keese. Senator, I believe you have indicated
familiarity with our study. Our study indicated that we would
use a huge amount of ethanol in California in the short-term
and the next 10 years to meet the octane demands of the
California market, but we would have had flexibility.
Now, our hands are going to be tied if we choose to go this
route and can only sell gasoline that has ethanol in it, with
no option whatsoever, under any circumstances.
Senator Fitzgerald. Well, eventually, where would you have
gotten your octane when you--say, 10 years from now?
Mr. Keese. Alcolytes and oxygen--I am sorry, we would not
need oxygen. We would have gotten our octane through alcolytes.
Senator Fitzgerald. And what can you tell me about that
substance? Do we know anything about it?
Mr. Keese. It is a petroleum product. It requires more
refining. It would have had to be imported in the short term.
Senator Fitzgerald. Mr. Dinneen, would you want to comment
on those alcolytes?
Mr. Dinneen. Absolutely, Senator. I was going to get to
that very point, because I think it gets back to the comment
that Mr. Segal was making about volume a moment ago.
First of all, I want to just stress the fact that the worst
volume situation is nonoxygenated gasoline. You use 11 percent
volume. That would have the worst impact on volume and price to
consumers.
Now, Mr. Segal is right, if you have ethanol, you have
still got a volume gap that you have to make up, and we believe
the way the refiners are contemplating making the adjustment,
making the fuels meet the standards, is by using alcolyte,
which is a product that Mr. Segal's companies are likely going
to begin to make, because units that are currently producing
MTBE, MTBE is produced by reacting ethanol with isobutylene. It
can begin producing alcolyte.
The State of California--the California Energy Commission
was one of the leaders in pulling this together several months
ago--had an ethanol and alcolyte conference, and indeed, the
discussion was that ethanol and alcolyte would make up the
volume, and that there were synergies between the two products
in terms of the distillation properties and their octane
benefits that made it a great fit for California.
I mean, I appreciate the fact that the CEC is now thinking
that there is all this uncertainty, but I would suggest that
the uncertainty was created by the waiver request that they
filed. The ethanol industry was equally confident that the
waiver would be denied, and while it was difficult, we have
gone on to make sure that we built the capacity to meet the
demand that is going to be created in California, and I am
proud of my companies for having done that, because I am
absolutely confident that we will do so.
Senator Fitzgerald. Mr. Keese, do you care to comment
whether California, now that the waiver has been denied, will
they continue the timeline on their ban on MTBE?
Mr. Keese. We have an active study to reconsider all our
options.
Senator Fitzgerald. Why would you reconsider that time line
now? I mean, nothing has changed, no new information has come
out to suggest that MTBE all of a sudden is not a problem for
our drinking water. It clearly is, is it not?
Mr. Keese. Clearly, we are now being forced into a
position--we had felt that we can deliver a product that meets
California, that meets all Federal standards, and solves both
our water and our air problem. Now we are being forced to
juxtapose one against the other. It is a very unfortunate
choice that we have, but we will have to look at that choice.
Senator Fitzgerald. All right. I appreciate all of you
having the opportunity to testify, and thank you very much. I
have no further questions, Mr. Chairman.
The Chairman. I think the testimony has been very useful.
Thank you all again for being here. That is the end of the
hearing.
[Whereupon, at 12:30 p.m., the hearing was adjourned.]
[Subsequent to the hearing, the following letter was
received for the record:]
ExxonMobil Refining & Supply Company,
Fairfax, VA, June 29, 2001.
Hon. Jeff Bingaman,
Chairman, Energy and Natural Resources Committee, Hart Senate Office
Building, Washington, DC.
Dear Chairman Bingaman: We respectfully disagree with the
conclusions in Senator Wyden's recent report and comments regarding the
oil industry. In a significant decision, the California Supreme Court
on June 14 ruled 7-0 to dismiss antitrust allegations against major
petroleum refiners operating on the West Coast. The judgment states
that there is no evidence of anti-competitive or improper behavior and
cleared the industry of any wrongdoing. The court refuted charges that
major oil companies attempted to drive smaller refiners out of business
or that they manipulated supplies of CARB gasoline.
This judgment was based on extensive discovery, including a review
of over 500,000 documents. The allegations repeated in the Senator's
report were considered and rejected by the court. We consider this
ruling to be comprehensive and definitive.
In addition, earlier this year the FTC voted 4-0 to close a three-
year investigation of West Coast gasoline marketing practices after
finding that oil companies did in fact follow all antitrust laws in
marketing gasoline. These most recent findings join a lengthy list of
past government investigations--at least one every two years since
1973--that have ultimately exonerated major gasoline suppliers.
Allegations that Mobil attempted to illegally influence the CARB
market were also thoroughly considered by the California Supreme Court
and rejected. Comments in the Mobil memo refer to the company's
objection to one refiner's request for an exemption from an
environmental requirement to produce cleaner-burning fuel. This
exemption would have created an unfair playing field, allowing refiners
who had not made the investments necessary to produce cleaner-burning
fuels to sell environmentally unfriendly gasoline in the Los Angeles
market, which required lower-emissions fuels.
ExxonMobil stands by our ethical business practices, and we take
strong exception to Senator Wyden's allegations of impropriety.
Sincerely,
D.H. Daigle,
Director, Americas Region.