[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
                                 ------                                

               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

                              ----------                              


                         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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    * The attachments have been retained in committee files.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    * The studies have been retained in committee files.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \1\ EIA
    \2\ www.eia.doe.gov/emeu/international/gas2.html
    \3\ www.eia.doe.gov/emeu/steo/pub/special/mtbecost.html
---------------------------------------------------------------------------

                    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:
---------------------------------------------------------------------------
    \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.
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