[Senate Hearing 108-300]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-300
 
                   CLEAN AIR ACT: ALTERNATIVE FUELS 
                           AND FUEL ADDITIVES
=======================================================================



                                HEARING

                               before the

              SUBCOMMITTEE ON CLEAN AIR, CLIMATE CHANGE, 
                           AND NUCLEAR SAFETY

                                 OF THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                                   ON

     PROVISIONS OF THE CLEAN AIR ACT TO SUPPORT CLEAN-BURNING FUEL 
                              ALTERNATIVES


                               __________

                             MARCH 20, 2003

                               __________


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









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               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                      one hundred eighth congress
                             first session

                  JAMES M. INHOFE, Oklahoma, Chairman
JOHN W. WARNER, Virginia             JAMES M. JEFFORDS, Vermont
CHRISTOPHER S. BOND, Missouri        MAX BAUCUS, Montana
GEORGE V. VOINOVICH, Ohio            HARRY REID, Nevada
MICHAEL D. CRAPO, Idaho              BOB GRAHAM, Florida
LINCOLN CHAFEE, Rhode Island         JOSEPH I. LIEBERMAN, Connecticut
JOHN CORNYN, Texaa                   BARBARA BOXER, California
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
CRAIG THOMAS, Wyoming                THOMAS R. CARPER, Delaware
WAYNE ALLARD, Colorado               HILLARY RODHAM CLINTON, New York

                Andrew Wheeler, Majority Staff Director
                 Ken Connolly, Minority Staff Director
                                 ------                                

     Subcommittee on Clean Air, Climate Change, and Nuclear Safety

                  GEORGE V. VOINOVICH, Ohio, Chairman
MICHAEL D. CRAPO, Idaho              THOMAS R. CARPER, Delaware
CHRISTOPHER S. BOND, Missouri        JOSEPH I. LIEBERMAN, Connecticut
JOHN CORNYN, Texas                   HARRY REID, Nevada
CRAIG THOMAS, Wyoming                HILLARY RODHAM CLINTON, New York

                                  (ii)
















                            C O N T E N T S

                              ----------                              
                                                                   Page

                             MARCH 20, 2003
                           OPENING STATEMENTS

Bond, Hon. Christopher S., U.S. Senator from the State of 
  Missouri.......................................................    44
Carper, Hon. Thomas R., U.S. Senator from the State of Delaware..     5
Clinton, Hon. Hillary Rodham, U.S. Senator from the State of New 
  York...........................................................    42
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...     3
Voinovich, Hon. George V., U.S. Senator from the State of Ohio...     1
    Statement, Energy Policy Act, Executive Office of the 
      President..................................................    18

                               WITNESSES

Early, A. Blakeman, consultant, The American Lung Association....    29
    Prepared statement...........................................    94
Garman, Hon. David, Assistant Secretary for Renewable Energy, 
  U.S. Department of Energy......................................     9
    Prepared statement...........................................    49
Granger, Paul J., Superintendent, Plainview Water District.......    31
    Prepared statement...........................................   119
Holmstead, Hon. Jeffrey R., Assistant Administrator for Air and 
  Radiation, U.S. Environmental Protection Agency................     6
    Prepared statement...........................................    45
    Response to additional questions from Senator Jeffords.......    47
Murphy, Edward, Downstream General Manager, American Petroleum 
  Institute......................................................    22
    Prepared statement...........................................    54
Perkins, Craig, director, Environment and Public Works Management    33
    Prepared statement...........................................   128
Segal, Scott, partner, Bracewell and Patterson, L.L.P............    26
    Prepared statement...........................................    78
Slaughter, Robert, President, National Petrochemical and Refiners 
  Association....................................................    23
    Articles, EIA Week...........................................64, 71
    Prepared statement...........................................    57
Wagman, Rich, first vice chairman, American Road and 
  Transportation Builders Association............................    28
    Prepared statement...........................................    87
Yoder, Fred, President, National Corn Growers Association........    20
    Prepared statement...........................................    52

                          ADDITIONAL MATERIAL

List, Narrow Liability Provisions Adopted by Congress............    86
Statements:
    Oxygenated Fuels Association.................................    84
    National Resources Defense Council...........................   130
    National Biodiesel Board.....................................   142
    Renewable Fuels Association..................................   143
    National Association of Convenience Stores and Societyof 
      Independent Gasoline Marketers of America................147, 150















                   CLEAN AIR ACT: ALTERNATIVE FUELS 
                           AND FUEL ADDITIVES

                              ----------                              


                        THURSDAY, MARCH 20, 2003

                                   U.S. Senate,    
             Committee on Environment and Public Works,    
                Subcommittee on Clean Air, Climate Change  
                                        and Nuclear Safety,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:35 a.m. in 
room 406, Senate Dirksen Building, Hon. George V. Voinovich 
[chairman of the subcommittee] presiding.
    Present: Senators Voinovich, Carper, Clinton, Thomas, 
Inhofe [ex officio], and Jeffords [ex officio].

  OPENING STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR 
                     FROM THE STATE OF OHIO

    Senator Voinovich. One of the things I would like to make 
clear to my colleagues is that I am going to the very best that 
I can to get hearings started when we say we are going to start 
the hearings.
    Before I begin my opening remarks, I would like to comment 
for a minute on the fact that the military action in Iraq that 
we had hoped and prayed to avoid is upon us. Some of my staff 
members wanted to know what this ribbon represented. That 
ribbon is a ribbon that I wore when I was Governor of Ohio 
during Desert Storm. It was a reminder to the people of Ohio 
that we had Ohioans overseas that were in harm's way; that we 
were thinking about them; we were praying for them; thanking 
them and their sacrifice and hoping that the war would end 
soon. Those are my sentiments today, and I am sure they are the 
same sentiments of everybody that is here in the room.
    As it is the responsibility of the United States to finish 
the job begun by the U.N. and end the threat posed by Saddam 
Hussein's weapons of mass destruction, it is the responsibility 
of this body to look after the interests of the American 
people, which is why we are here today. It is no small irony 
that we are here today to discuss issues affecting our gasoline 
supply while our troops are engaged in the war on terror in the 
Middle East.
    Our purpose in Iraq is to end a regime that risks becoming 
the arsenal of terrorism, which has defied the world for more 
than a decade, to liberate the Iraqi people from oppression and 
violence. However, our mere presence in that part of the world 
highlights the fact that we are entirely too dependent on oil 
that we import from the Middle East. The legislation that we 
are here to discuss today, a compromise that will triple the 
amount of domestically produced ethanol used in America, is one 
essential tool in reducing our dependence on imported oil.
    This legislation is even more important, given that just 
yesterday this body defeated a proposal to allow exploration of 
production of another major domestic source of energy, the 
Arctic National Wildlife Reserve.
    It is interesting that if the Arctic National Wildlife 
Reserve produced the minimum that people expected, it would be 
the equivalent of what we are getting from Iraq. If it produced 
the maximum amount, it would be the equivalent of all the oil 
that we import from Saudi Arabia--just to put it in 
perspective.
    As many of you know, the Senate overwhelmingly passed a 
fuels package in last year's energy bill that established a 
five billion gallon renewable fuel standard, repealed the Clean 
Air Act's oxygen requirement, and phased out the use of MTBE. 
Fortunately, that energy bill was killed in a House-Senate 
conference committee, not because of its merits, but because 
people that put partisan political bickering ahead of getting 
our energy policy done.
    One of the things that is contributing to our sputtering 
economy is the fact that we do not have an energy policy. As I 
have often stated, we sorely need to develop a long overdue 
energy policy for our Nation. The Senate has a responsibility 
to develop a policy that harmonizes the needs of our economy 
and our environment. These are not competing needs. A 
sustainable environment is critical to a strong economy, and a 
sustainable economy is critical to providing the funding 
necessary to improve our environment. We need a policy that 
broadens our base of energy resources to create stability, 
guarantee reasonable prices, and protect America's security. It 
has to be a policy that will keep energy affordable. Finally, 
it has to be a policy that will not cripple the engines of 
commerce which fund the research that will yield environmental 
protection technologies for the future.
    I believe that increasing our use of alternative and 
renewable fuels such as ethanol and biodiesel is a key element 
in our effort to construct a viable energy policy. During the 
last Congress, I, along with several of my colleagues, worked 
to develop an ethanol package that provides a tangible benefit 
for the American people. Passage of an ethanol bill will 
protect our national security, economy and our environment.
    President Bush has stated repeatedly that energy security 
is a cornerstone for national security, and I agree. It is 
crucial that we become less dependent on foreign sources of oil 
and look more to domestic sources to meet our energy needs. 
Ethanol is an excellent domestic source. It is a clean-burning, 
home-grown, renewable fuel that we can rely upon for 
generations to come.
    Ethanol is also good for our Nation's economy. Ohio is 
sixth in the Nation in terms of corn production and is among 
the highest in the Nation in putting ethanol into gas tanks. 
Over 40 percent of all gasoline used in Ohio contains ethanol. 
An increase in the use of ethanol across the Nation means an 
economic boost to thousands of farm families across my State. 
Currently, ethanol production provides 192,000 jobs and $4.5 
billion of net income to farmers nationwide.
    Creation of a five billion gallon renewable fuel standard 
by 2012 will create new markets for corn, reduce the U.S. trade 
deficit by $34.1 billion, create 214,000 new jobs, add $51 
billion to net farm income, and reduce government subsidies to 
farmers by $5.9 billion, which will reduce the cost of the farm 
bill due to the creation of these new markets. Expanding the 
use of ethanol will also protect our environment by reducing 
auto emissions, which will mean cleaner air and improved public 
health.
    Earlier this year, along with several of my colleagues, I 
introduced legislation that is identical to the ethanol title 
passed by the Senate in last year's comprehensive energy bill. 
I commented at the time that the legislation was a good 
starting point for discussions in this Congress on these 
issues. It is my hope and expectation that we will markup a 
fuels package similar to that legislation in this committee and 
take it to the floor. It is crucial that we move this important 
legislation, I think, immediately. These issues have been on 
the front of us for a long time--far too long. Now, we have 
everybody in the same room at the same time and agreeing on the 
same legislation, by golly, we ought to move it.
    I thank Chairman Inhofe for his leadership in this 
committee. I look forward to working with him, as well as 
Senator Carper in the minority on these issues as we prepare to 
mark up legislation that makes sense for our energy security, 
environment and economy this year.
    Our witnesses on the first panel today include Mr. Jeffrey 
Holmstead, the Assistant Administrator for Air Quality at the 
Environmental Protection Agency; Mr. David Garman, the 
Assistant Secretary for Renewable Energy and Energy Efficiency; 
and Mr. Guy Caruso, Director of the Energy Information 
Administration at the Department of Energy.
    In our second panel, we will hear from various witnesses 
who represent a wide variety of stakeholder interests.
    I would like to thank these witnesses and everyone else who 
came to the table and worked together on reaching a compromise 
on these issues that we reached last year. It was a monumental 
effort; something that we all were very proud of. I really 
believe that this is the best way, and frankly the only way to 
get things done in this town. I wish that it happened more 
often.
    I look forward to hearing the testimony from our witnesses 
and I thank them for being here today.
    I would now like to call on the Chairman of our committee, 
Senator Inhofe.

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

    Senator Inhofe. Thank you, Mr. Chairman.
    When I chaired this subcommittee in October 1999, I can 
remember we had a hearing on the EPA's blue ribbon panel 
findings on the fuel additive MTBE. In that hearing, I said, 
and I am quoting now, ``The safeguarding of the nationwide 
supply and distribution of gasoline must be the key 
consideration to any action that is taken to address MTBE.'' 
And it could not be any truer than it is today.
    As you have said, Mr. Chairman, I firmly believe that what 
we are dealing with here is a national security issue. This 
goes all the way back to the early 1980's for me, when I was 
critical of the Reagan Administration for not having an energy 
policy that had some type of a cornerstone that would have a 
minimum of our reliance upon foreign countries for our ability 
to fight a war. At that time, we were 36 percent dependent; 
today, we are 57 percent dependent. Any deal that is part of 
the energy bill should reduce our dependence on countries like 
Iraq, and we should certainly be sensitive to that today.
    With that in mind, there are some fundamental concerns I 
have with the fuels deal that was a part of the energy bill 
last year. First, the impact of the fuels deal on small 
refineries. While I understand large refineries, many of them, 
are happy with the deal, I know the small refineries were 
unhappy with the deal. Right now, we are at 100 percent 
refining capacity. Anything that we do that will change this is 
going to have a direct effect on the cost to the ultimate 
consumer.
    Second, the potential impacts of the fuels deal on the 
supply, and therefore the price of fuel to the American people. 
I think we have talked about it. We know that it has to be a 
major consideration.
    Third, the agreement last year is that the ethanol mandate 
is to be phased in over 10 years. Mr. Chairman, I want to make 
sure that agreement stands and that no one tries to accelerate 
that.
    Fourth, as a matter of fairness, I think we need to take a 
close look at the safe harbors for congressionally mandated 
products such as MTBE and ethanol. When the government comes 
along and mandates the use of MTBE, so the market responds to 
that, and we have MTBE, and then government comes along and 
mandates we do away with the MTBE, implying that there is a 
danger out there--that subjects those very individuals that 
were responding to our demands to start with to frivolous 
lawsuits. So I believe that we should have some type of 
liability protection in there, and I will work to do that.
    Fifth, the impacts of the fuels deal on the Highway Trust 
Fund. Right now, we are dealing with the budget. In fact, I am 
going to be supporting a budget that is going to increase the 
amount of money that will be there for our roads, our 
infrastructure, our highways, our bridges. The amount that is 
in the budget that we are considering now is not adequate. What 
I have done, Mr. Chairman, and I am sure that you will be 
interested in this, is I have figured out a way that we could 
reach that $255 billion over a 6-year period, No. 1, without 
affecting the tax reductions; and No. 2, without having an 
increase in the deficit. So I have a broad array of funding 
capabilities that we can choose from, and I believe that this 
is something that we are going to have to do.
    So with those comments in mind, I regret to say, Mr. 
Chairman, that we have Mr. Garman's boss in a hearing. I 
thought since we had Senator Warner as Chairman of the Senate 
Armed Services Committee and me as the Chairman of this 
committee that we would not have our meetings coinciding with 
each other, because we are both on both committees. That did 
not work out that way, so we do have the Secretary of Energy 
before our committee, which is starting at the same time, so I 
have to be attending that meeting.
    Thank you, Mr. Chairman.
    Senator Voinovich. Thank you, Senator Inhofe.
    Senator Carper?

 OPENING STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR FROM 
                     THE STATE OF DELAWARE

    Senator Carper. Thank you, Mr. Chairman.
    To our guests, welcome. Thanks for coming by and joining us 
today.
    We all know that the fighting has begun in the Middle East 
and we hope for a quick conclusion and hopefully one that 
brings minimal casualties to both sides--to our side and to the 
civilian population of Iraq.
    This hearing today is on MTBE and whether we ought to phase 
it out or not. I would just say as an adjunct, there is a lot 
of interest in the Congress. In fact, if you look at the energy 
bill we passed last year, there is a whole lot of interest in 
finding other ways to not only reduce our dependence on foreign 
oil through ethanol, biodiesel fuels, but also to clean up our 
air, if we are smart, and reduce our reliance on imported oil 
and reduce our trade deficit.
    In the Delmarva peninsula, which I am privileged to 
represent, we raised a lot of corn and a lot of soybeans. Some 
interesting stuff is going on, Mr. Chairman, involving one of 
our major corporate citizens in Delaware. The DuPont Company 
has won an $18 million Energy Department grant. They will be 
using that Energy Department grant to create a refinery--I will 
call it a bio-refinery--that we believe when it is done will be 
able to create ethanol out of corn so much more efficiently 
that it will no longer require a tax subsidy to be competitive 
with gasoline. It is a very promising, creative approach. It 
has some implications for MTBE utilization going forward.
    That is the work that is out there. We also are doing a 
fair amount with biodiesel. We have just about all of our 
Delaware government vehicles that are diesel powered these days 
being run by a combination of soybean oil and diesel fuel. The 
results are quite good in terms of performance and in terms of 
what happens to the environment. It is very positive as well. 
It smells like popcorn, which is always a plus, too.
    The other thing I would say just as an observation as we 
get into this hearing, the idea of using biodiesel fuels--over 
in Europe, last year about 40 percent of the vehicles that were 
sold were diesel powered--40 percent. In this country, it was 
like four tenths of 1 percent. Either we are a lot smarter than 
they are, or they have figured something out that we have not. 
As we go forward, the ability to harness clean diesel, not 
those old diesels that we grew up with back in the 1960's and 
1970's--but clean diesel, and vehicles that can meet our tier 
two requirements, and use some of this biodiesel fuel that is 
being created, would do good things for the environment, and 
certainly do good things for reducing greenhouse gas emissions, 
and might even help our farmers a little bit as well.
    That is my statement, Mr. Chairman. Thank you for letting 
me give it.
    Welcome again to our witnesses.
    Senator Voinovich. We are very fortunate to have with us 
Mr. Jeffrey Holmstead--Jeff, we are glad to hear from you this 
morning; and Mr. Garman, who is the Assistant Secretary for 
Renewable Energy, U.S. Department of Energy. I understand that 
Mary Hutzler, Director of the Office of Integrated Analysis and 
Forecasting of the EIA, is here substituting for Mr. Caruso. Is 
that correct? OK. We look forward to your testimony, and we 
will begin.
    Senator Carper. Before our witnesses begin, I have four 
hearings going today and they just sandwiched a leadership 
meeting in at 10:30 that I am going to attend. So if I am in 
and out, I apologize. I mean no disrespect, but that is the way 
this place works.
    Thank you.
    Senator Voinovich. The fact of the matter is that we could 
all be in three places at the same time and justify each one of 
them.
    Senator Carper. Human cloning is getting to be more 
interesting.
    [Laughter.]
    Senator Voinovich. Before we begin, and I did not forget, 
the Chairman asked me to insert in the record the testimony of 
the National Association of Convenience Stores and the Society 
of Independent Gasoline Marketers of America. Without 
objection, those statements will be entered into the record.
    [The referenced documents follow:]
    Senator Voinovich. Mr. Holmstead?

STATEMENT OF HON. JEFFREY R. HOLMSTEAD, ASSISTANT ADMINISTRATOR 
  FOR AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION AGENCY

    Mr. Holmstead. Thank you, Mr. Chairman and Senator Carper 
and the other members of the subcommittee who I know may be in 
and out, for the invitation to appear today.
    I also apologize in advance that I will need to leave the 
hearing early this morning. I do not have four other hearings, 
but as I hope you have been informed, I was previously 
committed to appear before our Appropriations Committee, so I 
will need to leave by about 10:15. Again, I apologize for that.
    Senator Voinovich. I understand your priorities. Show me 
the money.
    [Laughter.]
    Mr. Holmstead. Show me the money. I am speechless.
    I do appreciate the opportunity to be here this morning and 
to discuss the vital role that cleaner-burning gasoline plays 
in improving America's air quality. Specifically, I would like 
to comment this morning on the gasoline provisions in the 
legislation introduced by Senator Daschle and cosponsored by 
the distinguished Chairman of this subcommittee.
    The Bush Administration supported and continues to support 
the fuel provisions of the energy legislation that passed the 
Senate last year. That legislation would have maintained the 
environmental benefits of the reformulated gasoline program, 
known as the RFG program, prevented backsliding in air toxics, 
removed the RFG oxygenate mandate, imposed a Federal phase-out 
of MTBE, and created a national renewable fuels standard. The 
Administration wants to reaffirm its support of legislation 
such as S. 385 that is consistent with this approach.
    As I think you both know, unhealthy smog levels are a 
significant concern in this country, notwithstanding the 
progress that we have made over the last decade. There are 
still about 50 million people living in counties with air 
quality that does not mean the 1-hour ozone standard. Since the 
RFG program began 8 years ago, it has resulted in combined 
annual reductions of volatile organic compounds known as VOCs 
and NOx of more than 105,000 tons, and at least 24,000 tons of 
reductions in toxics air pollution. As I think you know, VOCs 
and NOx are pollutants which react in the atmosphere to form 
ozone or smog.
    Ambient air monitoring data from the first year of the RFG 
program, which was 1995, indicate that RFG also had a 
significantly positive impact on reducing air toxic emissions. 
One of the major air toxics controlled by the RFG program is 
benzine, a known human carcinogen. The benzine levels at air 
monitors in 1995 in RFG areas showed the most dramatic 
declines, with a median reduction of 38 percent in 
concentrations of benzine from the previous year, which is very 
significant over a 1-year time period.
    The emission reductions that can be attributed to the RFG 
program are roughly equivalent to taking 16 million cars off 
the road altogether, and we estimate that about 75 million 
people are breathing cleaner air because of the RFG program.
    Now, let me just address if I can for a moment the issue of 
MTBE. MTBE is a high-quality blending component of gasoline, 
but significant concern continues about its contamination of 
drinking water in many parts of the country. Most MTBE 
contamination is the result of leaks from fuel storage tanks, 
but some contamination has resulted from fuel spills. We now 
know that MTBE if leaked or spilled can contaminate water 
supplies more readily than other components of gasoline. Public 
concern has been focused on the issues of taste and odor 
associated with MTBE contamination.
    Current data on MTBE in ground and surface waters indicates 
numerous detections of MTBE at low levels. Data from the United 
States Geological Survey indicates a strong relationship 
between MTBE use as a fuel additive in an area and finding 
detections of MTBE in ground and surface water.
    While EPA and States have made significant strides to 
improve the effectiveness of the Leaking Underground Storage 
Tank Program, MTBE contamination groundwater persists. As a 
result of the existing MTBE contamination and the potential for 
future occurrences, 17 States have taken action to ban the use 
of MTBE as a gasoline additive in the future. Over the next 
year, MTBE bans go into effect in the States of California, 
Connecticut and New York.
    At the Federal level, EPA published an advance notice of 
proposed rulemaking in the year 2000 requesting comments on a 
possible phase-down or phase-out of MTBE from gasoline under 
the Toxic Substances Control Act, known as TSCA. TSCA is the 
only administrative mechanism available to EPA for addressing 
the issue of MTBE use, but the TSCA process is cumbersome and 
lengthy at best. We believe that legislation crafted to address 
the future use of MTBE would be a more timely and effective way 
of addressing public concerns.
    Because actions taken by individual States to control or 
ban the use of MTBE as a fuel additive are not uniform or 
coordinated, they can create concerns about the fuel 
distribution network. For example, when the MTBE bans take 
effect in less than 12 months in Connecticut and New York, fuel 
providers will not be permitted to supply MTBE-containing 
gasoline in those two States, yet neighboring States in the 
Northeast will continue to allow MTBE in gasoline. Such a 
patchwork approach of State requirements will likely complicate 
the distribution of gasoline in that part of the country. A 
significant portion of the gasoline supplied to the Northeast 
comes through pipelines from the Gulf region, but variations in 
State laws affecting gasoline could potentially lead to supply 
constraints as refiners and distributors struggle to ship 
complying fuel to individual States.
    The provisions of S. 385 would help to address this 
situation in several ways. The bill would, one, maintain the 
air quality benefits of the Clean Fuels Program, such as RFG; 
two, remove the 2 percent oxygenate requirement under the RFG 
program; three, phase-out the future use of MTBE across the 
Nation, while allowing sufficient lead time for refiners and 
MTBE producers to switch production to other gasoline blend 
stocks; and four, implement a renewable fuel standard that 
encourages positive life cycle renewability through the use of 
domestically produced renewable fuels, through a national 
credit averaging and trading program.
    The Administration supports this carefully balanced package 
of provisions. We and other Federal agencies are committed to 
working with Congress to explore ways to maintain or enhance 
environmental benefits of the Clean Fuels Program, while 
exploring ways to increase the flexibility of the fuels 
distribution infrastructure, improve fungibility, and provide 
added gasoline market liquidity. We stand ready to work with 
this subcommittee as it seeks to enact fuels legislation such 
as S. 385.
    Thank you again for the opportunity to appear before you 
today, and if I am able to before I leave, I would be pleased 
to answer any questions you may have.
    Senator Voinovich. I want to make sure that I--and this is 
a question for all three of the witnesses. It is the issue of 
phasing out MTBE and the impact it will have, as you well know. 
EIA estimates the current MTBE phase-out language could add as 
much as 10 cents to every gallon of gas sold, if the 
environmental impacts of MTBE are serious and need to be 
addressed. What I am suggesting, Mr. Holmstead, is that is 
there some way that you can sit down and work on this and 
report back to me with an Administration proposal on a workable 
MTBE phase-out that will not add a dime of gasoline prices and 
will still protect our environment. This is an issue that we 
have to get resolved that is still hanging out there. It would 
be really great if you folks to get together and come back with 
some ideas on how we could deal with this problem.
    Mr. Holmstead. If I can say, I do not know of that specific 
estimate. I think it would be worthwhile for our folks to work 
with EIA, and we have a very good relationship with them, to 
determine whether we think there would be that sort of a price 
impact. I think, as I said in my testimony, it is important to 
look at this overall package of things that I think you and 
others have carefully crafted, which addresses the timing of 
the MTBE phase-out in relationship to the renewable fuels 
standard and other things. I think all of us are a little 
concerned about anything that would upset that balance. But we 
will respond to your request and work with EIA to get back to 
you on that issue.
    Mr. Voinovich. Thank you.
    Mr. Garman?

    STATEMENT OF HON. DAVID GARMAN, ASSISTANT SECRETARY FOR 
          RENEWABLE ENERGY, U.S. DEPARTMENT OF ENERGY

    Mr. Garman. Thank you, Mr. Chairman. I apologize for our 
late arrival. Our letter of invitation had indicated this 
hearing was to start at 10 o'clock a.m., so we were a little 
late.
    Mr. Voinovich. We could not wait.
    [Laughter.]
    Mr. Garman. Nevertheless, our apologies to you for that.
    Knowing my full testimony is in the record, I will be 
brief. The Administration supports legislation such as S. 385, 
designed to achieve a five billion gallon annual average 
renewable fuel use target by the year 2012. Getting to this 
level of production and beyond will be a challenge. The U.S. 
ethanol industry produced a little over two billion gallons in 
2002, and the extended capacity needed to reach the five 
billion gallon target will depend on grains, primarily corn, at 
least in the near term.
    But there are limits to the amount of ethanol that can be 
produced from grain before encountering secondary effects such 
as impacts on food and feed markets and the sustainability of 
production on marginal agricultural lands. We want renewables 
to play an even greater role in displacing some of the roughly 
136 billion gallons of gasoline and 33 billion gallons of 
highway diesel we use each year, so we have to look beyond 
grain-based alcohol.
    S. 385 explicitly recognizes the need for new technologies 
through provisions that provide extra credits for ethanol 
produced from cellulosic materials and the Department of Energy 
has been focusing on research and development programs to 
develop cellulosic-based ethanol that could be produced from 
many types of agricultural resources, residues, and energy 
crops. There are about 500 million to 600 million tons of 
biomass residue and waste generated each year. Much of this 
could be used for ethanol production if affordable methods of 
collection, transportation, and conversion are developed.
    Success in converting these cellulosic materials into 
ethanol will depend in part on the continued development of 
enzymes that break down the cellulosic materials into shorter 
chains of fermentable sugars. We have demonstrated the ability 
to do this, but it is a greater expense and difficulty than 
starch-based approaches. So our R&D program will continue to 
bring down the costs and the complexity of cellulosic 
conversion.
    Our approach to using the Nation's supply of biomass is not 
limited to liquid fuels such as ethanol and biodiesel. Biomass 
can be converted to a multitude of products for everyday use. 
In fact, there are very few products that are made today from a 
petroleum base that cannot also be produced by biomass. Paints, 
inks, adhesives, plastics, fibers and a variety of value-added 
products and chemicals currently produced from oil can be 
produced from biomass.
    I have a couple of examples here. This is a polymer of 
polylactic acid that was produced from corn in Nebraska. These 
polymers can be used for any kind of plastic application--milk 
bottles, soda bottles--and they have the ancillary benefit of 
products made from this plastic break down in landfills in a 
very, very short time. Here is a fabric that is made completely 
of polylactic acid made from corn.
    So we are thinking beyond ethanol to a full range of power, 
products and liquid fuels produced from biomass and achieving 
economically competitive production. Focusing only on producing 
fuels or only on producing products or only on producing power 
is extremely difficult. But if one pursues an integrated 
approach to the production of liquid fuels and power and 
products simultaneously in an integrated bio-refinery, then 
process synergies can improve the economics of production 
significantly.
    We are even exploring how to make biomass into hydrogen, 
and that linkage to hydrogen is one that I would like to stress 
in particular. As this subcommittee is aware, we have made 
tremendous progress in reducing pollutant emissions from our 
cars and trucks, as well as stationary power sources, but we 
ultimately want a transportation system that is free of foreign 
energy supplies and that is also emissions-free, and we want to 
preserve the freedom of consumers to purchase the kind of cars 
and trucks they want to drive. That is the concept behind the 
FreedomCar Partnership and the Hydrogen Fuel Initiative that 
the President announced during his State of the Union.
    Producing the hydrogen necessary for the President's vision 
is going to require a variety of domestic feed stocks, and 
biomass can play a critical role in this. We believe that the 
Nation's energy sector may be able to produce from the 500 
million to 600 million metric tons of biomass waste we produce 
each year as much as 40 million tons of hydrogen. That is 
enough to power 100 million fuel cell vehicles. In so doing, we 
will not only be producing a clean domestic energy carrier to 
power emission-free cars, we will also be helping to reverse 
the economic fortunes of rural America.
    With that, I would be pleased to answer any questions that 
you may have, either today or in the future. Accompanying me is 
Mary Hutzler who does not have testimony, but is from the 
Energy Information Administration and can answer questions, 
particularly related to price and supply.
    Thank you, Mr. Chairman, and members of the committee.
    Senator Voinovich. Thank you very much.
    Ms. Hutzler, would you like to make any comments at all?
    Ms. Hutzler. No. I am here to answer any questions and to 
help Mr. Garman in terms of our price impacts and our supply 
forecasts.
    Mr. Carper. I don't know if you noticed, Mr. Chairman, her 
lips moving when he spoke. I don't know if that always happens.
    Just kidding.
    [Laughter.]
    Mr. Voinovich. Mr. Jeffords, do you want to make any 
comments before we ask the witnesses questions, understanding 
that Mr. Holmstead has got an obligation?
    Mr. Jeffords. Certainly, I will be very quick. I think it 
is about 15 seconds that will suffice.
    We all know, we are all thinking about the war today, and 
certainly we all hope this is completed quickly and without 
loss of life.
    I understand the need to carry on the business of the 
Nation. That is why we are here today. I think renewable fuels 
and renewable energy is an important part of our Nation's 
national security. We increase our national security by 
increasing the use of renewable fuels. That is all I have to 
say. I will have some questions later.
    Mr. Voinovich. Mr. Holmstead, you have looked at S. 385. If 
you repeal the oxygenate requirement, are the backsliding 
provisions adequate to protect air quality?
    Mr. Holmstead. Yes, we believe that they definitely are. 
There is an antibacksliding on the air toxic side and the other 
benefits of the RFG program would be preserved under the 
legislation as it is now crafted.
    Mr. Voinovich. How do you go about doing that--the 
backsliding? What are the things that we are going to do to 
make sure that that does not happen?
    Mr. Holmstead. Most of the air toxics that come from 
tailpipes of cars have to do with the constituents in the fuel, 
particularly the aromatics, the benzine, the toluene. The 
legislation would explicitly cap those at today's level so they 
could not be any worse on the air toxic side.
    On the other tailpipe emissions that we look at--things 
like hydrocarbons, NOx, CO--there would be specific performance 
standards that we now know can be met in another way, other 
than the oxygenate standard. So we are fully confident that the 
air quality benefits that we currently get from the RFG program 
will clearly be maintained under this legislation.
    Mr. Voinovich. So what you are saying is that if you 
eliminate the oxygenate requirement, that it can be compensated 
with using reformulated gas?
    Mr. Holmstead. Yes, that is basically correct. In 
reformulated gas right now under the current Clean Air Act, 
socalled RFG has to contain at least 2 percent by weight of an 
oxygenate. That requirement would effectively be replaced by 
this national renewable fuels standard. In addition to that, 
there would be explicit performance standards for the fuel. So 
that combination would . . .
    Mr. Voinovich. When you have done your calculation, have 
you taken into consideration the new ambient air standards that 
are going to be going in for ozone and particulate matter?
    Mr. Holmstead. That is something we certainly look at. One 
of the benefits, we think, of this legislation is that it would 
make RFG more attractive to more parts of the country. As you 
probably know, the way the law works today areas can opt in. 
They can choose to participate in the RFG program. It appears 
that a number of areas have chosen not to do that because of 
concerns about MTBE and groundwater. So if anything, this will 
make the RFG program more attractive and help areas come into 
attainment with the new national ambient air quality standards.
    Mr. Voinovich. One of the questions that I have is that I 
recall when I was Governor, that we had to make a decision on 
whether we were going to use RFG in the Cincinnati area and 
some other areas. We went to emissions testing as the 
alternative. One of the things that I think that you ought to 
consider is just, they have done some research work on 
emissions testing to see how valid it is. Of course, some are 
arguing that with the newer automobiles that it is not needed 
and there is some controversy there.
    But there are some States that are thinking about moving 
away from emissions testing, frankly not understanding that 
they are going to be having to achieve higher standards in the 
next two or 3 years.
    Mr. Holmstead. Yes, we will be designating new areas in 
April of 2004, so it is about a year from now.
    Mr. Voinovich. I think that that is something that EPA 
ought to be getting out across the country, informing Governors 
and their environmental protection agencies that these things 
are coming down--and also I would say to write to the leaders 
of the legislative bodies. Too often in this country, you write 
to the Governor and sometimes he does not communicate that 
information to his legislative body. So I think you ought to 
roll them into it.
    The other question I have got is, if we are going to go to 
more reformulated gasoline, one of the problems that we had a 
couple of years ago in terms of gas supply was the fact that 
there were so many varieties of RFG that were out there that we 
had a lack of supply and so on. It all came together and we had 
a real crisis in terms of price at that time. Is anybody 
anticipating this in terms of more use of that, and do we have 
the capacity to take care of it? We have not built a new 
refinery in 25 years. Are we ready for this?
    Mr. Holmstead. That has been a significant issue, as you 
well know. In fact, at the request of President Bush, we did a 
big report about a year ago on the socalled boutique fuels 
issue. One of the reasons why we are very supportive of this 
legislation is because we think that this would help address 
that issue. As I mentioned a little bit in my opening 
statement, there are a number of reasons why these different 
types of fuels have proliferated throughout the country, but 
one of them is because of concern about MTBE contamination of 
groundwater; people concerned about the oxygenate requirement. 
By replacing that with this renewable fuels standard, the RFS, 
we think it will significantly reduce the concerns about 
proliferation of boutique fuels.
    So we understand that the markets are fairly tight and we 
will certainly work with Dave and Mary to make sure that we 
think through all those issues. But we are confident that the 
compromise that you all have crafted will significantly reduce 
the pressure toward boutique fuels.
    Mr. Voinovich. Thank you.
    Senator Carper?
    Senator Carper. Thank you, Mr. Chairman.
    I have a question before you hit the road, Mr. Holmstead. 
It is a pretty quick one. Has EPA . . .
    Mr. Holmstead. Depending on the question, I may need to 
leave a little early.
    [Laughter.]
    Senator Carper. You will want to stay for this one.
    Has the EPA or any other authoritative body done a 
comprehensive analysis, to your knowledge, on the environmental 
impacts of a national ethanol mandate to use ethanol? Are you 
aware of any?
    Mr. Holmstead. Yes, we actually have looked at that issue. 
As you know, the mandate would not be specifically on ethanol, 
it would be on renewables. We anticipate ethanol would satisfy 
the largest part of that. As is always the case, there are some 
tradeoffs. We know that we would get significant reductions in 
CO emissions. There would be significant reductions in air 
toxics emissions. The one concern has been that in certain 
areas of the country, it could potentially raise the volatility 
of the fuel, known as the revapor pressure. We believe, though, 
that the performance requirements in the gasoline will address 
that. So we think that on the whole this will be at least as 
good as, if not better than the current program. But that is 
something that we have looked at pretty carefully. We would be 
happy to provide you with more information, if you would like, 
on that.
    Senator Carper. I would like that very much.
    Let me just ask, are the maybe unintended or unforeseen 
consequences of national mandates part of the impetus for 
legislation such as S. 385?
    Mr. Holmstead. I think that is fair to say. We have seen 
consequences that nobody expected back in 1990 with the 
Renewable Fuels Program, and in particular the oxygenate 
mandate. One of the appeals of this program is that it allows 
much more flexibility for the ethanol or the other renewable 
fuels to be used wherever it can be done the most efficiently. 
So with the averaging and the banking provisions, we would 
anticipate there would be greater use of ethanols nearer the 
sources of ethanol. We just do not have that sort of 
flexibility under the current program, where every gallon of 
gasoline has to have 2 percent oxygenate in it.
    So even though this is a fairly large amount, we think with 
the banking and trading provisions that you all have designed 
into the bill that it would really address many of those 
issues. But you are correct to say that there have been some 
unanticipated consequences.
    Senator Carper. Can I reserve my time? Senator Jeffords, 
Mr. Holmstead has to leave us to be at another hearing. Do you 
want to ask him a question?
    Senator Jeffords. I have no questions.
    Senator Carper. I don't know if this is the time that we 
want to excuse Mr. Holmstead. What do you think?
    Senator Voinovich. It is fine with me.
    Mr. Holmstead. Thank you very much. I am going to go see if 
I can get some money from the Appropriations Committee. I 
appreciate your----
    Senator Carper. Get some for me while you are at it.
    [Laughter.]
    Senator Carper. Mr. Chairman, if I could, I have just 
another question or two for Mr. Garman and Ms. Hutzler as well. 
Let me just ask, has the EPA or the Department of Energy 
connected any kind of analysis of NOx emissions that would 
result if we established a requirement for biodiesel? Maybe a 
five or ten or 20 percent blend to be used nationwide?
    Mr. Garman. We have done some preliminary analysis that 
shows that a 20 percent blend of biodiesel known as B-20 does 
slightly increase NOx emissions, even though particulate 
matter, carbon monoxide and air toxics were all driven down. 
But I think it is also fair to say that the testing we did was 
run on older engines, and not the modern diesel engines with 
improved emissions controls. So we think it is doubtful that 
the use of biodiesel in percentages of up to 20 percent would 
have a measurable impact on air quality. At the request of some 
of the Members in the other body, I want to launch a new round 
of testing on that question, using the most modern diesel 
engines that we have available.
    Senator Carper. In the testing was done using Del DOT 
vehicles, Delaware Department of Transportation vehicles in our 
State, with the B-20 fuel, 20 percent soybean oil with the 
diesel, we have had good results on emissions, with everything 
except NOx. We have seen a little uptick in the NOx. I have 
actually talked to the folks at DuPont, some of their top 
scientists, about whether or not they can--you know, they 
reengineer soybean and corn all the time. I have asked them if 
they could think about reengineering a different kind of 
soybean that would address NOx. If I had suggested that to 
somebody five or 10 years ago, they would probably have thought 
I was nuts. They may still think that, but at least no one 
laughed out loud.
    One more question for Mr. Garman and maybe Ms. Hutzler, and 
that is I think the President and maybe Secretary Abraham have 
described their plans to move us toward a hydrogen economy. I 
know the President did in his State of the Union. I have talked 
a little bit with your secretary about that as well. You talked 
a little bit about this in your earlier statements, but just 
give us a little bit more on how you might explain establishing 
a renewable fuel standard for ethanol or biodiesel and how does 
that fit into a hydrogen strategy? Does it help or does it hurt 
our progress?
    Mr. Garman. It helps because some of the same work that we 
would do, particularly the work on enzymes to break down 
cellulosic material to make products such as these or ethanol, 
is precisely the same technology we would use to make synthesis 
gas from biomass, which is what we would derive hydrogen from. 
So nothing in this bill precludes or hurts or inhibits our 
movement toward that hydrogen future in any way.
    Plus, the timeframe for that shift is admittedly down the 
road a ways. We envision for automakers and hydrogen fuel 
suppliers to even be in a position to make a commercialization 
decision by 2015, and we do not envision seeing mass market 
penetration of these vehicles prior to 2020.
    Senator Carper. Mr. Hutzler, do you want to correct 
anything he said?
    [Laughter.]
    Ms. Hutzler. No.
    Senator Carper. Did he do OK? All right.
    Mr. Chairman, thanks. I am going to slip out now, but we 
appreciate very much your attendance and your comments.
    Senator Voinovich. Senator Jeffords?
    Senator Jeffords. I appreciate the witnesses being here 
today to give us testimony on renewable fuels. Mr. Garman, I 
know that you also have considerable expertise in the use of 
renewable energy resources such as wind, biomass and solar 
power for the production of electricity. As you know, Mr. 
Garman, last session as a part of its comprehensive energy 
bill, passed a renewable portfolio standard provision that 
would have required that utilities ensure that by the year 
2020, 10 percent of all electricity sold for retail consumption 
be reduced from renewable sources. This 10 percent standard was 
actually fairly modest, in my mind. The Department of Energy's 
own Energy Information Administration has found that even a 
more ambitious requirement of 20 percent of renewable energy 
production by the year 2020 will minimally impact consumer 
electricity costs.
    The President's national energy policy states, quote, 
``renewable energy can help provide for our future needs by 
harnessing abundant, naturally occurring sources of energy such 
as the sun and the wind, geothermal heat and biomass. Renewable 
and alternative energy supplies not only help diversify our 
energy portfolio, they do so with few adverse environmental 
consequences. Continued growth of renewable energy will 
continue to be important to deliver larger supplies of clean 
domestic power for America's growing industry.''
    Given the tremendous benefits of renewable energy, 
including the benefits of diversifying our energy resources in 
these times of terrorist threats, can you give me your 
assurance that the Administration will lend its support to this 
Congress for a strong renewable portfolio standard?
    Mr. Garman. I am sorry, Senator, the Administration does 
not support a specified national renewable portfolio standard 
at this time. We do, however, note that individual States have 
been adopting renewable portfolio standards. Texas adopted one 
when President Bush was Governor of that State.
    The reason that this approach is appealing to us is that 
there are differences in the amount of renewable resources 
available in different regions of the country. I have actually 
had some advocates of certain renewables, geothermal in 
particular, say a national renewable energy portfolio standard 
might actually hurt them because if they are in a State such as 
Nevada or California with a tremendous geothermal resource, 
they might be able to exceed a national standard that might be 
put in place.
    So there is a lot of thinking that suggests that letting 
the States match their own renewable portfolio requirement to 
the resources that they have in those States might be a good 
approach to take because it would diminish the regional 
inequities that might arise with a national renewable portfolio 
standard.
    Having said that, we will obviously work with the Congress 
as it attempts to move toward a comprehensive energy bill and 
be open minded on whatever arises from that process.
    Senator Jeffords. I would hope so because I look at the 
future and we could do so much if we put more emphasis on those 
utilizations, and that we should do that. Just not having real 
emphasis on it disturbs me.
    To date, 13 States have implemented various types of State 
renewable portfolio standards. This includes Texas, where we 
just talked about. Texas is now one of the largest renewable 
energy sources in the United States. These State programs have 
demonstrated the effectiveness of renewable portfolio standards 
and estimates are that the States' RPS laws will provide for 
over 12,000 megawatts of new and renewable power by 2012, an 
increase of 90 percent over the total of the recent time we 
measured.
    However, State standards alone cannot address the reality 
of regional electricity generation. Electrons do not stop at 
the borders, nor can the State standards alone have the impact 
on national economics or produce the wide scale of 
environmental effects. Wouldn't you agree that the Federal RPS 
would provide benefits that individual State RPS's alone cannot 
deliver?
    Mr. Garman. Again, it would provide some economy of scale, 
but it also could provide some regional inequities, 
particularly in those areas of the country that might not have 
a renewable energy resource. It also provides a perplexing 
situation that arises in the context of transmission. For 
example, there is a tremendous amount of wind resource in the 
Dakotas that is virtually untapped. There are tens of thousands 
of megawatts of potential there, but less than 100 or so that 
has actually been tapped in North Dakota.
    The reason is because of transmission constraints. Wind is 
a great example of where the resource, the wind, tends to blow 
in areas that are pretty distant from population and load 
centers, which is why in our R&D approach we are trying to, in 
essence, provide the kind of wind turban technology that can be 
economically successful in areas with much lower wind speeds--
that would enable us to move the renewable wind generation 
closer to population and load centers and diminish the 
difficulties we have with transmission.
    So we think a multifaceted approach that embodies advancing 
the technology has been tremendously successful. Wind 
generation today in the highest wind-speed areas is around four 
to six cents a kilowatt hour at the point of generation. That 
is down from 20 cents a kilowatt hour a decade ago. So we are 
making great progress in bringing down those costs to make them 
competitive.
    Senator Jeffords. Thank you. That is an area of great 
interest to me, as you know. Thank you.
    Senator Voinovich. Senator Thomas, would you like to make a 
statement before you ask questions?
    Senator Thomas. Thank you, Mr. Chairman. I am sorry I was 
tied up in another meeting before. At any rate, welcome. I am 
very interested in what you are doing here, Mr. Chairman, in 
terms of this hearing.
    Interestingly enough, however, I have just come from a 
budget discussion and also from an energy discussion. So I 
guess we have a real challenge to talk about the things that 
the Senator from Vermont feels so strongly about, and at the 
same time talk about the fact that we have unprecedented prices 
now for gas--very high; where we have not had any increases in 
refinery capacity for a number of years. We need to talk about 
both of these things. We need to talk about where we are going 
in the future, certainly. At the same time, many of the things 
we are talking about here are not going to happen right away, 
and we have some other things that need to be done.
    So what we are doing here, what impact it has on refineries 
and remodeling and increasing capacity I think has to be an 
issue that we talk about. I just came from the Budget Committee 
where they are talking about not having enough money in the 
highway fund, partly because these new fuels and even ethanol 
does not pay into the highway fund the same as it might.
    So I think what we have to do as we look forward to these 
things is to get some balance to deal with today's needs, as 
well as the projections for the future.
    So I know, Mr. Chairman, that you do that in reality. I 
just wanted to make that point and urge you to continue with 
what you are doing. I think it is good. We also have to deal 
with today's problems and the ones in the short term, and some 
of them are in conflict, quite frankly.
    Thank you.
    Senator Voinovich. Thank you.
    One of the questions that I have, and it is a tactical 
issue and if you were willing to comment on it, I would 
appreciate it. We worked very hard to get a compromise on this 
piece of legislation. It was almost miraculous, and 
particularly difficult for me because I have a lot of oil 
people and I have a lot of corn people. Somehow the oil and the 
corn got together and worked something out, and you folks were 
helpful in advising and so on.
    We are going to have an energy bill on the floor. I am not 
sure when. What is the urgency in terms of getting this passed? 
I know there are a lot of States now that they have got the 
right that the States themselves can eliminate MTBE. Is that 
correct?
    Mr. Garman. Yes, and several States have done so.
    Senator Voinovich. I do not know how many more are going to 
be doing it, but from a tactical point of view if we have got 
unanimity, and I know there is a little tweaking here. The 
Chairman of this committee has got some problems, but if we 
could work those out, how would you feel about us moving this 
out as quickly as we can and get it done?
    Mr. Garman. There is value in getting a national approach 
on the MTBE phase-out. I know that this was a carefully worked 
out package, and commend you for your ability to put such a 
compromise together--a very difficult compromise. We support 
the package, even though there may be elements that may give us 
pause from time to time, that is the nature of compromise.
    We hope that this will be an element in a comprehensive 
energy bill that, if you will, helps keep the pressure to pass 
a comprehensive energy bill sooner in total, rather than later. 
And it would be our hope that it can be a part of that 
comprehensive approach, but I would not want to give advice to 
you all on the tactics. At the end of the day, we would like to 
see this package passed, and we will have to see how progress 
on the energy bill--we hope progress on the energy bill happens 
very quickly, too, and that the whole package can move ahead 
together.
    Senator Voinovich. I think the interesting thing about it 
is in this particular area that there was a good bipartisan 
support of it. So much of what we are doing around here is not 
that way. Your opinion is that you would like to see it be part 
of the overall package.
    Mr. Garman. That is my understanding of our position. We 
would prefer to see the package move together in a 
comprehensive bill. If elements of a comprehensive bill start 
to get split apart, then of course the enthusiasm for the bill 
as a whole tends to wane.
    Senator Voinovich. I would like a statement from you folks 
on why is it important that we move forward with this, and how 
urgent is it that we move forward with it. There are a lot of 
people that are looking at doing things out there right now, 
but they are not sure what they should be doing because we have 
not passed this legislation, and they are I am sure watching. 
It is going to happen or isn't it? So I would really like your 
opinion on that.
    Mr. Garman. Yes, sir. We have unequivocal support for this 
legislation and the President's strong support that we move 
ahead with comprehensive energy legislation at the earliest 
possible date. I will elaborate on that in writing for the 
committee with the proper people making the elaboration, above 
my pay grade.
    Senator Voinovich. One last question: I like to refer to 
Akron, Ohio as the polymer capital of the world. Could you tell 
me if the University of Akron, or any of our companies in the 
Akron area, are in touch with you on this work you are doing 
with using corn for polymers--the product that you just showed 
us?
    Mr. Garman. Specifically, we have just this week put out a 
solicitation. In other words, we put some money on the table 
inviting private sector entities and consortiums of private 
sectors and universities and others to work with us on this 
bio-refinery concept, including polymerization of biomass feed 
stocks. If your staff can alert us to some of the individuals 
in Akron who are active in this area, we will endeavor to make 
sure they are aware of this particular opportunity that they 
should now work with us on this solicitation.
    [Information submitted for the record follows:]
                   executive office of the president
                    office of management and budget
 Statement of Administration Policy on S. 14--Energy Policy Act of 2003
    The Administration commends the Senate for taking a step toward 
comprehensive and balanced national energy legislation by including in 
S. 14 many provisions that are largely consistent with the 
Administration's National Energy Policy. The bill would improve the 
Nation's energy security by diversifying our energy sources and 
reducing energy consumption through greater conservation, while 
expanding new technology to reduce pollution and increase energy 
efficiency.
    The Administration strongly supports modernizing the Nation's 
antiquated electricity laws and increasing the amount, efficiency, and 
reliability of our electricity supply. We commend the Senate for long 
overdue provisions in its bill to accomplish these goals. In 
particular, the Administration strongly supports provisions to provide 
open access for all generators to the transmission grid, repeal the 
Public Utility Holding Company Act which will increase investment in 
the energy sector, enhance consumer protection, and increase 
penalties', for violations of law. We urge the Senate to include the 
Tennessee Valley Authority consensus language to help the regional 
wholesale market develop in the Southeast. The Administration would 
oppose amendments to set a national renewable portfolio standard (RPS) 
on power generation and believes these standards are best left to the 
States. A national RPS could raise consumer costs, especially in areas 
where these resources are less abundant and harder to cultivate or 
distribute. We urge the Senate to support the President's proposal to 
extend and expand the renewable energy production tax credit as a more 
efficient means to expand renewable energy.
    A diverse portfolio of energy sources is vital for energy security, 
and the Administration believes nuclear power is an essential component 
of that portfolio. The Administration supports provisions in S. 14 that 
reauthorize the Price Anderson Act nuclear liability insurance.
    The Administration is pleased that S. 14 authorizes funding for two 
of the President's recent major energy initiatives. The bill authorizes 
funding for the Hydrogen Fuel Initiative and the Administration looks 
forward to working with the Congress to refine these provisions 
further, including clarifying the appropriate roles and authorities for 
various Federal and State agencies. S. 14 also authorizes the Secretary 
of Energy to enter into ``negotiations aimed at building an 
international fusion test facility known as ITER, which is an essential 
step toward developing a commercially viable fusion energy source. In 
addition to these recent Presidential initiatives, we strongly support 
research and development on clean coal technologies consistent with the 
President's Budget proposal to provide $2 billion toward this effort. 
We commend the Senate'', for including incentives to spur the 
production of alternative and renewable sources of energy and 
authorities that will help accelerate advances in these and related 
energy fields.
    We urge the Senate to support further expansion and diversification 
of the Nation's energy supplies to enhance our economic security. In 
particular, the Administration urges the Senate to adopt a provision, 
like the one included in H.R 6, to open a small portion of the Arctic 
National Wildlife Refuge (ANWR) to environmentally responsible oil and 
gas exploration and development. Opening ANWR is not only key to making 
energy legislation truly comprehensive by increasing domestic 
production, but also to creating tens of thousands of new jobs for 
American workers. In addition, the Administration strongly supports an 
amendment to adopt, a renewable fuels standard to increase the use of 
clean, domestically produced renewable fuels like ethanol, which would 
reduce dependence on imported oil, protect the environment, and benefit 
the farm economy.
    The Administration supports provisions that are consistent with the 
National Energy Policy and the Department of the Interior's proposed 
regulations to increase production of traditional energy resources on 
the Outer Continental Shelf ((CS), Federal onshore lands, and Indian 
lands. However, we are concerned that the annual trust asset evaluation 
of the activities of Indian tribes required by section 2604 will hinder 
the development of resources on Indian lands and is inconsistent with 
the principles of Indian self-determination and self-governance. In 
addition, the Administration would object to any coastal impact 
payments such as those authorized by the bill. Under current law, more 
than $1 billion annually from OCS mineral leasing receipts is already 
shared with coastal and noncoastal States.
    The Administration supports the construction of a commercially 
viable Alaska natural gas pipeline and believes market forces should 
select the route and timing of the project. The Alaska natural gas will 
provide a significant new domestic energy supply to America for years 
to come, and will be a key component of our long-term energy security. 
However, the Administration opposes the price-floor tax subsidy 
provision in the Senate Finance Committee bill, because it would 
distort markets and could be very costly.
    The Administration is not convinced of the need for additional 
legislation that would attempt to limit or direct U.S. global climate 
change, and will oppose any climate change amendments that are 
inconsistent with the President's climate change strategy. In February 
2002, the President committed the United States to an ambitious 
national goal to reduce the greenhouse gas intensity of the American 
economy by 18 percent over the next 10 years. The President directed a 
broad range of domestic and international actions, including new 
initiatives for scientific research, advanced energy and sequestration 
technologies, and voluntary reporting of greenhouse gas emissions. The 
President's climate change strategy provides for a continuing cabinet-
level policy process to oversee and direct this comprehensive program. 
Other provisions in S. 14 that make good energy policy sense--such as 
expanded use of renewable and nuclear energy, improved energy 
'efficiency, and accelerated development of a hydrogen fuel cell 
transportation infrastructure--w11 themselves reduce the projected 
growth in greenhouse gas emissions, and we urge the Senate to allow 
these and the President's strategy to go forward unimpeded.
    States and New York v. United States. The legislation must be 
revised to specify that the participation of States in the programs at 
issue is strictly on a voluntary basis.
Pay-As-You-Go-Scoring
    The Budget Enforcement Act's Pay-As-You-Go requirements and 
discretionary spending caps expired on September 30, 2002. The 
Administration supports the extension of these budget enforcement 
mechanisms in a manner that ensures fiscal discipline and is consistent 
with the President's Budget. OMB scoring of the bill is under 
development.
    Mr. Garman. The staff of the Office of Energy Efficiency 
and Renewable Energy (EERE) contacted the Committee on 
Environment and Public Works staff to determine the appropriate 
contacts in the State of Ohio. Upon receipt of the information, 
EERE staff telephoned the Senator's constituent on April 2, 
2003, to inform him of the Biomass program solicitation.
    Senator Voinovich. One of the things that--I do not know 
how it all works out--but this astronomic increase in natural 
gas today is just impacting negatively on everyone in this 
country, and it is really hurting our plastic industry. We have 
just got to start looking around for some other things. So I 
thank you very much.
    Mr. Garman. Thank you, Mr. Chairman.
    Senator Voinovich. Senator Thomas, do you have any 
questions? OK. Thank you very much for your testimony today.
    We will call our next panel. The panel is made up of Fred 
Yoder, President of the National Corn Growers Association. 
Fred, we are real happy to hear from you today. Mr. Yoder and I 
have known each other for a long time and we are proud of the 
fact that somebody from Ohio is chairman of the organization. 
Dr. Edward Murphy, Downstream General Manager of API--Mr. 
Murphy we are glad to have you here today. Mr. Robert 
Slaughter, President of the National Petrochemical and Refiners 
Association--nice to see you again. Mr. Scott Segal, partner in 
Bracewell and Patterson, L.L.P.--Mr. Segal, you are back again. 
And Mr. Rich Wagman on behalf of the American Road and 
Transportation Builders Association, Vice Chairman of ARTBA, 
and President of G.A. and F.C. Wagman from York, Pennsylvania. 
We are very happy to have you here today.
    And Mr. Blakeman Early, consultant from the American Lung 
Association--Mr. Early, we are very happy to have you here 
today. And Mr. Paul J. Granger, Superintendent, Plainview Water 
District, Plainview, New York. We will find out how it really 
is in the street. We are very pleased that you are here today. 
And Mr. Craig Perkins, Director, Environmental and Public Works 
Management of Santa Monica, California. Again, we are very 
interested in the California perspective on this whole issue.
    I want you all to know that we will put your full testimony 
into the record. Because we have so many witnesses here today, 
we would like you to adhere to the 5-minute rule if you can, 
and again thank you for being here.
    Mr. Yoder, we will start with you.

   STATEMENT OF FRED YODER, PRESIDENT, NATIONAL CORN GROWERS 
                          ASSOCIATION

    Mr. Yoder. Thank you, Mr. Chairman.
    Thank you for giving me the opportunity to testify before 
this subcommittee to talk about a key issue in our world today, 
and that is energy independence.
    My name is Fred Yoder and I am President of the National 
Corn Growers Association. I have to say that I live and farm in 
the great State of Ohio. Our mission is to increase 
opportunities for corn growers in the changing world and to 
enhance corn's profitability and usage across this country. 
NCGA represents more than 32,000 members and have made passage 
of the renewable fuels standard the organization's No. 1 
legislative item for 2003.
    RFS can help us fix some of those long-term obstacles 
facing agriculture, while at the same time playing a critical 
role in our Nation's comprehensive energy policy. We believe 
ethanol provides energy security for the United States, and we 
believe the necessary resources are here to make a significant 
contribution to our domestic fuel supply.
    An RFS will more than triple the size of the ethanol market 
within the next 10 years. On February 13, we took one step 
closer to making that priority a reality when you joined 
Senators Tom Daschle and Dick Lugar to introduce the Fuel 
Security Act of 2003. We are encouraged by this legislation, 
which bans MTBE nationwide, strengthens air quality 
regulations, provides refiner flexibility, establishes an RFS, 
and ensure marketplace certainty to our Nation's farmers.
    Under the leadership of Representative Collin Peterson and 
Tom Osborne, the House of Representatives has introduced 
companion legislation. Specifically, some of these key 
provisions include an RFS which, in part of our Nation's fuel 
supply, growing to five billion gallons by 2012, as provided by 
renewable, domestic fuels such as ethanol and biodiesel. It 
also includes eliminating the Federal reformulated oxygen 
requirement and it phases out the use of MTBE.
    Time and time again, we see boosts to local economies when 
renewable fuels are in the picture. Local labor is hired. Local 
supply industries are tapped. And crops from local producers 
are consumed and made into ethanol. Mr. Chairman, one of the 
most positive developments in the ethanol industry is the huge 
investment by farmers in ethanol plants. Nine of the last ten 
plants constructed last year were farmer-owned coops or LLCs. 
Of the 11 plants coming under construction and implementation 
this year, 10 of the last 11 are going to be owned by farmers.
    The ethanol industry is no longer dominated by one company. 
Instead, it is dominated by thousands of individual farmer 
investors seeking a way to add value to their corn. At the same 
time, these farmers have committed themselves to being a part 
of our Nation's energy security.
    Mr. Chairman, I am also very disappointed that Mr. Garman 
is concerned that the current ethanol industry cannot meet the 
requirements of the RFS. Current capacity is in excess of 2.7 
billion gallons per year, and by the end of this year U.S. 
ethanol production will be up to three billion gallons per 
year. This industry is exceeding 30 percent annual production 
increases.
    Mr. Chairman, as we approach this year's debate on the TEA-
21 reauthorization, there is no one issue of greater interest 
to the NCGA. That issue is the preservation of the tax 
incentive for those marketers who blend ethanol with gasoline. 
Refiners and gasoline marketers who use 10 percent ethanol 
blends receive a 5.2 cents per gallon reduction from the tax 
paid on straight gasoline. This tax incentive has made a 
tremendous contribution to the use of renewable fuels in this 
country. Our members strongly support full funding of the HTF, 
and the NCGA is working with Members of Congress to retain this 
important tax incentive, while also making sure that the HTF is 
whole.
    As I stated earlier, passage of the RFS is the No. 1 
legislative priority for the National Corn Growers for 2003. 
Together, we can continue to grow a healthier U.S. economy and 
work toward greater energy security and a cleaner environment.
    Chairman Voinovich and the rest of the committee, I thank 
you for this opportunity to comment today and we look forward 
to working with you in advancing the ethanol-friendly 
legislation during this 108th Congress.
    Thank you.
    Senator Voinovich. Thank you.
    Dr. Murphy?

    STATEMENT OF EDWARD MURPHY, DOWNSTREAM GENERAL MANAGER, 
                  AMERICAN PETROLEUM INSTITUTE

    Mr. Murphy. Thank you, Mr. Chairman. My name is Edward 
Murphy. I am the Downstream General Manager for the American 
Petroleum Institute, the trade association representing more 
than 400 companies from all sectors of the oil and natural gas 
industry.
    First of all, I would like to particularly extend my thanks 
to you, Senator Voinovich, for your efforts to put together 
this historic piece of legislation, and to work with us in 
passing it through the Senate.
    We appreciate the opportunity to address the fuel supply 
problems facing U.S. fuel proprietors and consumers. Time is of 
the essence because individual State MTBE bans will start to 
take effect very soon, with Connecticut starting in October and 
New York's and California's beginning in January of next year. 
Differing start dates and gasoline requirements from various 
States, combined with a Federal oxygenated content requirement 
for reformulated gasoline will complicate an already tight fuel 
supply system, increasing the potential for disruptions in the 
supply and distribution system.
    As Congress considers a comprehensive national energy bill, 
we urge you to address problems with fuel supplies that have 
plagued the petroleum industry and energy consumers over the 
last 8 years. Those problems were underscored in recent days by 
the decision of the New York Mercantile Exchange to suspend 
gasoline futures trading beginning in 2004 due to uncoordinated 
State MTBE bans. The New York Merc decision should be seen as a 
shot across the bow regarding the worsening fuel problems that 
we will face is Congress fails to act.
    Likewise, the U.S. Energy Information Administration has 
recently concluded, and I quote, ``that the increases in RFG 
prices in California, New York and Connecticut would be 
significantly higher than the national average of 3.6 cents as 
the result of State MTBE bans, and that there was a possibility 
of supply imbalance and price spikes during the State-level 
MTBE phase-out.''
    We believe Congress should repeal the oxygen requirement 
for RFG that is in the Clean Air Act, and require a national 
phase-down of MTBE. As part of the package that meets these 
objectives, we also support the renewable fuels standard that 
phases out the five billion gallons over several years 
nationally, with an averaging and credit trading program to 
allow the use of renewable fuels where most feasible and cost-
effective.
    In addition, we support provisions that would protect and 
enhance the environmental benefits already achieved from RFG.
    Finally, we support limited liability protection that 
recognizes that when Congress mandates the use of fuels 
components, it is reasonable to disallow defective product 
claims for introducing that product into commerce. This very 
limited liability relief would not affect liabilities for 
cleanup costs and a legal regime for cleanup of hazardous 
spills would be left in full force.
    These steps are a much better solution than the 
alternative, which is continued State MTBE bans and further 
aggravation of the already troublesome situation of patchwork 
fuels requirements across the country. A solution that relies 
on State MTBE bans to fix the problem is not efficient and will 
exacerbate the supply problems that are likely to arise out of 
uncoordinated and disjointed State requirements.
    Unique State fuel requirements isolate affected markets and 
in the event of a supply disruption, could cause shortages and 
price volatility as experienced in two of the last 4 years in 
Chicago and Milwaukee. Sixteen States have already enacted MTBE 
bans or caps and additional States are considering bans.
    The carefully crafted provisions I have discussed as part 
of a package that meets our objectives are supported by an 
historic coalition including API, numerous farm and ethanol 
interests, Northeast State air quality officials, environmental 
interests, and they were passed by the Senate last year as part 
of the comprehensive energy bill. They offer carefully 
considered solutions to the fuels problems that have challenged 
fuels providers and burdened American consumers. They protect 
important environmental benefits achieved by reformulated 
gasoline. We strongly urge Congress to adopt similar 
legislation.
    Mr. Chairman, the member companies of API are interested in 
providing clean, environmentally acceptable gasoline to their 
consumers, which the consumers have a right to deserve. We are 
asking the Congress to give us the ability to do that.
    Thank you very much.
    Senator Voinovich. Thank you, Dr. Murphy.
    Mr. Slaughter?

      STATEMENT OF ROBERT SLAUGHTER, PRESIDENT, NATIONAL 
             PETROCHEMICAL AND REFINERS ASSOCIATION

    Mr. Slaughter. Good morning, Mr. Chairman. The National 
Petrochemical and Refiners Association thanks you for the 
opportunity to offer our recommendations today on an updated 
energy policy.
    We are a national trade association with more than 450 
members who own and operate most U.S. refineries and 
petrochemical manufacturing facilities. NPRA favors a supply 
oriented national energy policy which has twin goals to 
increase energy supply and energy security. We believe that 
energy policy should also recognize, and we thank Senator 
Thomas for mentioning, the great importance of a healthy and 
diverse domestic refining industry that produces most products 
consumed here in the United States.
    In that regard, Mr. Chairman, I really want to recognize 
your commitment to achieve reform of the New Source Review 
Program, which must occur to maintain a healthy and diverse 
heavy manufacturing industry like refining and petrochemical 
manufacture in the United States. We are much closer to real 
NSR reform today because of your efforts over the last several 
years, and we thank you for it.
    We also appreciate your holding this first-ever Senate 
hearing regarding highly important and controversial fuels 
language added to the Senate energy bill last year without 
benefit of consideration by the committee of jurisdiction. 
Although we may disagree on some policy issues involved, NPRA 
appreciates the return to regular order on such important 
matters as these.
    Our specific recommendations--we support prompt elimination 
of the 2 percent RFG oxygenation requirement. This will give 
refiners greater flexibility to manufacture and distribute this 
important environmental product in the most efficient and cost 
effective manner, and also allow refiners to respond to State 
and local concerns about MTBE use without subjecting those 
areas to mandatory use of ethanol, which is inappropriate 
during the summer ozone season.
    I must also admit that we are not part of the group that is 
supporting the Senate compromise of last year, and feel that it 
is important on behalf of our association to register our 
concerns about some of it, including the ethanol mandate. I can 
only offer in mitigation that I was born and raised in 
Coshocton, Ohio and hope that you will keep that in mind.
    [Laughter.]
    Mr. Slaughter. We do oppose the national ethanol mandate in 
gasoline because fuel mandates, in our opinion, are 
inefficient, and given experience they are also inflexible and 
costly policy mechanisms. Many NPRA members already use large 
quantities of ethanol in their gasoline. They, along with other 
industry experts and analysts, expect future ethanol usage to 
increase substantially because of the shortage of available 
gasoline blend stocks. Thus, there is no need to impose a 
national ethanol mandate on gasoline consumers nationwide to 
expand the ethanol market.
    One size does not really fit all in diverse America. There 
is just no need to force gasoline consumers across the country 
to either use ethanol in their gasoline or pay for the 
privilege of not doing so. This mandate really creates a tax on 
consumers who live in parts of the U.S. where ethanol use is 
impractical. It would be of much greater benefit to everyone to 
repeal the 2 percent RFG requirement, reject this mandate, and 
allow consumers to decide for themselves which gasoline is most 
appropriate for their region's supply profile and environmental 
needs.
    Last year's language also encouraged use of ethanol in the 
summer months. We are concerned about that because it creates 
potential environmental and gasoline supply problems. We do not 
believe that this should be part of our national energy policy.
    Whatever its shortcomings, the national ethanol mandate 
proposal is already responsible for one miracle. It succeeded 
in uniting the editorial pages of the New York Times, Wall 
Street Journal and Washington Post in firm opposition to it. 
NPRA believes that they are right, and it pains us to disagree 
with the Chairman on this matter, but we urge you to take a 
second look at it.
    We also do not support a Federal MTBE ban. We are concerned 
about the lack of justification for this step and the impact on 
supply. The U.S. Energy Information Administration has pointed 
out that MTBE volumes and desirable blending attributes will be 
hard to replace, leading to potential gasoline supply problems. 
We agree, and urge Congress to be conservative on this matter. 
The States where most MTBE is used are already dealing with it. 
Several have already delayed or are expected to delay their 
target dates to limit MTBE use because of supply concerns. Many 
of the large number of States who are listed as having banned 
MTBE do not use significant amounts of MTBE.
    The fact is, the State of California is in the process of 
dealing with its own MTBE-related program. The State of 
Connecticut is scheduled to have a State ban effective October 
1 of this year, which is being reconsidered. I know a bill just 
came out of a subcommittee there to move that back to the first 
of the year. New York has a ban the first of next year, and as 
I understand it, the Senate bill does not affect those dates, 
which are different, because they are the result of State 
actions. So we do not really understand why these States cannot 
deal with this problem on their own, in the absence of a 
Federal ban, with DOE and EPA monitoring the supply and 
environmental impacts.
    We do want to join others in supporting the extension of 
product liability protection to MTBE and any other mandated 
fuel component. Those who comply with a government mandate 
should not be penalized and subjected to large punitive damages 
just because they obeyed the law.
    We would also just ask that you and others evaluate the 
impact on supply of any fuel-related initiative that is part of 
this national energy bill. Our experience over the last several 
years has been that we have a very tight supply and demand 
balance. We think we need to be very careful to things that 
make it more difficult to manufacture gasoline for America's 
consumers, and we do think that given the experience of not 
just the last few years, but also the last few decades, that it 
pays to be conservative about some of the expectations that we 
have about how quickly and smoothly these changes can be made.
    Thank you for your time.
    Senator Voinovich. Thank you.
    Mr. Segal?

  STATEMENT OF SCOTT SEGAL, PARTNER, BRACEWELL AND PATTERSON, 
                             L.L.P.

    Mr. Segal. Mr. Chairman, my name is Scott Segal. I am a 
partner at the law firm of Bracewell and Patterson. I am here 
in my capacity as counsel to the Oxygenated Fuels Association. 
We, too, look forward to the timely passage of energy 
legislation.
    I want to state for the record that while I am from Texas, 
my dad was raised in Dayton, Ohio, so that ought to be worth 
something.
    [Laughter.]
    Mr. Segal. Mr. Chairman, the decision to examine fuel and 
fuel additives could not be more timely. As today's hearings 
are underway, disturbing trends are emerging regarding security 
and supply of motor fuels. In particular, the problems in 
California have been attributable in part to the decision of 
some to shift from MTBE to ethanol fuels, given the 
difficulty--the unique challenges, let me say--that ethanol 
fuels can sometimes present.
    Further, we know, as OFA has noted many times, that the 
impact of MTBE on the national motor fuels pool is 
extraordinarily significant. In fact, Mr. Garman's boss 
testified before the Senate last year that MTBE's contribution 
is equivalent to about 400,000 barrels a day of gasoline 
production capacity, or the gasoline output of four to five 
large refineries. By way of comparison, during the peak of 
Operation Desert Storm, the 500,000 U.S. military personnel 
involved consumed approximately the same amount on a daily 
basis. So it is a significant addition.
    I want to say just one or two things to address this 
concept that the States will continue to ban, and therefore we 
ought to do the right thing and take the most restrictive 
possible State action and then nationalize it. That does not 
seem to make a lot of sense to me. Will States implement these 
bans? That is an open question, sir. That is an open question. 
Every time a State that actually uses MTBE to any significant 
extent has been faced with actually implementing their ban, 
they have pushed back because they know of the impact of MTBE 
on energy security, on price, on supply and on the environment. 
Does anyone believe that on a policy of flexibility what we 
ought to do is adopt a nationwide mandate and a nationwide ban, 
because we need more flexibility? That makes no sense, sir. I 
would put it that it makes no sense.
    RFG made with oxygenates has never been a boutique fuel. It 
currently accounts for over one-third of the national gasoline 
supply. That is not a boutique, that is a supermarket. It is 
not a boutique fuel. There is no evidence that concerns 
regarding MTBE have stopped gasoline supplies from moving 
across borders. I just wanted to get that on the record.
    By every measure, clean-burning RFG blended with MTBE has 
exceeded all pollution reduction goals, as Mr. Holmstead 
indicated. It is the equivalent of removing 64,000 tons of 
harmful pollution from the air we breathe, or taking about 10 
million vehicles off the road.
    However, objective analysis points to MTBE having become a 
convenient scapegoat for a collective failure to protect U.S. 
groundwater resources. An Australian fuels expert recently 
characterized this phenomenon as shooting the messenger. As 
Senator Daschle testified before this committee in September, 
1998, inadequate gasoline storage facilities is the cause of 
this problem, not the RFG program. Simply removing MTBE from 
the marketplace will not stop gasoline groundwater 
contamination. It will, however, have major negative effects on 
other important national priorities--that from the author of 
the 2 percent oxygen standard.
    As Mr. Perkins testified last year in front of the House, a 
primary focus of MTBE control should be the UST Program, its 
inspection, training and enforcement. The most recent data has 
indicated as UST programs have been fully implemented, 
detections of MTBE have declined.
    Mr. Chairman, as you know, last year's energy proposal 
contained a safe harbor provision applicable only to ethanol 
fuels, but the same argument as a matter of law, fairness and 
policy was clearly applicable to MTBE and other ethers. MTBE 
usage in RFG derives from compliance with a Federal mandate. As 
Senator Daschle said on the floor defending the 2 percent 
standard, he said the ethers, especially MTBE and ETBE, are 
expected to be major components of meeting a clean octane 
program.
    Some have argued that the imposition of strict product 
liability is a prerequisite for appropriate remedial actions. 
We respectfully disagree. First, negligence theories more than 
suffice to address remedial questions. Second, the use and 
improvement of the UST program provides a far fairer and more 
efficient mechanism to address the problems of alleged 
contamination. And third, one can hardly think of a less 
efficient or perhaps greedier mechanism for addressing water 
quality concerns than imposition of an inflexible strict 
liability theory. A recent report from the Council of Economic 
Advisers found that using the tort system in this way is 
extremely inefficient, returning only 20 cents of the tort cost 
dollar for that purpose. Surely, we can construct a policy to 
address underground storage leaks such that greater than 20 
cents out of every dollar actually goes to clean up.
    If Congress should choose to adopt some form of ethanol 
mandate, then policies must be put in place that facilitate 
such mandates in the most acceptable terms. Mere splash funding 
of ethanol is likely to prove unacceptable on a number of 
fronts. One way to address the problem is to incorporate 
ethanol into other ethers like ETBE, an ether with less 
affinity for water than MTBE. But ETBE must be treated fairly 
in tax and regulatory contexts, and we are going to submit a 
separate statement from Lyondell Chemical Company on that 
matter for the record, with your permission.
    Mr. Chairman, thank you for your continued interest in 
these matters. These are tough issues to resolve. We do not 
want them to be a burden on adopting energy policy concerns, 
and I think we are close. So we look forward to working with 
you on resolving these energy policy matters.
    Senator Voinovich. Thank you, Mr. Segal.
    Mr. Wagman?

 STATEMENT OF RICH WAGMAN, FIRST VICE CHAIRMAN, AMERICAN ROAD 
            AND TRANSPORTATION BUILDERS ASSOCIATION

    Mr. Wagman. Good morning, Mr. Chairman. I am Rich Wagman, 
Chairman and CEO of G.A. and F.C. Wagman, Incorporated, a 
bridge and highway construction firm based in York, 
Pennsylvania. I also serve as First Vice Chairman of the 
American Road and Transportation Builders Association. I am 
representing ARTBA at this hearing.
    There is a unique nexus between Federal transportation, 
energy and environmental policies. All of these have a common 
thread--the use of Federal tax law involving motor fuels to 
advance national objectives. Unfortunately, these tax policies 
are often debated and decided separately, and thus in a vacuum 
during a transportation bill, an energy bill or an 
environmental bill. As a result, positive impacts for one 
policy area sometimes contradict or even undermine goals and 
objectives in another policy area.
    That certainly is what has happened in the case of ethanol 
tax law, as it impacts the Highway Trust Fund. Since 1979 when 
gasohol tax preferences were first initiated, the Highway Trust 
Fund has lost billions of dollars in potential highway user fee 
revenue. This situation needs to be examined, and hopefully 
reformed this year.
    There is reason and urgency for such action. The 2002 U.S. 
Department of Transportation report to Congress on highway 
systems, conditions and performance suggests close to a $50 
billion per year Federal highway program is necessary just to 
maintain current system conditions and performance levels over 
the period 2004 to 2009. The gap between these documented needs 
and current Highway Trust Fund revenue forecasts is over $17 
billion per year.
    Mr. Chairman, the chart that we have brought here 
illustrates the problem. We have used U.S. Department of Energy 
forecasts for future ethanol-related motor fuels use to 
quantify the effect of current ethanol tax policy and the 
effect of the proposed renewable fuels standard on Highway 
Trust Fund collections. This chart also appears on page eight 
of our written testimony.
    The orange portion of these bars reflect the impact of 
current ethanol tax law. Absent changes to the law over the 
next 9 years, an average of $2.4 billion per year in potential 
highway user revenue will be lost to the Highway Trust Fund due 
to ethanol motor fuel sales. Over the 6-year TEA-21 
authorization period, the total trust fund loss reflected here 
in the orange bars would be $13.8 billion. Over the full 9 
years depicted, the loss would total $21.5 billion.
    The proposed renewable fuels standard would exacerbate the 
magnitude of the loss if the current ethanol tax stands. That 
additional loss is reflected in the yellow portion at the top 
of the bars.
    As the ethanol fuel market grows under the proposed 
standard, so would the potential revenue loss to the Highway 
Trust Fund--starting at about $200 million in the year 2007, 
growing to $1.3 billion in fiscal year 2012. The TEA-21 
reauthorization period impact of the proposed renewable fuel 
standard would also total about $1.3 billion in foregone 
revenue.
    As you work to develop a TEA-21 reauthorization bill, we 
respectfully suggest that $13.8 billion are available by 
reforming the ethanol tax policy and ensuring that as ethanol 
use grows in the future, the Highway Trust Fund is not 
negatively impacted.
    I would like to emphasize that ARTBA is not opposed to 
either ethanol use or the proposed renewable fuels standard. We 
just want to draw the committee's attention to the negative 
impact these well-intended tax and energy initiatives will have 
on the future revenue to the Highway Trust Fund. We believe 
Federal ethanol initiatives that support agriculture, energy 
and environmental objectives should be supported through the 
general fund, not at the expense of transportation improvements 
funded by highway users through the transportation trust fund.
    We applaud the Bush Administration and the Budget 
Committees of the Senate and the House for proposing to 
redirect the revenue stream from the $0.025 portion of the 
gasohol excise from the General Fund to the Highway Trust Fund. 
We also believe there is a great merit in a proposal that we 
understand Senators Baucus and Grassley are developing that 
would establish a General Fund tax credit for ethanol refiners 
in lieu of an excise tax incentive. We urge the Senate to 
address the ethanol Highway Trust Fund issue once and for all 
this year in either TEA-21 reauthorization or the energy bill. 
We also encourage you to establish a commission to develop 
recommendations on how to finance Federal highway and mass 
transit investments in the future, post-gasoline and diesel 
era. We need to prepare now for future transportation financing 
needs.
    Mr. Chairman, that concludes my testimony. Again, thank you 
for the opportunity to present our views. I will try to answer 
any questions you or other committee members might have.
    Senator Voinovich. Thank you, Mr. Wagman.
    Mr. Early?

 STATEMENT OF A. BLAKEMAN EARLY, CONSULTANT, THE AMERICAN LUNG 
                          ASSOCIATION

    Mr. Early. Thank you, Mr. Chairman. I am A. Blakeman Early, 
a consultant appearing on behalf of the American Lung 
Association. Obviously, a nexus to Ohio is very important and I 
would like to say I am a proud graduate of Dennison University 
in beautiful Granville, Ohio, as is Senator Lugar, I might 
point out.
    My testimony reflects that the Lung Association has worked 
hard for compromise legislation in this area. We supported 
compromise legislation that this committee reported in the 
106th Congress, I would observe, without a liability shield, 
Mr. Chairman. We also support those elements of S. 385 which 
was part of a very important Senate compromise that included an 
increased RFS. We supported all those elements of that bill 
except the liability shield.
    Unfortunately, progress was prevented last year because the 
House has a very different view. I just want to review what the 
House offer did. It added a liability shield for MTBE. It 
removed the MTBE ban. It preempted State bans and it removed 
the authority for EPA to regulate gasoline additives based on 
their potential to cause water pollution--essentially gutting 
the Senate bill.
    I am going to move to the key issues that are obviously in 
play. First, we believe very strongly MTBE must go. 
Incidentally, Mr. Chairman, we do not think it will be nearly 
as costly as you suggested in your opening remarks. Ten cents a 
gallon is more than it costs to product all of RFG. We think 
that removing MTBE from the fuel supply will be a very modest 
cost, which obviously is very important.
    The presence of MTBE in gasoline undermines public support 
for the RFG program. It promotes areas adopting boutique fuels 
and it creates a nightmare for water suppliers and people who 
own wells, and Mr. Granger's testimony that will be presented 
just after mine will illustrate that well. As long as MTBE is 
in the fuel, there will be more plain-view water district 
problems that Mr. Granger will describe.
    We very much oppose a safe harbor for MTBE. It was not in 
this committee's legislation. My testimony contains information 
that shows that when manufacturers were advocating the 
oxygenate standard--MTBE manufacturers and refiners--they knew 
of the hazards of MTBE and water; they knew that leaking 
underground storage tanks were leaking all over the country; 
they continued to advocate the requirement for oxygen which 
they knew would be MTBE in every gallon of reformulated 
gasoline and oxygenated fuels; and they never told Congress 
about the problems.
    I think the key element of my testimony includes a quote 
from a Shell expert who said when asked by API, ``Even if it 
were not a factor to health, MTBE still had to be removed to 
below detectable amounts in order to use the water.'' That is a 
Shell expert reporting to API on the problems with that 
company.
    It is important to understand that the inclusion of the 
MTBE in the liability shield as in the House language bars 
people from bringing product liability litigation for spills 
that occurred prior to 1990. It bars them from bringing 
litigation on this theory for spills from MTBE in conventional 
gasoline where refiners are placing the MTBE in the fuel 
voluntarily. They are not required under the RFG. One of the 
important elements is that the industry was voluntarily putting 
in 4.2 million gallons per day of MTBE in fuel before either 
the oxygenated fuel program or the RFG program rule went into 
effect. That is half the total use that is occurring under 
those programs today.
    So it is not as if the government made them do it. They 
certainly share a major responsibility and people like Mr. 
Granger need every tool available to them to be able to address 
the contamination problems that they are facing.
    The last problem is that history is repeating itself. The 
OFA testimony advocates promoting ETBE because it is, quote, 
``has less affinity for water than MTBE.'' What the testimony 
does not contain is that while yes, ETBE is 60 percent less 
soluble than MTBE, it is 30 times more soluble than benzine; it 
is very resistant to biodegradation which benzine is not; and 
it has an odor effect in water at one-quarter of the 
concentration of MTBE. Is it a good idea to shift from MTBE to 
ETBE? I think not. I would actually recommend legislation that 
prohibits refiners from using it.
    We oppose the liability shield being extended to renewable 
fuels. It will simply create the potential for another MTBE 
disaster. We recommend the Senate remove the liability shield 
for renewable fuels. They should be asking the refiners and the 
ethanol manufacturers, what do they know that we do not know, 
that they need this shield? It is not like there is a tidal 
wave of litigation out there. Why do they need this shield? Do 
they know something we do not know, just like they did in 1990? 
We hope not.
    Senator Voinovich. Thank you, Mr. Early.
    Mr. Granger?

 STATEMENT OF PAUL J. GRANGER, SUPERINTENDENT, PLAINVIEW WATER 
                            DISTRICT

    Mr. Granger. Good morning, Mr. Chairman, and thank you for 
providing me with the opportunity to address the subcommittee 
today.
    My name is Paul Granger and I am a licensed professional 
engineer and service superintendent for the Plainview Water 
District. The Plainview Water District is a large water supply 
system located in Nassau County, New York. My system directly 
relies on groundwater as the sole source of drinking water for 
our community. My comments today will specifically address my 
first-hand experience and knowledge of the adverse impact of 
the fuel additive MTBE on our drinking water supply.
    The widespread use of MTBE in reformulated gasoline and the 
impact of the compound on the water supply system throughout 
the country has raised the serious concerns of water purveyors 
across the Nation. MTBE has unique properties that allow it to 
travel far into the groundwater system and make it very 
difficult and expensive to remove with traditional treatment 
methods. This fact is well documented in scientific literature.
    During November, 2000, the MTBE threat to the Plainview 
Water District became a sudden and unwelcome reality when a 
large spill containing a very high concentration of MTBE was 
found only within 450 feet of a vital drinking water supply 
well facility. The spill will eventually impact two critical 
supply wells, as indicated on this map over here. There are 
also more spills discovered since then, unfortunately, and they 
are unfortunately even closer.
    At this time, the polluter has not taken any action to 
clean up the impacted aquifer, even though it was reported to 
State environmental authorities during 1997. What is 
unfortunate and very disturbing is that more than 6 years has 
elapsed and the contamination continues to migrate unabated 
toward our vital supply facility.
    Due to the failure of the polluter to clean up the 
contaminated groundwater and lack of State regulatory agency 
assistance, the water district as a last resort was forced to 
undertake legal action against the polluter. This action was 
taken to ensure the cleanup of the spill and to properly shift 
the enormous financial burden of treatment onto the responsible 
party, rather than the water rate payer.
    As a result of vigilant monitoring by water utilities and 
regional health departments, the chemical is now being detected 
in many public and private water supply wells throughout the 
country. On Long Island, MTBE has been detected in 
approximately 130 public supply wells. It should be noted that 
hundreds of shallow private wells on Long Island have been 
contaminated with MTBE and have been taken out of service.
    In addition, at least 21 States have reported well closures 
due to MTBE groundwater contamination. To underscore my 
concern, New York has identified 1,970 MTBE spills as shown on 
this map, and with 430--approximately one-quarter of them--on 
Long Island alone. The American Waterworks Association 
estimates that water suppliers are already faced with a 
national cost exceeding $1 billion to prevent, cleanup, and 
treat MTBE-contaminated supplies. It is clearly evident that 
MTBE must be immediately banned before the problem worsens.
    Recent scientific studies concluded that there is no 
significant air quality benefit to the use of oxygenates such 
as MTBE and reformulated gasoline. In summary, the studies 
concluded that MTBE addition has no significant effect on the 
emissions from modern vehicles, while presenting significant 
risks and costs associated with water contamination.
    It is my understanding that a liability safe harbor 
provision is under serious consideration as Congress 
deliberates proposals for amending the Clean Air Act. The 
proposed provision would unjustly shield the petroleum and 
ethanol industries from defective product liability. Such a 
provision would unfairly place the monumental cleanup and 
treatment costs onto water suppliers and ultimately the 
customer--both of which are innocent parties that did not 
create the problem in the first place.
    It is respectfully requested that our Federal legislators 
take careful note of the substantial MTBE drinking water 
contamination problems facing water suppliers throughout the 
country. In addition, it is very important to consider 
scientific facts concerning the use of MTBE and overall the 
need for oxygenates as legislative proposals are reviewed. The 
Senate and government as a whole still has time to prevent MTBE 
from becoming a national drinking water catastrophe if prompt 
and proper action is taken at this time.
    In conclusion, I recommend the following be strongly 
considered as the Senate deliberates proposals for amending the 
Clean Air Act. One, based on the present impact and expanding 
threat to water supplies nationally, MTBE must be swiftly 
phased out of gasoline. Two, the oxygenate mandate in the 
present Clean Air Act must be removed based on the conclusions 
and recommendations made by prominent studies which are 
scientific in nature and EPA blue ribbon panel. And three, the 
legal rights of water suppliers and consumers must be upheld so 
that the vast cleanup burden is not placed on taxpayers. 
Providing a liability safe harbor eliminates a vital tool to 
protect the economic, environmental and public health interests 
of the water consumer.
    The rest of my recommendations are contained in my written 
testimony, so in the interest of time you can refer to that.
    In closing, we need immediate help from the Federal 
Government to ensure that our water supply remains safe and 
economically viable for public consumption.
    Thank you for your time and providing me with this 
opportunity, and I would be willing to answer any questions 
that you may have on this topic.
    Thank you.
    Senator Voinovich. Thank you.
    Mr. Perkins?

 STATEMENT OF CRAIG PERKINS, DIRECTOR, ENVIRONMENT AND PUBLIC 
                        WORKS MANAGEMENT

    Mr. Perkins. Thank you, Senator.
    I would like to share with you today the MTBE experiences 
that we have had in Santa Monica. Santa Monica is a city of 
nearly 90,000 permanent residents, but during any given day 
with the commuter and visitor population, we rise to about 
250,000 people within our boundaries. We have always depended 
heavily on groundwater supplies. In fact, by 1995 we had 
maximized those resources and they supplied 70 percent of our 
water, which was a very high level of self-sufficiency in an 
arid environment. By using those sustainable resources, we were 
able to reduce our reliance on Colorado River water and 
Northern California water.
    This all changed in 1996 when we were hit with our MTBE 
catastrophe. Within a 6-month period, we were forced to shut 
down most of our water wells, accounting for about one-half of 
our total daily water supply. We now purchase about 80 percent 
of our drinking water from outside sources, putting strain not 
only on ourselves, but on California's already fragile water 
supply system.
    We know what the characteristics of MTBE are. When it leaks 
from tanks and pipelines, it readily travels through 
groundwater and travels much farther than the other 
constituents in gasoline. All of our wells had been in 
operation since the 1920's. They had never been impacted by any 
gasoline contaminant until MTBE hit us in 1996.
    Really, it strikes at the confidence of our drinking water 
customers. People are not going to drink water that smells and 
tastes like turpentine, nor do we believe that they should be 
required to do so.
    Although the effects just from the MTBE contamination have 
been quite devastating, what is perhaps the most frustrating 
part of our experience is the recalcitrance with which the 
companies responsible for the pollution--oil companies and MTBE 
manufacturers and distributors--their recalcitrance to accept 
responsibility and cleanup the mess they have caused. 
Initially, the initial financial burden was borne completely by 
our water customers, both for evaluating the cleanup 
alternatives, investigating and identifying the responsible 
parties, and purchasing outside water.
    This is unfair for our citizens and as a result we worked 
very hard. About 18 months after we had started shutting down 
our wells, we were able to reach an interim agreement with two 
large oil companies to reimburse the city for past costs and to 
pay for the ongoing costs of dealing with the problem. That 
interim agreement lasted only about two and a half years before 
it was allowed to fall apart, not by the city, but by the 
participating oil companies, very likely due to the escalating 
costs that they were projecting to deal with MTBE remediation. 
In Santa Monica right now, we are estimating that the cost just 
to clean up our main well field exceeds $250 million. Current 
estimates of the total cost of nationwide MTBE cleanup are $30 
billion and counting.
    With no other acceptable options to us, we filed a lawsuit 
against 18 companies in June of 2000. We did not want to file 
this lawsuit. From the start, our motivation has been to reach 
a settlement and to get on with the task of restoring our 
drinking water supply, but we do not believe it is right for 
our water customers to pay for any of those costs to do so.
    Two years after filing our lawsuit, just last autumn, we 
were able to reach a new settlement with two of the major 
companies that guarantees that Santa Monica's water will be 
cleaned up as quickly as possible, and the full cost will be 
borne by the polluters. Our best case projection, however, even 
with that settlement is that our local drinking water supplies 
will not be back on line until 2008, which is fully a dozen 
years after the problem hit us. Our lawsuit against the other 
companies continues and it has to continue in order to ensure 
that every responsible party ends up paying their fair share to 
restore our groundwater resources.
    We are going to eventually overcome this, but the price is 
going to be steep. It is only fair for the costs of the 
remediation to be borne by the polluters. But we have found 
through painful experience is that it is frequently only the 
prospect of a very expensive jury judgment intended probably to 
punish oil companies for their past misconduct that brings many 
of these companies to the negotiating table. We need, as public 
water agencies, every legal tool at our disposal to ensure that 
polluters ultimately do what is right. If a defective product 
is sold and manufactured, then the damages caused by that 
product should not be the responsibility of the customer, but 
of the people who made it and sold it. There is no legitimate 
justification for treating MTBE differently than any other 
product in the economy.
    The argument that we were only doing what Congress told us 
to do just does not hold water--no pun intended. I urge you to 
review the transcript and the jury verdict from the South Tahoe 
Public Utility District trial, which took place in San 
Francisco last year, where a pattern of prior knowledge and 
wilful misconduct regarding the potential environmental damage 
that can be caused by MTBE is shown. It came out clearly in 
that trial proceeding.
    We are struggling to ensure that MTBE polluters deal 
expeditiously with the serious water contamination problems 
they have caused us, and we need your support. We need the full 
Senate and House's support to ensure that that progress 
continues to be made.
    Thank you very much for your consideration this morning.
    Senator Voinovich. Thank you very much.
    This testimony this morning has been very interesting and 
certainly demonstrates a different perspective by some of the 
witnesses that have come here to testify.
    Mr. Wagman, your comment about the issue of ethanol and 
other renewables is well taken. It seems to me that as we sit 
down and draft the highway bill, we ought to look down the road 
to see the different changes that we are going to see in terms 
of the use of energy. For example, there is a lot of emphasis 
on renewables, fuel cells, these fuel cells and electric and 
all the combinations thereof. I think that we really need to 
look at that, because as you know, the fund did not materialize 
as well as we had expected in the last couple of years. In 
fact, it was very light and frankly the general fund had to 
make up the difference in order for us to maintain the level 
that we had committed to in 2003.
    So that is a very good point. You are aware, I think you 
mentioned, that 2.5 cents at least in the Senate budget bill is 
going into the Highway Trust Fund. I am glad you made that 
point for us today. Thank you.
    I would like to point out one other thing to you, that even 
if we take care of that problem, the amount of money coming 
into the trust fund will not adequately do what needs to be 
done, and anyone who really cares about the infrastructure in 
this regard has got to step up to the table and understand that 
we are going to need additional tax money in order to meet this 
crisis that we have.
    Mr. Wagman. User fees.
    Senator Voinovich. User fees. Well, user fees, but I am a 
debt hawk and I will be darned if we are going to borrow money 
from our children and grandchildren to pay for highways. We 
need user fees to take care of it and we need to face up to it. 
It seems to me that those of you on the outside that are 
looking in on some of these things understand that and get 
involved.
    I am also interested in the difference of opinion on MTBE. 
Mr. Granger, would you want to explain more to me? I frankly 
was not--Mr. Perkins, both of you made a comment on it. What 
you are indicating is that the MTBE--these are from underground 
storage tanks. I know we have a law in Ohio that we are moving. 
One of the things I did as Governor was remove underground 
storage tanks, so it was a big deal. You are saying that these 
tanks--these are abandoned tanks or current tanks that are 
there, that somehow have leaked and this MTBE has gotten into 
the water supply?
    Mr. Granger. Let me comment on that. There were various 
sources. One documented source had to do with leakage at the 
fuel pump itself, an internal problem. Another issue had to do 
with leaking fuel tanks, in fact. Also, there are problems with 
the newer fuel tanks out there. In my particular instance, the 
one site had an old single-wall tank and it was replaced and I 
understand that there was another problem with it again.
    So these problems with MTBE come from a multitude of 
sources. Tanks are one of them and components that deliver the 
fuel are also problematic.
    Mr. Perkins. I just wanted to say it is really important to 
think of it as a fuel distribution system. It is the tank and 
it is the pipes leading to and from the tank to the dispensers. 
What we have found in many cases is that the weak link is the 
piping, not the tank itself. Prior to the requirement for 
double-walled fiberglass tanks, our experience was that 
approximately 25 percent of all tanks put in the ground could 
be expected to leak during their lives. That percentage goes 
down significantly with the new tank technology, but we find 
significant problems in the piping systems. In fact in Santa 
Monica, we require double containment. We require containment 
pipes around the distribution pipes, which is above State and 
Federal standards because that is, in our minds, such a 
problematic part of the system.
    There is no such thing as leak-proof tank. That should go 
the way of the one-coat paint. It just is not going to happen 
no matter how good the system is, failures will occur and they 
will cause problems if there is a chemical like MTBE in the 
fuel.
    Mr. Early. Mr. Chairman, if I may, the unique thing about 
MTBE is it does not biodegrade. It is 50 times more soluble in 
water than benzine. So in the past the response to leaking 
storage tanks was less vigorous because many times the benzine 
which would leak out, which is of course the most toxic 
constituent of gasoline, would not move very far and there was 
time for biodegradation to reduce the benzine. MTBE moves very, 
very quickly through water. It does not biodegrade. And unlike 
benzine, it renders drinking water unusable at very low 
concentrations.
    Senator Voinovich. I just understand that our committee 
moved our Senator Chafee's bill which addresses several of the 
issues of underground storage tanks. That deals with just 
trying to make sure that there is not more of this that leaks 
out into the water system. But you, particularly in California, 
the reason why it has hit California so much is you must rely a 
lot more on undergroundwater than other States. We get a our 
water from Lake Erie.
    Mr. Perkins. It is interesting. In California, 
approximately one-half of the drinking water is supplied by 
groundwater, underground sources. Actually, if you look at the 
entire United States, it is pretty close to one-half throughout 
the United States. It is a surprising statistic.
    Mr. Granger. In my region in Nassau and Suffolk Counties, 
New York, we are an island so our three million customers 
receive groundwater as their strict drinking water source of 
supply.
    Senator Voinovich. Mr. Segal?
    Mr. Segal. Well, sir, I guess I have to disagree with a 
number of the representations that are being made. Blake is 
wrong. It is not that MTBE does not biodegrade at all. It 
depends on whether it is in an aerobic environment or an 
anaerobic environment, which means it is more of a difficulty 
in groundwater, that is for sure.
    There are other, more persistent, more difficult problems 
that even the State of California faces with respect to 
groundwater. That is the opinion of their own California 
Resources Control Board. The most recent data that has been 
crunched by the U.S. Geological Survey indicates that all of 
the terrible rhetoric that you have heard down the table has 
not occurred; that in fact the problem has stabilized and is 
declining in terms of numbers of detects.
    Now, aside from that I have listened with respect to the 
two witnesses at the end here, and this concept that they are 
reluctant litigants--you know, we did not want to be thrown 
into this; we really wanted to exhaust all administrative 
remedies before joining litigation--I think does not bear out 
under the facts. In the case of Plainview, the supply wells, 
according to Mr. Granger, are free from MTBE contamination and 
I am quoting him now, ``we are strictly being proactive here.'' 
What does that mean?
    Proactive litigation asking for several billions of dollars 
in punitive damages for a system that has less than 10,000 
accounts. To me, it seems like a tremendous overreach. Santa 
Monica's own press release said that we have, quote, 
``assembled our legal dream team,'' but this is the same legal 
dream team that is the father of modern asbestos litigation, 
which has cost States and cities and counties billions of 
dollars in resources. That is the price one pays when one 
overreaches on products liability theories.
    We are not asking that all litigation be extinguished. In 
fact, Mr. Granger argues that there is a discrete spill that 
they wish to address. That is what the negligence system is 
designed to do. Mr. Perkins indicates that we know what problem 
is. He says, and I am quoting him here, just a moment go, ``the 
weak link is the pipes of the tanks; the weak link is not the 
MTBE in the gasoline.'' Those are matters for negligence 
theories and the safe harbor in the legislation does not 
address the negligence theories at all.
    In addition, you are correct, sir, that Senator Chafee has 
just passed out the underground storage tank bill. As Senator 
Daschle indicated some years ago, that is the appropriate 
mechanism to address problems with handling of gasoline. This 
is a gasoline handling problem. It is not a MTBE problem.
    Senator Voinovich. Has Santa Monica paid any money out for 
this yet so far to deal with your problem?
    Mr. Perkins. Meaning the city of Santa Monica?
    Senator Voinovich. The water system.
    Mr. Perkins. During the first year and a half after we shut 
down our wells, we were paying for 100 percent of the cost. We 
raised our water rates 25 percent in order to pay for the 
additional costs caused by MTBE. It was at that point that we 
were able to reach a temporary settlement with two of the 
companies. I might say that we have never received an offer of 
$1 from the Oxygenated Fuels Association to help pay for the 
problem. But right now, those costs are not being paid by our 
customers because there is an order from the EPA requiring that 
replacement water costs be paid by oil companies, and we have 
just entered into a new settlement which we hope will be 
approved by the courts.
    Senator Voinovich. Well, it seems to me that just like 
everything else around here, that there is a middle ground. I 
am working right now to support legislation on medical 
liability reform, on asbestos reform, on class action reform. 
It appears to me that this is another area of litigation. You 
know, instead of people sitting down and saying, well, you 
can't do this, you can't do this--Mr. Segal, why don't you get 
together with these people and your organization and lay out 
something that makes sense, that does hold people that are 
responsible responsible, but puts some limitation on it so that 
this does not become another asbestos nightmare that we have 
got to confront here.
    It just seems that, frankly, at this stage--you know, the 
other thing is that basically what we are saying is this stuff 
is really bad; it gets in the water; stinks. I have never 
tasted the stuff, and apparently you have to get rid of it and 
get something else. So there has got to be some middle ground 
here. It just seems to me around this place, we don't talk to 
each other; we talk past each other.
    So my suggestion is that if you guys are concerned about 
this, you ought to sit down and maybe talk about it; get your 
national organization, Mr. Segal get your people in there and 
talk about some of these things now, before the next thing you 
know is--you know, we had the big debate 2 years ago on is this 
carcinogenic. There was some stuff, some Italian research and 
that got into a big hassle back and forth. But in this 
particular case, the stuff stinks, I guess, and it is a matter 
of how you deal with it.
    Mr. Segal. We do think that we have hit a middle ground, 
though. That is the point, which is negligence theories and new 
U.S.-TEA legislation is an appropriate way to address the 
problem. Playing the products liability lotto, we do not think 
is an appropriate approach to the problem.
    Senator Voinovich. OK. Let's forget it.
    Mr. Murphy?
    Mr. Murphy. Senator, let me suggest, I think there has been 
sort of a mischaracterization of what is being considered here. 
We are not talking about removing liability for remediation 
expenses or cleanup expenses, for the type of expenses being 
incurred by the city of Santa Monica. That would be unaffected 
by this. The polluter, the company that spills or leaks or what 
not, that is responsible for the impact on the groundwater 
supplies, would in fact have to pay for the remediation 
expenses. What we are talking about is a very, very limited 
defective product claim.
    Let me suggest, sir, that one of the things when a spill 
does occur, for whatever reason, the impact of that spill tends 
to increase over time. It is very, very important when you are 
going to clean up a spill to move as quickly as you can, in 
fact many times before you can identify the responsible party. 
You therefore minimize the impact on groundwater. You minimize 
the overall expense. The tort liability system right now is 
impeding that action, because obviously you are exposing 
yourselves to potential tort liability by taking action very, 
very quickly.
    So I think there is both a good environmental reason, as 
well as frankly a logical reason why we need to have a very, 
very limited defective product liability relief.
    Senator Voinovich. It is like the medical errors issue.
    Yes, sir, Mr. Early?
    Mr. Early. I just wanted to point out that what Dr. Murphy 
is suggesting is that we put this at the feet of the gas 
station operator, because they are the ones who own the tanks. 
The important thing to understand about the product liability 
concept, which the jury at Lake Tahoe was persuaded of, is that 
the refiners knew of the dangerous nature of MTBE in 
groundwater and they failed to warn their customers that if 
they wanted to use this fuel with this product in it, that they 
damn well better have tight tanks. They never said anything. So 
these people who had, as we know, leaking tanks, and it is 
widely known that the tanks leak across the country, they did 
not know. So the kind of legal theory that is being suggested 
with just a little tiny protection essentially puts the water 
purveyors on the hook; it puts the gasoline station owners on 
the hook; and it takes the refiners off the hook.
    Senator Voinovich. I am going to end the debate on this 
issue. There is certainly a difference of opinion. My 
suggestion again is that it would be good if people got 
together and figured out some reasonable way to deal with this, 
if there is a way to do it, or we will do it for you and God 
only knows.
    [Laughter.]
    Senator Voinovich. I have a lot of other questions here, 
but I can tell from the testimony here that the question I 
asked the other witnesses about whether or not we ought to move 
forward with this legislation is problematic. The problem today 
we have in the country, I think--we are going to have some--we 
have a very fragile economy right now. It seems to me that 
those of us in Congress ought to be doing what we can to try to 
eliminate as much uncertainty as we can.
    I guess the real issue is--Mr. Yoder, I will ask you this 
question. We may have to get into--I was just with Mr. Wagman 
talking with to some folks the other day about the highway 
bill. We may have to get into some public works programs around 
here. I hope not, but we may very well have to do it. For every 
$1 billion we spend on new highways, they tell me it is 43,000 
new jobs or something like that. But we may have to start 
looking at some of those things.
    How does this impact on your farm economy? And the other 
thing that I am interested in is, we passed this big farm bill. 
As you know, I had some real problems with it because we are 
borrowing the $87 billion and at the time it was passed they 
thought they had a surplus; that is gone. And the interest 
costs on that bill are another almost $30 billion. It is a lot 
of money. Part of the problem is that if the price is not 
right, then you have to go back and take advantage of the 
guarantee that is in the bill. Would you comment on those two 
things for me?
    Mr. Yoder. Well, the great thing about passing a renewable 
fuel standard is the fact that you could talk about that big 
farm bill that you had problems with, that has to pay farmers 
for low prices in commodities. Well, the beauty of this RFS 
with the five billion gallon usage by 2012 will save almost $6 
billion of outlays for farm payments, for subsidizing low 
prices. This would go and be reflected in the market price.
    Not only that, but I think we really underestimate the 
value of this whole thing is the big picture. I think that is 
really what we have to concentrate on, and that is the big 
picture. That is the fact of jobs. I mean, it has already 
created 192,000 jobs, and look at the jobs it will create over 
the next 10 years.
    The other thing is like I said in my testimony, the amount 
of money that is regenerated in each community when those 
communities are reinvigorated in the very rural areas that need 
jobs, and the amount of money that is turned. In Minnesota 
alone, they have had proof that each dollar that goes through 
that is reflected 10 times the amount as it goes through the 
process. So it reinvigorates our rural communities. This is a 
great economic stimulus package on its own. It has got great 
merit for that.
    The other thing that we have to look at is the fact that 
the RFS will give the flexibility to the petroleum blenders to 
remove MTBE and give them their flexibility in different parts 
of the country where it makes sense to use ethanol and where 
there might be some other problems, to go ahead and trade some 
credits like that. So it is win-win-win. You know, I have 
fought for a lot of different issues, but this is probably the 
most logical thing I have ever seen. It helps everything and I 
think that is the important thing is what it brings to the 
whole economy. It is good for the blenders. It is good for the 
farmers. It is good for the economy and it is good for 
environmental benefits, too, and it is also great for energy 
security. The U.S. farmer is anxious and waiting to be a great 
part of our energy security in this country.
    Senator Voinovich. How much impact was the compromise that 
we were to get last year, in terms of its impact on--you are 
talking about they are building more of these facilities and 
farmers are actually invested in these ethanol refineries I 
guess was that you call them, isn't it?
    Mr. Yoder. How much of an impact it is going to be?
    Senator Voinovich. Yes. In other words, it seems to me 
there has been some acceleration of this investment.
    Mr. Yoder. There has been great acceleration. As a matter 
of fact, like I said there are 11 plants now working to go on 
line and there are probably another 20 to 26, the business 
plans that are sitting there waiting to get ready to go and 
have some resource funding and so forth, once we get an RSF 
passed, it's huge, huge.
    Senator Voinovich. Are they borrowing this money from banks 
in order to go forward with this? How are you financing these 
things?
    Mr. Yoder. Actually, most of them are financed like 30 to 
50 percent with the farmer-owned influence, and then the rest 
is borrowed from a bank. It has to have a business plan to pan 
out. The reason this is so important, there is a change in 
agriculture today, I think, where we are going to see a 
difference. You are going to see the scale of farmers get 
bigger and bigger, but you are also going to have to see a 
smaller farm like myself. I farm about 1,000 acres. That was 
one time considered to be a big farm. It is not anymore. How am 
I going to survive? Well, the truth of the matter is the only 
way I can survive is if I get more vertically integrated and 
invest in that next step. I need to become a middleman.
    Ethanol is just the beginning of many identity to preserve 
opportunities, and also investments that I can go ahead and 
capture some of that extra value. We have to grow a more 
valuable product and be rewarded for it on our farms. That, to 
me, is the concept. This is going to be a template for many, 
many other types of businesses, and that is why it is so 
important to make sure that this ethanol industry flourishes 
and that we build this infrastructure so that farmers get used 
to investing in that next step of investment, and that is 
something we have not done in the past.
    Senator Voinovich. Five billion gallons is very important. 
I am thinking you are going to a bank and you are saying I want 
to invest in this, and they want to know, well, are you going 
to be--is there going to be a need for this product in the 
future?
    Mr. Yoder. Well, the five billion gallon in the future, we 
look at that as a floor and not a ceiling. That is just a 
guarantee in the market of at least five billion.
    Senator Voinovich. I am just saying, the fact that we have 
considered that and it looks like ethanol will be a source of 
fuel in the future is what encouraged bankers to come to you 
and say we will be willing to come up with the rest of the 
money and invest in this, just as we had another issue here--
nuclear energy.
    One of the reasons why nuclear power plants have not been 
built is because everyone was concerned about what are you 
going to do with the nuclear waste. And the fact that we got 
Yucca Mountain out of the way and looks like we are moving in 
that direction, now you are starting to see some other plants 
go forward because the investment bankers are saying, well, 
that issue is going to be taken care of and let's invest in it. 
That is the point I am trying to make. So some of these things 
that we are discussing here have a big impact on a lot of 
decisionmaking.
    Mr. Murphy, you wanted to speak?
    Mr. Murphy. Yes, I was just going to comment, Senator, that 
we estimate that if this bill does not pass and the MTBE bans 
in California and New York and Connecticut go ahead, we are 
going to have to use roughly three billion gallons of ethanol 
next year. That is larger than the amount that is called for 
under the bill. So the impact on the Highway Trust Fund is 
going to be there in any case, and we do need and do support 
and strongly are committed to fixing that and working with you 
and others to fix that and make sure that Highway Trust Fund is 
made whole.
    But in fact, the Highway Trust Fund is going to be 
adversely impacted to a greater extent in the short term. Even 
in the longer term, if this bill does not pass, at the end of 
the period as the States ban MTBE, we are going to end up using 
4.3 billion gallons of ethanol as opposed to the five billion 
gallons under this target, and we still have 2.5 cents per 
gallon, of course, going into the general trust fund.
    So the Highway Trust Fund issue is there confronting us. It 
is a bigger issue actually if this bill does not pass. It is an 
issue that we strongly support addressing and will work with 
you and others to address that.
    Senator Voinovich. Mr. Yoder, are you aware of that problem 
that was shown on the board here?
    Mr. Yoder. Oh, we are very much aware of the Highway Trust 
Fund, and we think it has to be fixed.
    Senator Voinovich. You are going to have to be part of 
this, so we have got to figure that out, too. Maybe we have 
got--what is it?--there is a supplement of 2.5 cents we have 
put in then, and the incentive is how much? Another 5.2 cents. 
If we go forward with additional revenue enhancements, whatever 
you want to call them--user fees--I think that some real 
thought needs to be given by your folks in terms of their 
participating in this.
    Mr. Yoder. I certainly understand that. We talked earlier 
about how the efficiencies are greatly going to be increased. I 
agree 1 day we are not going to even need a subsidy, but the 
worst thing we can do right now is to undercut the 
infrastructure formation of the ethanol industry. We need to 
make sure that that is put in place, and then, yes, obviously 
there has been a tremendous amount of new efficiencies gained 
by ethanol production. A few years down the road I can see 
where it will be self-sufficient, but I do not think we are 
there yet. So we need to work that out.
    Senator Voinovich. Senator Clinton has come in. Senator, I 
have got to terminate this hearing at least by 5 minutes to 
twelve, so I call upon you to make an opening statement or ask 
any questions.

OPENING STATEMENT OF HON. HILLARY RODHAM CLINTON, U.S. SENATOR 
                   FROM THE STATE OF NEW YORK

    Senator Clinton. I thank you, Mr. Chairman. I apologize for 
being late. It is one of those mornings in the Senate and this 
is such an important hearing. It is crucial that we air this 
and I appreciate this very large panel of witnesses being here, 
especially Mr. Paul Granger, Superintendent of Engineering and 
Business Administration of the Plainview Water District. I 
really appreciate everything you and your colleagues are doing 
in Long Island, Nassau County to keep our water safe and clean 
to drink.
    As Mr. Granger said in his testimony, the Plainview Water 
District is located in Nassau County, New York--one of the 
larger water systems on Long Island. As many of our water 
systems out on the island are, it relies on groundwater as the 
sole source of drinking water for the communities it serves.
    There is this long aquifer that runs the length of the 
island, which is a wonderful gift of nature to Long Island, but 
like so much else it has to be carefully monitored and tended. 
We have first-hand knowledge and evidence of the problems with 
MTBE. So I appreciate Mr. Granger being a witness in a very 
personal way. Mr. Granger, I would like to ask you--you 
mentioned that the major spill that is threatening your well, 
the well shown on the map--I am no sure it is this map, but one 
of the maps--that was reported to the State in 1997. What has 
been done since then to address this spill, to clean it up, to 
contain it, by either the responsible party or the State?
    Mr. Granger. What is disappointing is that the groundwater 
contamination has not been treated whatsoever. What is very 
disappointing is that the polluter did not take the first 
fundamental step of delineating the plume. I want to clarify. 
We are really not dealing with a threat. We are dealing with a 
reality, because of the close proximity of the spill and other 
spills. I kind of look at it in terms of a large tidal wave 
building its crest and it is just a matter of time before it 
crashes into our facility here. So that is the issue we are 
dealing with here, and this photograph speaks volumes of our 
issue on how close it is.
    Senator Clinton. So you felt that taking legal action was 
really a last resort?
    Mr. Granger. We actually found out about the spill in our 
own volition in 2000. The polluter nor, unfortunately, the 
State agency took any action to notify us. I personally was 
driving past the spill site and then conducted my own personal 
investigation. Despite November, 2000 coming and going, we are 
here now in the year 2003, and no action has been taken. So if 
you cannot obtain help from your regulatory agencies and you 
cannot rely on the polluter to take the proper action, then 
what choice do you have?
    Senator Clinton. I understand, Mr. Perkins, that legal 
action was the last resort in the case of Santa Monica. How 
would the speed at which a spill is addressed affect the cost 
of cleanup?
    Mr. Perkins. It would address it significantly. Once the 
genie is out of the bottle, is spreads very quickly and there 
is an exponential increase in terms of the cost of solving the 
problem once it has spread into an entire aquifer.
    Senator Clinton. You know, the issue that we are facing 
here is obviously an important one for I would argue all of the 
country, but certainly for those of us in New York. We have a 
lot of concerns about health effects. There are a number of 
cancer clusters out on Long Island. We are very cognizant of 
the environmental impact on health. I wanted to ask Mr. Early, 
could you point out for us, is there a map of New York State 
that I think was attached to Mr. Granger's testimony, where the 
RFG areas in New York State are located?
    Mr. Early. Just in the lower portion of the State. I think 
one of the fascinating things is that that is not where all the 
little--there is obviously a very tight cluster in the RFG 
area, but that is not the only area.
    Senator Clinton. So there is no requirement to use RFG in 
the upstate areas, even though we are finding MTBE 
contamination up in the rest of the State as well?
    Mr. Early. That is absolutely correct. You can see 
Rochester, Utica, Buffalo--these are not RFG areas. Presumably, 
the only reason the MTBE is in the fuel in those areas is 
because the refiners chose to put it there, presumably for 
octane. Either that, or they chose by themselves to take 
reformulated gas that they were selling in the lower part of 
the State and sell it as conventional gasoline in the upper 
part of the State.
    Senator Clinton. Is there any way we can actually discover 
what the answer to the question is?
    Mr. Perkins. If I can just interject, it is a very similar 
situation in California. There are many areas which are not 
RFG-required. It is really a function of the refining 
infrastructure. So in California, the main refineries supplying 
the areas that do need the RFG fuel also supply those other 
areas. So essentially there has been no choice. If you purchase 
fuel, it had MTBE in the fuel, even if you did not want it.
    Senator Clinton. Yes, Mr. Yoder?
    Mr. Yoder. Yes, Senator Clinton, one of the important 
reasons why we need a Federal phase-down is it is essentially 
impossible to control MTBE entering a very fungible gasoline 
supply system. Roughly 50 percent of the gasoline you use in 
New York comes from the Gulf Coast. It is shipped up through 
common pipelines. Unless we have a Federal phase-down, it is 
going to be virtually impossible for us to make sure that there 
is no MTBE in the gasoline.
    Mr. Granger. We would argue for a phase-out, Senator.
    Senator Clinton. I argue for a phase-out also, and we have 
had more than sufficient experience in New York. Our situation 
on Long Island I think should be an object lesson to anyone 
around the country of what the consequences are. So I am very 
responsive to that. Can you respond to those on the panel who 
have testified that MTBE and other fuel additives should 
receive a safe harbor from liability, essentially because the 
Federal Government required their use? Mr. Early?
    Mr. Early. Well, Senator, you missed a full discussion of 
this, but to slightly repeat myself it seems to me that the big 
problem is that refiners used MTBE; they knew it moved very 
quickly through the water; and they never told either Congress 
or their customers about this problem in the fuel, because if 
they had then some of the customers, at least presumably, might 
have done a little more to ensure that their gasoline tanks 
were not leaking and be able to protect themselves and 
obviously protect the people around them.
    Senator Clinton. I did miss this whole discussion, and I 
know that my staff will certainly fill me in on all the 
details, and the Chairman has to depart. So I apologize again 
for not being able to get here any earlier. This is an issue of 
great concern to my State. Again, I would just stress, we have 
an obligation as we learn more about what contaminates our 
environment, even if it had some initially effective use 
predicted, but now that we know more about the downsides and 
the unintended consequences, not to continue making the same 
mistakes.
    I feel very strongly that we are only at the beginning of 
understanding the impact on health of all of these 
environmental decisions. I have the greatest respect for the 
people who initiated this decision for what they thought of as 
good and efficacious reasons, but I do not think that we can 
let a decision that has not stood the test of time continue to 
stand, and then open up all new opportunities for safe havens 
and freedom from liability going down the same road, which 
really does not make any sense to me.
    So thank you, Mr. Chairman.
    Senator Voinovich. Thank you, Senator Clinton.
    I think I would like to emphasize again that so many of the 
members of this committee have other responsibilities, and I 
really appreciate the fact that you came over and indicated 
your interest in this area, because there is a lot of work that 
needs to be done.
    I would like to thank the witnesses for coming. I am going 
to hold the record open and may submit some questions to you in 
writing, if you would be so kind as to respond to them.
    Thank you.
    [Whereupon, at 11:55 a.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
    [Additional statements submitted for the record follow:]
 Statement of Hon. Christopher S. Bond, U.S. Senator from the State of 
                                Missouri
    Clean air is a common goal that we strive to reach and well know it 
can be a challenge in many locations. My home State of Missouri is no 
exception. We have two major municipalities who continually monitor to 
ensure that they stay within ``attainment'' levels of ozone and other 
air pollutants. We have made great strides in helping these cities and 
cities all across the Nation cleanup their air. The use of oxygenates 
in reformulated gasoline, as part of mandated or voluntary clean air 
plans, has been a great tool in these efforts. Unfortunately for clean 
water concerns, one of the two most widely used oxygenates, MTBE a 
known carcinogen, has been found in drinking water supplies.
    Of course, clean air concerns are not restricted to the city limits 
of major municipalities. Missourians in smaller cities and in rural 
areas are concerned about the air that they breathe, and they obviously 
do not want clean air to come at the detriment of their clean water. I 
believe a big part of the answer for across the board clean air in both 
metro and rural areas lies with increased usage of cleaner burning 
renewable fuels, such as ethanol and biodiesel.
    Ethanol is a preferred motor fuel because of its proven ability to 
reduce harmful vehicle emissions, thereby protecting the environment 
and public health. Ethanol contains 35 percent oxygen by weight. By 
increasing the amount of oxygen in fuel, ethanol enhances engine 
combustion and reduces harmful tailpipe emissions of carbon monoxide 
(CO), particulate matter (PM-10), oxides of nitrogen (NOx) and other 
ozone-forming pollutants. Ethanol also displaces gasoline additives 
like benzene, a known human carcinogen, and aromatics that are highly 
toxic.
    Gasoline engine emissions are not the only source of air 
pollutants. Diesel engines definitely contribute their share, but 
fixing this source of pollutants has proven challenging. By utilizing 
biodiesel and biodiesel blends there is opportunity to reduce diesel 
engine emissions, in both light duty and heavy-duty applications. This 
can be accomplished without sacrificing engine performance or forcing 
high costs of operation on truckers, mass transit systems, or other 
businesses. The use of biodiesel or biodiesel blends in conventional 
diesel engines results in a substantial reduction of unburned 
hydrocarbons, carbon monoxide, particulate matter and sulfates compared 
to emissions from diesel fuel. Also, in its pure form, soy biodiesel 
reduces lifecycle carbon dioxide emissions by 78 percent compared to 
petroleum diesel according to a joint DOE/USDA study.
    The opportunity for enhancing our clean air efforts lies before us 
if we incorporate more renewable fuels, made from homegrown crops, into 
our fuel supplies. Ethanol and biodiesel, both have a proven track 
record of reducing air pollutants. Ethanol excels at improving gasoline 
engine emissions for most of the pollutants that we seek to decrease. 
Biodiesel, a proven fuel for light and heavy-duty diesel vehicles, is 
highly effective at reducing many of the pollutants that we target--
especially particulates and sulfates. I encourage this subcommittee and 
the Congress to phase-out MTBE, repeal the Clean Air Act's 2 percent 
oxygenate requirement and replace these clean air tools with a 
Reformulated Fuels Standard of 5 billion gallons or more.
                               __________
Statement of Hon. Jeffrey Holmstead, Assistant Administrator, Office of 
        Air and Radiation, U.S. Environmental Protection Agency
    Thank you, Mr. Chairman and members of the subcommittee, 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 the gasoline provisions in 
legislation introduced by Senator Daschle and cosponsored by the 
distinguished chairman of this subcommittee.
    The Bush Administration supported the fuel provisions of energy 
legislation that passed the Senate last year. That legislation would 
have maintained the environmental benefits of the Reformulated Gasoline 
program (RFG), prevented toxics backsliding, removed the RFG oxygen 
mandate, imposed a Federal phase-out of MTBE and included a national 
Renewable Fuels Standard. The Administration reaffirms its support of 
legislation, such as S. 385, that is consistent with this approach.
    Before further discussion of this legislation, I would like to 
briefly review the history and development of the RFG program, and 
discuss its air quality benefits. I will also discuss ongoing actions 
by States to address water contamination resulting from leaks or spills 
of the gasoline additive MTBE.
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 emissions from motor vehicles. In the 
1990 Amendments after extensive deliberations Congress imposed major 
reductions from both vehicle and fuel emission control programs. 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 minimum 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. The first 
phase of the RFG program introduced cleaner gasoline in January 1995 to 
help reduce vehicle emissions that cause ozone (smog) and toxic 
pollution in our cities. Phase 2 of the program began in 2000 and 
includes more protective emission requirements.
    Under the Clean Air Act, the Federal RFG program is required in ten 
metropolitan areas that 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 as oxygenates 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 close 
to major ethanol production centers.
Benefits of RFG
    Unhealthy smog levels are a significant concern in this country, 
with over 53 million people living in counties with air quality that 
does not meet the 1-hour ozone standard. Since the RFG program began 8 
years ago, we estimate that it has resulted in combined annual 
reductions of VOC and NOx of at least 105,000 tons, and at least 24,000 
tons of toxic air pollutants. VOC and NOx are pollutants which in the 
atmosphere form ozone, commonly called smog. Ambient monitoring data 
from the first year of the RFG program (1995) indicated that RFG also 
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 that 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.
Contamination of Water by MTBE
    Although MTBE is a high quality blending component of gasoline, 
significant concern persists about its contamination of drinking water 
in many areas of the country. Most MTBE contamination is the result of 
leaks from fuel storage tanks, but some contamination has resulted from 
fuel spills. We now know that MTBE, if leaked or spilled, can 
contaminate water supplies more readily than other components of 
gasoline. Public concern has been focused on the issues of taste and 
odor associated with MTBE contamination. Current data on MTBE in ground 
and surface waters indicate 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. EPA's Office of Research and Development is 
continuing to assess the health effects associated with MTBE exposure. 
While EPA and the States have made significant strides to improve the 
effectiveness of the Leaking Underground Storage Tank program, MTBE 
contamination of groundwater persists. Most recently, Plainview, New 
York, Ringwood, New Jersey, Rehoboth Beach, Delaware, Yorktown, New 
York and Roselawn, Indiana, have experienced MTBE contamination of 
their water supplies. It appears that the Yorktown incident was the 
result of a 250 gallon spill that occurred during a gasoline delivery 
at a filling station. In this case the MTBE threatens to migrate into a 
reservoir that supplies water to roughly one million users.
    As a result of existing MTBE contamination and the potential for 
future occurrences, 17 States have taken action to ban the use of MTBE 
as a gasoline additive in the future. Over the next year, MTBE bans go 
into effect in the States of California, Connecticut and New York At 
least six additional States are considering similar bans. At the 
Federal level, EPA published an Advance Notice of Proposed Rulemaking 
in 2000 requesting comments on a phase-down or phase-out of MTBE from 
gasoline under Section 6 of the Toxic Substances Control Act (TSCA). 
TSCA is the only administrative mechanism available to EPA 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. But 
the TSCA process is cumbersome and lengthy at best.
EPA's Perspective on National Fuels Legislation
    Because actions taken by individual States to control or ban the 
use of MTBE as a fuel additive are not uniform or coordinated, they can 
create concerns about fuel distribution. For example, when the MTBE 
bans take effect in less than 12 months in Connecticut and New York, 
fuel providers will not be permitted to supply MTBE-containing gasoline 
in those two States, yet neighboring States in the Northeast will 
continue to allow MTBE in gasoline. Such a patchwork approach of State 
requirements will likely complicate the distribution of gasoline in 
that part of the country. A significant portion of the gasoline 
supplied to the Northeast comes through pipelines from the Gulf region, 
but variations in State laws affecting gasoline could potentially lead 
to supply constraints as refiners and distributors struggle to ship 
complying fuel to individual States.
    The provisions in S. 385, however, would help to address this 
situation in several ways. The bill would (1) maintain the air quality 
benefits of the clean fuel programs, such as RFG, (2) remove the 2 
percent oxygenate requirement under the RFG program, (3) phase-out the 
future use of MTBE across the Nation while allowing sufficient leadtime 
for refiners and MTBE producers to switch production to other gasoline 
blendstocks, and (4) implement a Renewable Fuels Standard that 
encourages positive life cycle renewability through the use of 
domestically produced renewable fuels through a national credit 
averaging and trading program. It should be noted that in order to 
enhance the flexibility of these provisions, States may opt out of the 
MTBE ban and request waivers of the Renewable Fuel Standard.
    The Administration supports these provisions and we may offer 
additional views on the specifics of S. 385. The changes outlined in S. 
385 are needed now and are supported by what we have learned about 
cleaner burning fuels since 1990. 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 there are better ways to achieve these worthy 
goals.
    We and other Federal agencies 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. We stand 
ready to work with this subcommittee as it seeks to enact fuels 
legislation, such as S. 385. The timely enactment of these fuel 
provisions is essential. The clean fuel programs I have talked about 
today are critical to our nation's efforts to reduce the harmful 
effects of air pollution and any legislation must prevent environmental 
backsliding.
    This concludes my prepared statement. I would be pleased to answer 
any questions that you may have.
                                 ______
                                 
   Response of Jeffrey Holmstead to Additional Question from Senator 
                                Jeffords
    Question. Please provide the Committee with an updated list of 
studies completed or underway, and any other recently published 
findings, on the public health and environmental effects of ethanol, 
biodiesel, ETBE, and other renewable fuels, as collected through the 
use of the authority under the Clean Air Act section 211(b) and (c), or 
made available through other authorities or means.
    Response.
Completed Studies:
    ``Analysis of the Economic and Environmental Effects of Ethanol as 
an Alternative Fuel,'' April 1990, Office of Mobile Sources, U.S. 
Environmental Protection Agency.
    Alternative Fuels Research Strategy [External Review Draft]. Office 
of Research and Development, U.S. Environmental Protection Agency, 
Research Triangle Park, NC, EPA report no. 600/AP-92/002, 1992
    ``Health Risk Perspectives on Fuel Oxygenates,'' December 1994, 
Office of Research and Development, U.S. Environmental Protection 
Agency.
    ``Auto/Oil Air Quality Improvement Research Program, Technical 
Bulletin No. 16, Exhaust Emissions of E85 Ethanol Fuel and Gasoline in 
Flexible Fuel Vehicles,'' July 1995, Coordinating Research Council.
    Proceedings of the ``Conference on MTBE and Other Oxygenates: A 
Research Update,'' Falls Church, Virginia, July 26-28, 1993. Office of 
Research and Development, U.S. Environmental Protection Agency, 
Research Triangle Park, NC, EPA report no. EPA/600/R-95/134, 1995
    Oxyfuels Information Needs. U.S. Environmental Protection Agency, 
Washington, DC, EPA report no. 600/R-96-069, 1996
    ``Interagency Assessment of Potential Health Risks Associated with 
Oxygenated Gasoline,'' February 1996, National Science and Technology 
Council, Committee on Environment and Natural Resources, and 
Interagency Oxygenated Fuels Assessment Steering Committee.
    Health Effects Institute. The potential health effects of 
oxygenates added to gasoline: a review of the current literature, a 
special report of the Institute's Oxygenates Evaluation Committee. 
Health Effects Institute, Oxygenates Evaluation Committee, Cambridge, 
MA, 1996
    National Research Council; Committee on Toxicological and 
Performance Aspects of Oxygenated and Reformulated Motor Vehicle Fuels. 
Toxicological and performance aspects of oxygenated motor vehicle 
fuels. National. Academy Press, Washington, DC, 1996
    ``Final Report--CAA 211(b) Literature Search and Summary 
Information for Diesel Exhaust, Gasoline Evaporative Emissions, and 
Gasoline Exhaust,'' March 14, 1997, American Petroleum Institute (API). 
This report includes the following studies relevant to renewable fuels:
API In-House Literature Electronic Bibliographical Index
    Report ID Code 1487--Four week subchronic inhalation toxicity study 
in rats of ethyl tert-butyl ether (ETBE), 19.91.
    Report ID Code 1754--Letter to EPA on 8(d) and MTBE conference on 
odor threshold studies performed with gasoline and gasoline combined 
with MTBE, ETBE, and TAME, 1994.
    Report ID Code 2168--Disposition and acute effects of inhaled MTBE 
and ETBE in male volunteers. Reference no. 1594. International Congress 
of Toxicology--VII meeting abstract form, 1995.
    Report ID Code 3483--Acute inhalation toxicity study of ethyl-t-
butyl ether (ETBE) in rats. Final report. IITRI project no. L8100. IIT 
Research Institute, 1989.
    Report ID Code 4148--Four-week inhalation toxicity study of Ethyl 
tert-butyl ether (ETBE) in rats. Final Report. IITRI project no. 
L08100. Study no. 1544, 1991.
    Report ID Code 4370--Odor threshold studies performed with gasoline 
and gasoline combined with MTBE, ETBE and TAME. Final report. 
Publication no. 4592, 1993.
    Report ID Code 4637--Abbreviated primary eye irritation study of 
ethyl-tert-butyl ether-(ETBE) irrrabbits. Study.no,.,14931, 1989.
    Report ID Code 5616--Service Station personnel exposures to 
oxygenated fuel components, 1994. Publication no. 4625, 1995.
    Report ID Code 6614--The effect of gasoline composition on 
regulated and unregulated emissions, air toxics and ozone formation. A 
cooperative program with BMW. Report no. 93.001, 1993.
    ``Emissions Characterization of Baseline Gasoline and Gasoline 
Oxygenate Blends Under Tier 1 of the CAA 211(b) Fuels and Fuel 
Additives Registration Regulations,'' 1997, Southwest Research 
Institute.
    ``Interagency Assessment of Oxygenated Fuels,'' June 1997, National 
Science and Technology Council, and Committee on Environment and 
Natural Resources.
    ``Biodiesel Tier 1 Requirements, Literature Search, 
Characterization of Emissions,'' 1998, National Biodiesel Board.
    Oxygenates in Water: Critical Information and Research Needs. U.S. 
Environmental Protection Agency, Washington, DC, EPA report no. 600/R-
98/048, 1998
    ``Achieving Clean Air and Clean Water--The Report of the Blue 
Ribbon Panel on Oxygenates in Gasoline,'' September 1999, Clean Air Act 
Advisory Committee, U.S. Environmental Protection Agency.
    ``Biodiesel Tier II: 90 Day Sub-Chronic Inhalation Study of Exhaust 
Emissions as Required Under Section 211(b) of the Clean Air Act,'' 
2000, National Biodiesel Board.
    ``Reactivity comparison of Exhaust Emissions from Heavy-Duty 
Engines Operating on Gasoline, Diesel, and Alternative Fuels,'' 
Southwest Research Institute.
    ``Impact of Biodiesel Fuels on Air Quality and Human Health: Task 2 
Report--The Impact of Biodiesel Fuels on Ozone Concentrations,'' May 
2003, National Renewable Energy Laboratory.
    Secondary Peer Review of the California Environmental Policy 
Council Report on Ethanol. Versar, Inc., Contract 68-C-9-238, Task 
Order 72, for J. Michael Davis, U.S. Environmental Protection Agency, 
National Center for Environmental Assessment, Research Triangle Park, 
NC, 2003.
Draft Studies
    ``A Comprehensive Analysis of Biodiesel Impacts on Exhaust 
Emissions--Draft Technical Report,'' October 2002, U.S. Environmental 
Protection Agency.
    ``Ethanol Gasoline Vapor Condensate--One Generation Whole Body 
Inhalation Reproductive Toxicity Study in Rats,'' October 2002, 
Huntington Life Sciences.
    ``Evaluation of the Tier 1 and Tier 2 Biodiesel Health Effects 
Testing Requirements,'' October 31, 2002, Versar, Inc.
    ``Ethanol Gasoline Vapor Condensate--13 Week Whole Body Inhalation 
Toxicity Study in Rats with Neurotoxicity Assessment and 4 Week In Vivo 
Genotoxicity and Immunotoxicity Assessments,'' December 2002, 
Huntington Life Sciences.
    ``Ethyl Tertiary Butyl Ether Gasoline Vapor Condensate--One 
Generation Whole Body Inhalation Reporductive Toxicity Study in Rats,'' 
February 2003, Huntington Life Sciences.
    ``Ethyl Tertiary Butyl Ether Gasoline Vapor Condensate--13 Week 
Whole Body Inhalation Toxicity Study in Rats with Neurotoxicity 
Assessment and 4 Week In Vivo Genotoxicity and Immunotoxicity 
Assessments,'' May 2003, Huntington Life Sciences.
    Studies Underway for Gasoline/Ethanol and Gasoline/ETBE Blends for 
Evaporative Emissions: (All or portions of these studies may have been 
completed in draft form as indicated above.)
Subchronic Inhalation Toxicity Study, with Specific Health Effect 
        Assesments
    Fertility/Teratology Assessment which includes animal studies 
designed to provide information on potential health hazards to the 
fetus arising from the mother's repeated inhalation exposure to 
evaporative emissions before and during her pregnancy.
    In vivo Micronucleus Assay which is an in vivo cytogenetic test 
which uses erythrocytes in the bone marrow of animals to detect 
chemical damage to the chromosomes or mitotic apparatus of mammalian 
cells.
    In vivo Sister Chromatid Exchange Assay to detect the ability of a 
chemical to enhance the exchange of DNA between two sister chromatids 
of a duplicating chromosome.
    Neuropathology Assessment including histopathological and 
biochemical techniques designed to develop data in animals on 
morphologic changes in the nervous system associated with repeated 
inhalation exposures.
    Glial Fibrillary Acidic Protein Assay to determine chemically 
induced injury to the brain and central nervous system.
    Histopathology Assessment including preparation of the animals 
targeted for pathologic examination of the lungs shall include 
inflation of the lungs with fixative which will permit later 
examination of the lung tissues by electron microscopy, if followup to 
light microscopy is indicated. In addition, respiratory tract 
histopathology shall be conducted.
    Immunotoxicity Screening describing the performance and analysis of 
the required primary antibody response (IgM) to sheep red blood cell 
antigen by either the Jerne and Nordin splenic antibody plaque forming 
cell assay of by an enzyme-linked immunosorbent assay (ELISA).
    Inhalation Pharmacokinetic Studies which develop and validate a 
physiologically based pharmacokinetic (PBPK) model to quantitatively 
describe test substance disposition (uptake, distribution, metabolism 
and elimination).
    Research on remediation of fuel oxygenates, including monitoring 
the fate, transport, and/or degradation of ethanol and ETBE. U.S. 
Environmental Protection Agency, Office of Research and Development, 
National Risk Management Research Laboratory, in progress.
    Screening Life Cycle Assessment of Fuel Additives. U.S. 
Environmental Protection Agency, Office of Research and Development, 
National Risk Management Research Laboratory, in preparation.
    IRIS, Integrated Risk Information System [data base]. Ethanol. U.S. 
Environmental Protection Agency, Office of Research find Development, 
National Center for Environmental Assessment, in preparation.
    Pharmacokinetics and odor thresholds of ether oxygenates [including 
ETBE] in young and older human subjects. U.S. Environmental Protection 
Agency, Office of Research and Development, National Health and 
Environmental Effects, in planning stage.
    Comprehensive Environmental Assessment of Reformulated Gasoline 
Oxygenate Options: MTBE, Ethanol, and no oxygenate. U.S. Environmental 
Protection Agency, Office of Research and Development, National Center 
for Environmental Assessment, in planning stage.
                               __________
Statement of David K. Garman, Assistant Secretary for Renewable Energy, 
                       U.S. Departement of Energy
    Thank you for the opportunity to discuss the prospects for 
renewable fuels such as ethanol and biodiesel, as well as legislative 
proposals to promote the use of renewable fuels and additives.
    Biofuels can play an important role in reducing our dependence on 
foreign oil while reducing emissions of criteria pollutants and carbon 
dioxide. The Administration supports legislation such as S. 385 that 
phases out the use of MTBE across the country in a reasonable timeframe 
and in the context of a national Renewable Fuels Standard (RFS) 
designed to achieve a five billion gallon annual average use target by 
the year 2012.
    Getting to this level of production and beyond will be a challenge. 
According to the Energy Information Administration, the U.S. ethanol 
industry produced 2.13 billion gallons in 2002. According to the 
Renewable Fuels Association, currently 70 plants have a capacity of 
producing over 2.75 billion gallons per year, with an additional 500 
million gallons of capacity under construction. During the last 
Congress, the Energy Information Administration prepared several 
analyses of an RFS and related provisions affecting the use of fuel 
additives at the request of the Senate.
    The expanded capacity needed to reach the 5 billion gallon target 
will depend on starch, primarily from corn. There is an ongoing debate 
over just how much ethanol can be produced from feed grains. Secondary 
effects such as impacts on food and feed markets, by-product market 
saturation, the sustainability of production on marginal agricultural 
lands and environmental impacts from agricultural production in general 
become more acute as biofuels production solely from food grains 
increases substantially above five billion gallons per year.
    Because we want renewables to play an even greater role in 
displacing some of the roughly 136 billion gallons of gasoline and 33 
billion gallons of highway diesel we use each year, we must look beyond 
starch-based ethanol if we wish to have the impact we desire. S. 385 
explicitly recognizes the need for new technologies through provisions 
that provide extra RFS credits for ethanol produced from cellulosic 
materials. The Department of Energy (DOE) has been focusing on a 
research and development (R&D) program to develop cellulosic-based 
ethanol that could be produced from many types of agricultural 
resources, residues, and energy crops. In addition, the aggressive 
fire-supression policies of the past have led to a dangerous buildup of 
fuels in many of the nation's forests. The fuels reduction efforts will 
yield cellulosic materials in the form of brush and small diameter 
trees that could be converted into liquid fuels.
    According to the Oak Ridge National Laboratory (ORNL), there are 
about 500-600 million tons of biomass residue and waste generated per 
year. Some of these residues need to remain in the fields to maintain 
soil nutrient levels, but much of the remainder can be used for ethanol 
production if affordable methods of collection, transportation, and 
conversion are developed.
    Success in converting these cellulosic materials into ethanol will 
depend in part on the continued development of enzymes that break down 
the cellulosic materials into shorter chains of fermentable sugars. We 
have demonstrated the ability to do this . . . but at greater expense 
and difficulty compared to starch-based approaches. So our R&D program 
will work to continue to bring down the costs and complexity of 
cellulosic conversion.
    But our approach to using the nation's supply of biomass is not 
limited to liquid fuels such as ethanol and biodiesel. Biomass can be 
converted to a multitude of products for everyday use. In fact, there 
are very few products that are made today from a petroleum base that 
cannot also be produced from biomass. Paints, inks, adhesives, 
plastics, fibers and a variety of value-added products and chemicals 
currently produced from oil can be produced from biomass. In addition, 
biomass can also be used to produce heat and electricity.
    So we are thinking beyond ethanol to the full range of power, 
products, and liquid fuels that can be produced from biomass. Achieving 
competitive production focused only on producing fuels or products or 
power is extremely difficult. However, if one pursues an integrated 
approach to the production of liquid fuels, power and products 
simultaneously in an integrated biorefinery, process synergies can 
improve the economics of production significantly.
    Put another way, we are working toward the day when rural economies 
are revitalized through the domestic production of biomass feedstocks 
used to produce a wide variety of products, fuels and power in 
integrated biorefineries--displacing fuels and products we currently 
derive from imported petroleum.
    Pursuant to the Biomass R&D Act of 2000, the Department of Energy 
has been working with the Department of Agriculture (USDA) to expand 
the economic prospects and environmental promise of biomass. I am 
privileged to serve as the Co-Chairman of the Biomass R&D Board with 
Agriculture Undersecretary Mark Rey. Other members of this Federal 
agency biomass coordination group include the Department of Interior, 
the National Science Foundation, the Environmental Protection Agency, 
the Office of Science and Technology Policy, and the Office of the 
Federal Environmental Executive.
    The counterpart group created under the Act is the Biomass Research 
and Development Technical Advisory Committee. This committee consists 
of 31 members from the biomass community that include high-level 
representatives of industry, academia the farming community, technology 
developers, States and environmental and conservation entities. Last 
year, after a collaborative public process, the Technical Advisory 
Committee developed a Roadmap for Biomass Technologies in the United 
States. That roadmap is focused, among other things, on achieving the 
challenging goal of deriving 20 percent of our transportation fuel from 
biobased sources by 2030.
    We are also taking direction from the Food Security and Rural 
Investment Act of 2002, commonly referred to as the 2002 Farm Bill. 
Title IX of the Farm Bill includes sections addressing the Federal 
procurement of biobased products; biorefinery grants; biodiesel 
education; the continuation of the Bioenergy program to provide up to 
$150 million for farmers to produce ethanol and biodiesel; and further 
funding under the Biomass R&D Act of 2000.
    This last provision under the Biomass R&D Act has led to a joint 
solicitation between USDA and DOE to competitively award funding for 
breakthrough technology development. This is an unprecedented level of 
cooperation between our two agencies. The Departments have issued this 
week a solicitation with the same scope of work with individual agency 
program selection priorities based on their respective departmental 
missions. One merit review committee will review all proposals, and 
source selection officers from each department will make selections 
from the same merit review evaluation. This has required a much higher 
level of interaction between the Departments, and a much closer working 
relationship. DOE also learned a great deal from last year's 
competitive biomass solicitation, although it was not nearly as 
coordinated with USDA as this year's solicitation. As a consequence of 
last year's solicitation, we received almost 200 proposals for work to 
be 50 percent cost-shared with industry. After careful review, we are 
funding $75 million to six projects, mostly tied to the production of 
inexpensive sugars from cellulosic sources that can be converted to 
fuels and chemicals--work that is critical to the development of 
integrated biorefineries.
    Prior to last year, DOE biomass programs had been organized in a 
fragmented way with separate offices for the production of biofuels, 
biopower, and bioproducts. I reorganized my office last year, placing 
this scattered work under a single biomass office. Research within the 
new office is now organized and focused on two technology platforms, 
with the intent of advancing the technology needed for integrated 
biorefineries. These platforms are known as the ``Sugars Platform'' and 
the ``Syngas Platform.'' The Sugars Platform follows the biochemical 
route and involves the breakdown of biomass by enzymes into component 
sugars, which are fermented to produce a potentially wide range of 
fuels and products. The Syngas or Synthesis Gas Platform involves 
gasifying biomass to simple chemical building blocks which can be 
transformed to fuels, products, power, and hydrogen. The linkage to 
hydrogen is one I would like to stress in particular.
    As this subcommittee is aware, we have made tremendous progress in 
reducing pollutant emissions from our cars and trucks as well as our 
stationary power sources, and we will continue to make incremental 
gains through regulatory approaches such as EPA's Tier II tailpipe and 
fuel standards for passenger vehicles. But we ultimately want a 
transportation system that is free of dependence on foreign energy 
supplies and emissions-free. We also want to preserve the freedom of 
consumers to purchase the kind of vehicles they want to drive. That is 
the concept behind the FreedomCAR partnership and Hydrogen Fuel 
Initiative, which are designed to develop the technologies necessary 
for hydrogen fuel cell vehicles and the infrastructure to support them.
    Secretary Abraham unveiled the FreedomCAR partnership in January 
2002 at the North American Auto Show in Detroit with the major U.S. 
automakers by his side. And President Bush unveiled the 
Administration's Hydrogen Fuel Initiative during his State of the Union 
address in January. As the President put it:
    ``With a new national commitment, our scientists and engineers will 
overcome obstacles to taking these cars from laboratory to showroom, so 
that the first car driven by a child born today could be powered by 
hydrogen and pollution free.''
    Producing the hydrogen necessary for the President's vision will 
require a variety of domestic feedstocks, and biomass can play a 
crucial role. We believe that the Nation's energy sector may be able to 
produce, on an annual basis, as much as 40 million tons of hydrogen--
enough to power 100 million fuel cell vehicles--from 500-600 million 
tons of biomass residues and waste.
    In so doing, we will not only be producing a clean, domestic energy 
carrier to power emission free cars, we will be helping to reverse the 
economic fortunes of rural America. This is indeed an exciting prospect 
that I appreciate the opportunity to share with you this morning. With 
that, I will be pleased to answer any questions you may have today or 
in the future.
                               __________
 Statement of Fred Yoder, President, National Corn Growers Association 
                                 (NCGA)
    Chairman Voinovich, Ranking Member Carper, thank you for giving me 
the opportunity to testify before this subcommittee talk to you about a 
key issue in our world today--energy independence.
    My name is Fred Yoder, President of the National Corn Growers 
Association (NCGA). I farm 1,100 acres of corn, soybeans and wheat, Mr. 
Chairman, in our home State of Ohio.
                            ncga background
    As a little background, the National Corn Growers Association is a 
federation of State organizations, corn boards, councils and 
commissions.
    The National Corn Growers Association's mission is to create and 
increase opportunities for corn growers in a changing world and to 
enhance corn's profitability and usage across this country.
    NCGA was founded in 1957 and today represents more than 32,000 
dues-paying corn growers from 48 States, with 25 affiliated State corn 
grower organizations and hundreds of thousands of growers who 
contribute to State checkoff programs. NCGA, and its member States, 
have made passage of a renewable fuels standard the organization's No. 
1 legislative priority for 2003.
    For more than 20 years, the NCGA has worked side by side with 
farmers, industry and government to build the ethanol industry from the 
ground up. There can be little debate that the results add up to a bona 
fide success story.
                        renewable fuels standard
    The No. 1 legislative priority for NCGA for this year is the 
implementation of renewable fuels standard (RFS) legislation.
    The NCGA has long been a proponent of the expansion of ethanol, and 
encourages grower investment as new facilities come online--and we will 
continue to educate growers on the process required to build an ethanol 
facility.
    Over the last few years, the NCGA has worked hard in Washington, 
DC, to get an RFS. In fact, this week, NCGA sponsored a rally where 
Members of Congress, growers throughout the country, and industry 
leaders united around a specific message. The message being, an RFS can 
help us fix some of our long-term obstacles facing agriculture, while 
at the same time playing a critical role in our nation's comprehensive 
energy policy, thus making us less dependent on foreign oil.
    There are other positive impacts an RFS will have. With an RFS we 
will reduce the cost of the Farm Bill by raising the price of corn, 
creating more value added opportunities through farmer owned 
cooperatives, making us less dependent on foreign oil, and 
strengthening our sagging rural economy.
    NCGA believes ethanol provides energy security for the United 
States and we have the necessary resources to make a significant 
contribution to our domestic fuel supply. If successful, an RFS will 
more than triple the size of the ethanol market within the next 10 
years.
    On February 13, we took one step closer to making that priority a 
reality, Mr. Chairman, when you joined Sens. Tom Daschle (D-SD), and 
Dick Lugar (R-IN) to introduce the Fuels Security Act of 2003.
    The NCGA is encouraged by this legislation, which was introduced by 
a bipartisan group of Senators who are united in supporting a bill that 
bans MTBE nationwide, strengthens air quality regulations, provides 
refiner flexibility, establishes an RFS, and marketplace provides 
certainty to our nation's farmers. Under the leadership of Reps. Collin 
Peterson (D-MN) and Tom Osborne (R-NE), the House of Representatives 
introduced companion legislation.
    One part of this legislation is a national RFS, which will triple 
the use of ethanol over the next 10 years. The key provisions of this 
bill are identical to RFS legislation introduced in the 107th Congress. 
The legislation is the Fuels Security Act of 2003 (S. 385/H.R. 837).
    Specifically, these key provisions are:

      An RFS in which part of our nation's fuel supply, growing 
to 5 billion gallons by 2012, is provided by renewable, domestic fuels 
such as ethanol and biodiesel;
      Eliminating the Federal reformulated (RFG) oxygen 
requirement;
      Phasing down the use of MTBE in the U.S. gasoline market 
over 4 years; and
      Enhancing the air quality gains of the reformulated 
gasoline program.
                                benefits
    There is an evolution taking place across America's corn belt. A 
vision is being created to enhance value added agriculture. Investments 
in value added agriculture will foster a healthier agricultural 
structure and are necessary for thriving rural communities.
    Time and time again we see boosts in local economies when renewable 
fuels come into the picture. Investment capital comes to ``Rural-Town 
USA'' when an ethanol plant is built. Local labor is hired. Local 
supply industries are tapped. And crops from local producers are 
consumed and made into ethanol.
    Paid wages paid, and extra income from crops come back into the 
community, stimulating economic growth needed to create opportunities 
and revitalize many sagging rural economies.
    A study by the Minnesota Department of Agriculture estimated that 
the State's push to blend 10 percent ethanol in all gasoline created 
about 5,000 new jobs in less than a decade, and boosted payrolls by 
$115 to $124 million. Overall, the State's ethanol production, which is 
produced largely through farmer co-ops, generates $403 million to $437 
million for the local economy.
    The passage of the renewable fuels legislation is a start in this 
process. Increasing the use of renewable fuels from the current 1 
percent to 5 percent of motor vehicle fuel would displace 302 million 
barrels of crude oil annually between now and 2016.
    Farm income and the economies of rural communities would receive a 
significant boost in the process. As investments in farmer-owned 
ethanol co-ops and higher grain prices generate new income, farmers 
could receive an extra $6.6 billion of net cash income over the next 15 
years.
                       farmer owned cooperatives
    Growth in farmer owned cooperatives continues to expand vastly. 
Coupled with an RFS, we must also continue to expand incentives for 
smaller ethanol producers.
    Under current law, small ethanol producers are allowed a 10-cents-
per-gallon production income tax credit on up to 15 million gallons of 
production annually. The credit is capped at $1.5 million per year per 
producer. The provision applies to all small ethanol producers except 
those organized as farmer cooperatives.
    Unfortunately, due to their unique structure, farmer cooperatives 
are precluded from taking advantage of this credit. Farmer cooperatives 
are businesses, owned and controlled by farmers. The credit was created 
as an incentive for farmers' involvement as small ethanol producers.
    Unfortunately, the effect of the credit as currently designed 
actually works as a disincentive to farmers organized as a cooperative.
    At the beginning of the 108th Congress, a stand-alone measure was 
introduced by Sens. Peter Fitzgerald (R-IL), and Tim Johnson (D-SD) 
that would allow small ethanol producer cooperatives to take advantage 
of this tax incentive. You may recall, similar legislation that would 
modify the Small Ethanol Producer Tax Credit was included in the 
Senate's energy bill during the 107th Congress.
    Specifically, this legislation would:

      Allocate the ten-cents-per-gallon production income 
alcohol fuels credit to the members of a farmer cooperative;
      Change the definition of a ``small ethanol producer'' 
from 30 million gallons per year to 60 million gallons per year;
      Allow the credit to be claimed against the alternative 
minimum tax; and
      Repeal the rule that the amount of the credit is included 
in the income of the small ethanol producer.

    Additionally, I am very encouraged that recently the chairman of 
the Finance Committee, Sen. Charles Grassley (R-IA), and Sen. Max 
Baucus (D-MT) made this part of their energy tax package, which will be 
part of the next energy bill. They deserve credit for this important 
and key step.
                           highway trust fund
    Mr. Chairman, as we approach this year's debate on TEA-21 
reauthorization, there is one issue of great interest to the NCGA. That 
issue is the preservation of the tax incentive for those producers who 
blend ethanol with gasoline.
    As you know, in order to encourage the use of renewable fuels, 
Congress provided blends of gasoline and ethanol with a lower rate of 
tax than that imposed on gasoline. More specifically, refiners and 
gasoline marketers using 10 percent ethanol blends receive a 5.2 cent 
per gallon reduction from the tax paid on straight gasoline.
    This tax incentive has made a tremendous contribution in rebuilding 
rural America through the building of farmer-owned cooperatives, which 
has provided localities with jobs and extended the tax bases, while 
increasing the value of corn. Taxpayers benefit because reduced farm 
program costs and increased income tax revenue attributable to the 
Federal ethanol program provide a net savings to the U.S. Treasury of 
$3.6 billion a year.
    Since Federal motor fuel taxes are a primary source of funding for 
highway programs, the issue has arisen as to the revenue impact of 
ethanol-blended fuels on the Highway Trust Fund (HTF). The NCGA fully 
understands the concerns Members of Congress may have about retaining 
this tax incentive, as it may divert funds from the HTF.
    Our members strongly support full funding of the HTF and are 
committed to resolving this matter. The NCGA is working with Members of 
Congress to retain the important tax incentive, while also making sure 
the HTF is whole.
                                closing
    As I stated earlier, passage of an RFS is the No. 1 legislative 
priority of the National Corn Growers for 2003.
    I know we can work together in developing a comprehensive energy 
package that includes possibilities for renewable fuels like ethanol. I 
believe we can work together to make the RFS part of America's long-
term energy policy. Together, we can continue to grow a healthier U.S. 
economy. And work toward greater energy security and a cleaner 
environment.
    In closing, energy independence is a vital component to our 
national security. The NCGA stands ready to play its part. Renewable 
fuels like ethanol can contribute to that security, by making us less 
dependant on foreign oil.
    Chairman Voinovich, Ranking Member Carper, and members of the 
committee, thank you for the opportunity to testify today on this 
timely and important issue. The NCGA looks forward to working with you 
in advancing ethanol friendly legislation during the 108th Congress. 
Thank you.
                               __________
      Statement of Dr. Edward Murphy, American Petroleum Institute
    Thank you, Mr. Chairman and members of the subcommittee. My name is 
Edward Murphy and I am the Downstream General Manager for the American 
Petroleum Institute (API), a trade association representing more than 
400 companies from all sectors of the oil and natural gas industry.
    API appreciates this opportunity to address the fuels supply 
problems facing U.S. fuel providers and consumers. Time is of the 
essence because individual State MTBE bans will start to take effect 
soon, with Connecticut's starting in October and New York's and 
California's bans beginning in January 2004. Differing start dates and 
gasoline requirements from various States, combined with a Federal 
oxygen content requirement for reformulated gasoline (RFG), will 
complicate an already tight fuels system and increase the potential for 
disruptions in the supply and distribution system.
    As Congress considers a comprehensive national energy bill, we urge 
it to address problems with fuel supplies that have plagued the 
petroleum industry and energy consumers over the last 8 years.
Solutions Needed to Fuels Problems Facing the Nation
    We believe Congress should repeal the oxygen content requirement 
for reformulated gasoline that is in the Clean Air Act and require a 
national phase-down of MTBE. As part of the package that meets these 
objectives, we also support a renewable fuels standard that phases up 
to 5 billion gallons over several years nationally, with an averaging 
and credit trading program to allow the use of renewable fuels where 
most feasible and cost-effective. In addition, we support provisions 
that would protect and enhance the environmental benefits already 
achieved from reformulated gasoline.
    Repeal of the oxygen requirement and a significant reduction in the 
use of MTBE were two of the key recommendations of the U.S. 
Environmental Protection Agency's 1999-2000 Blue Ribbon Panel on 
Oxygenates in Gasoline. The report is also important because it 
recognizes that refiners today can provide clean-burning reformulated 
gasoline without the oxygen requirement. Three years have passed since 
those recommendations were made.
    These steps are a much better solution than the alternative--which 
is continued State MTBE bans and further aggravation of the already-
troublesome situation of a patchwork of fuels requirements across the 
country. A solution that relies on State-by-State MTBE bans to fix the 
problem is not efficient and will exacerbate supply problems that are 
likely to arise out of uncoordinated and disjointed State requirements. 
Unique State fuel requirements isolate affected markets and, in the 
event of a supply disruption, could cause shortages and price 
volatility, as experienced in two of the last 4 years in Chicago and 
Milwaukee. Sixteen States already have enacted MTBE bans or caps and 
additional States are considering bans.
    In addition, there needs to be recognition that even without 
Federal legislation, ethanol is going to be in our gasoline system in 
increased amounts--at a minimum to fulfill the Federal oxygen content 
requirement for RFG. But the current rules allow little flexibility in 
how, when, and where ethanol would be used. We need a Federal solution 
that phases down MTBE in a uniform manner and allows the use of 
renewable fuels where it makes the most economic sense.
The Federal RFG Oxygen Requirement and State MTBE Bans
    Let me briefly review the situation we face: In 1990, Congress 
amended the Clean Air Act to require the use of RFG in areas with the 
worst ozone pollution. Congress decided that RFG had to meet certain 
emissions performance standards but also had to include a specific 
amount of oxygen. The two most widely used oxygenates at the time were 
MTBE and ethanol. Most of the RFG oxygenate demand was on the coasts, 
where ethanol use faced significant economic, transportation, and 
handling challenges relative to MTBE. As a result, as Congress full 
well expected, MTBE became the most commonly used oxygenate in areas 
near the coast. Ethanol became the oxygenate of choice in the Midwest 
due to favorable economics and proximity to ethanol supply. However, 
when gasoline was spilled or leaked and MTBE came into contact with 
water supplies, odor and taste issues arose with even very small 
concentrations of MTBE.
    Many State governments reacted by banning the use of MTBE. 
Unfortunately, there is considerable variation in the start dates and 
requirements for these laws. For example, Connecticut's ban starts on 
October 1, 2003, while neighboring New York's starts on January 1, 
2004. Some allow incidental amounts of MTBE to remain, while others do 
not. Differing State gasoline requirements will complicate and increase 
the likelihood of disruptions in the supply/distribution system; this 
will place considerable stress on the efficiency and, therefore, the 
reliability of the gasoline distribution system--unless Federal 
legislative changes are made to the fuels provisions of the Clean Air 
Act.
Harmful Effects of State MTBE Bans
    In the absence of Federal legislation, consumers will be subject to 
the uncertainties posed by uncoordinated State actions. Individual 
States are restricting the use of MTBE, but they cannot change the 
Federal RFG oxygen content requirement. That requirement is 
unnecessary, uneconomical and inflexible. It requires the use of an 
oxygenate in each gallon of gasoline in RFG areas. It is driving New 
Hampshire, for example, to opt-out of the Federal RFG program and try 
to impose a State oxy-flexible RFG program, which could add yet another 
boutique fuel to the system if they are successful. Maintaining the 
status quo--with the Federal RFG oxygen requirement in place and States 
continuing to ban MTBE--will require using ethanol in RFG areas where 
it may not be cost-effective. Alternatively, other States may pursue 
solutions that further fragment the market in new and different ways.
    Currently, most of the RFG is required on the east and west coasts, 
yet ethanol is predominantly manufactured in the Midwest. As additional 
State MTBE bans start to take effect, RFG markets will, by default, 
need to use ethanol in each and every gallon of RFG in order to meet 
the Federal oxygen content requirement. The Connecticut, California and 
New York MTBE bans alone are expected to result in ethanol demand in 
those States of about 1.1 billion gallons in 2004. There are no 
assurances that the full extent of the infrastructure needed to 
transport the added amount of ethanol will be in place in time to 
assure a smooth transition. As States get closer to the implementation 
date for their fuel programs, the greater the temptation to change the 
date rather than deal with the uncertainty. California has already 
delayed its ban once. Such a changeable environment does not make the 
investment decision process easier. A Federal solution would remove 
much of the uncertainty that exists now.
    Individual State bans have the effect of balkanizing the fuels 
markets, requiring that fuels with different characteristics be moved 
through the limited distribution system. With more types of fuels comes 
more complexity and less flexibility as the fuels used under one set of 
requirements may not be used to supply an area with other requirements. 
This is a problem where adjacent States require different grades. It is 
also harder to ensure that gasoline with MTBE does not intermingle with 
other gasoline volumes since all gasoline is moved via the same 
pipelines.
    These factors all argue for a national phase-down of MTBE. In order 
for such a phase-down to have the least impact on supply, it needs to 
be done over a 4-year timeframe.
Increasing Use of Renewable Fuels
    While oxygenates are not necessary to make clean-burning fuels, 
there is a public desire to increase the use of renewable fuels, such 
as ethanol. We believe this goal and that of a flexible gasoline 
distribution system can be met by a repeal of the Federal oxygen 
requirement, a uniform nationwide phase-down of MTBE, and a renewable 
fuels standard rising to 5 billion gallons over several years. However, 
for the renewable fuels standard to function effectively, it is 
absolutely critical that refiners be allowed to freely buy and sell 
credits for renewable fuels under a national average and credit-trading 
program. That would allow for flexible and economical use of renewable 
fuels.
    Let me emphasize that the cost of an approach that includes a 
Federal phase-down of MTBE, repeals the Federal RFG oxygen content 
requirement and includes a renewable fuels standard with a flexible 
national averaging, banking and trading program, would be less than 
maintaining the status quo of State MTBE bans and maintaining the 
Federal RFG oxygen requirement. A study by the U.S. Department of 
Energy (DOE) revealed that the cost of the renewable fuels standard 
would be minimal, between 0.5 and 1.0 cents per gallon and likely less 
with an effective banking and trading system. Importantly, a state-of-
the-art study in 2002 by MathPro, Inc., a leading economic analysis 
firm, concluded that replacing the 2 percent oxygen requirement with 
the renewable fuels standard would be less costly than the status quo 
outcome of continued State MTBE bans and continuation of the Federal 
RFG oxygen requirement.
The Need for Limited Liability Protection
    Finally, we support limited liability protection that recognizes 
that when Congress mandates the use of fuels components, and when those 
components have been studied and approved by EPA, it is reasonable to 
disallow a case in which the mere presence of a renewable fuel or 
additive in the gasoline makes it a ``defective'' product. We believe 
the coalition's safe harbor provision strikes a balance between the 
interests of providing limited liability protection for using an 
additive that was approved for that purpose and providing legal 
remedies to injured parties. This narrowly tailored provision only 
applies to design and manufacturing defective product claims under 
products liability law. It would not affect the ``failure to warn'' 
defective product claim or other tort remedies, such as negligence, 
trespass, and nuisance.
    Moreover, the safe harbor provision would not affect liability 
under Federal and State environmental laws, and therefore would not 
affect response, remediation and clean-up. Federal and State 
environmental statutes such as the underground storage tank laws under 
RCRA would still apply if gasoline was released and got into a well or 
contaminated a drinking water supply. There are legitimate concerns 
about the potential risks of renewable fuels, and Congress may address 
those concerns by including a requirement that the EPA take a more 
active regulatory role than it has in the past. The protection afforded 
by a safe harbor provision would apply only to renewable fuels and 
additives that had been approved by EPA.
Conclusion
    To conclude: If Congress fails to act, consumers are likely to face 
the increasing costs of uncoordinated State MTBE bans--leading to 
increased strains on the fuel distribution system. While individual 
States are restricting use of MTBE, they cannot change the inflexible 
Federal RFG oxygen requirement. Maintaining the status quo of the 
Federal oxygen requirement and State MTBE bans will force the use of 
large volumes of ethanol in a very inflexible and unnecessarily costly 
fashion--and it could severely burden, if not disrupt, fuels 
distribution and supply.
    The carefully crafted provisions I have discussed, as part of a 
package that meets our objectives, are supported by an historic 
coalition including API, numerous farm and ethanol interests, Northeast 
State air quality officials and environmental interests and were passed 
by the Senate last year as part of the comprehensive energy bill. They 
offer carefully considered solutions to the fuels problems that have 
challenged fuel providers and burdened American consumers. They protect 
important environmental benefits achieved by reformulated gasoline. We 
strongly urge Congress to adopt similar legislation.
                               __________
Statement Bob Slaughter, President, National Petrochemical and Refiners 
                              Association
    Chairman Voinovich, Senator Carper and other members of the 
subcommittee, thank you for the opportunity to appear before you today 
to discuss the need for a comprehensive U.S. energy policy and 
particularly issues involving fuels and fuel components. My name is Bob 
Slaughter, and I am President of NPRA, the National Petrochemical & 
Refiners Association.
    NPRA is a national trade association with about 450 members who own 
or operate virtually all U.S. refining capacity, as well as 
petrochemical manufacturers who operate similar manufacturing 
processes. NPRA's refining members include large integrated refiners, 
large independent refiners, and regional independents as well as small 
refiners.
Needed: A Focus on Increased Supply
    To summarize our message, today NPRA urges policymakers in Congress 
and the Administration to encourage production of an abundant supply of 
petroleum products. A healthy and growing U.S. economy needs a steady, 
secure and predictable supply of petroleum products, at reasonable 
cost. NPRA believes that Federal policy in recent years has drifted 
away from the need to emphasize the supply side of the energy equation, 
and that an adequate energy supply has been largely taken for granted. 
We need to reinstitute an energy supply ethic in Federal policy to 
provide both national energy security and maintain U.S. economic 
growth.
    To summarize our energy policy recommendations, NPRA urges Congress 
to: repeal the 2 percent RFG oxygenation requirement; reject calls for 
an ethanol mandate; avoid a Federal ban or mandatory phase-out of MTBE; 
extend product liability protection to MTBE and ethanol; and avoid 
unnecessary changes in fuel specifications. We will discuss these 
recommendations in more detail in subsequent sections of this 
statement.
Domestic Refining is a Critical Asset, But a Challenging Business
    We also ask policymakers to extend the concern over petroleum 
product supply to include the domestic refining industry. Total daily 
U.S. demand for petroleum products is approximately 20 million barrels, 
and only 17 million barrels of this is supplied by U.S refineries. The 
remaining 3 million barrels of demand is supplied from a combination of 
several sources: the Caribbean, South America, Canada, Europe, and more 
rarely, the Middle East and Asia.
    No new refinery has been built in the United States since 1976, and 
it is unlikely that one will be built here in the foreseeable future, 
due to economic and political considerations, including siting costs, 
environmental requirements, industry profitability and public concerns.
    U.S. refining capacity has grown somewhat in recent years, but it 
is becoming harder to keep pace with growth in demand for petroleum 
products. As it is, refiners have increased capacity at existing sites 
to offset the impact of capacity lost elsewhere due to refinery 
closures.
    It is also more difficult to add capacity at existing sites due to 
increasingly stringent environmental regulations and the challenging 
economic climate faced by the refining industry. EIA projects that U.S. 
refining capacity may grow by 2 million barrels per day by 2010; this 
would still not keep pace with the rise in U.S. demand for petroleum 
products, which EIA estimates will grow by 1.6 percent per year each 
year through 2025.
Product Imports Could Increase
    This means that the United States, which has had a hard time 
adjusting to the fact that 60 percent of its crude is now imported, may 
have to become accustomed to another unpleasant fact: a larger 
percentage of petroleum products such as gasoline, diesel, jet fuel and 
heating oil may also come from imports.
    NPRA suggests that balanced and temperate actions, adopted now, can 
prevent excessive dependence upon foreign refined products. It seems 
clear that it is in the nation's best interest to manufacture a 
significant portion of the petroleum products we need here in domestic 
refineries. Reduced U.S. refining capacity clearly affects the amount 
of control we have over our supply of refined petroleum products and 
the flexibility of the supply system, particularly in times of stress 
or disruption.
    Currently, about 95 percent of such products are manufactured in 
U.S. refineries. (U.S. exports of refined products to non-U.S. 
destinations are relatively insignificant.) This indicates that this is 
a good time to adopt a policy to maintain a healthy and diverse U.S. 
refining industry. Although the precise percentage of refined product 
manufactured here will vary, adopting this policy now will help 
mitigate or prevent any abrupt slide in U.S. refining capacity and any 
adverse impact on the nation's energy security. And that policy is 
founded in good common sense.
Refiners Are Investing Billions to Improve the Environment
    Refiners currently face a massive task of complying with four 
regulatory programs affecting fuels with significant investment 
requirements, all in the same timeframe. Refiners must invest about $20 
billion to sharply reduce the sulfur content of gasoline and both 
highway and much of off-road diesel. Refiners face additional 
investment requirements to deal with State and possible Federal 
limitations on ether use, as well as compliance costs with Mobile 
Source Air Toxics reductions and other limitations. This does not 
include additional significant investments needed to comply with 
stationary source regulations affecting refineries.
    On the horizon are other environmental requirements which will 
necessitate significant investment. They are: the challenges and cost 
of increased ethanol use, expected Federal or State programs mandating 
changes in diesel fuel properties (cetane and aromatics content, lower 
gravity), and the potential for significant proliferation of new fuels 
caused by the need to comply with the new 8 hour ozone NAAQS. These 
factors will also significantly impact fuel manufacture and 
distribution.
Average Refining Returns Are Modest
    Refining earnings have recently been more volatile than usual, but 
refining returns are generally quite modest when compared with other 
industries. The average return on investment in the industry is about 5 
percent; this is about what investors could receive by investing in 
government bonds, with little or no risk. This relatively low level of 
return, which incorporates the cost of investments required to meet 
environmental regulations, is one reason why domestic refinery capacity 
additions are difficult and new facilities are unlikely to be 
constructed here.
A Key Government Advisory Panel Urged Prudent Regulation
    The National Petroleum Council (NPC) issued a landmark report on 
the State of the refining industry in 2000. Given the limited return on 
investment in the industry and the crushing investment required for 
environmental regulations, the NPC urged policymakers to pay special 
attention to the timing and sequencing of any changes in product 
specifications. Failing such action, the report cautioned that adverse 
impacts on the industry with fuel supply ramifications could result. As 
the above discussion shows, this warning has been widely disregarded.
Refiners Face Additional Facility Investment Requirements
    In fact, release of the NPC report was roughly concurrent with a 
problematic ``enforcement effort'' under the New Source Review Program, 
an effort that threatens to add additional billions of unanticipated 
cost to refiners just to stay in business. The enforcement initiative 
went forward despite near-universal agreement that the NSR program 
requirements were hopelessly confused and thus fertile ground for 
arbitrary enforcement. The refining industry has been struggling to 
resolve the enforcement issue on top of the many other challenges it 
faces. (Going forward, the recently effective final rule reforming NSR 
will add much-needed clarity and consistency to that program's 
requirements. That rule, and the current proposal to clarify the 
definition of routine maintenance under NSR, are rare instances in 
which policymakers heeded the NPC's warning.)
Refiners Will Meet the Challenges, But Some Facilities May Close
    Petroleum refining has never been an industry for the faint of 
heart. Domestic refiners will rise to meet the challenges of the 
current situation. They have demonstrated the ability to adapt to new 
challenges and keep the flow of critical fuels going to consumers 
across the Nation. But certain economic realities cannot be ignored and 
they will impact the industry. Thus, refiners will, in most cases, make 
the investments necessary to comply with the environmental programs 
outlined above. In some cases, however, where refiners are unable to 
justify the costs of investment at some facilities, those facilities 
may close.
    EIA summarizes the impact of past and future refinery closures: 
``Since 1987, about 1.6 million barrels per day of capacity has been 
closed. This represents almost 10 percent of today's capacity of 16.8 
million barrels per calendar day . . . The United States still has 1.8 
million barrels of capacity under 70 MB/CD (million barrels per 
calendar day) in place, and closures are expected to continue in future 
years. Our estimate is that closures will occur between now and 2007 at 
a rate of about 50-70 MB/CD per year . . . All refineries face 
investments . . . But smaller refiners may find their lack of economies 
of scale and the size of the investments required put them at a 
competitive disadvantage and would keep them from earning the returns 
needed to stay in business.'' (EIA, J. Shore, ``Supply Impact of Losing 
MTBE & Using Ethanol,'' October 2002, p. 4.)
Reasonable Regulation Will Help Refiners Maintain Supply
    As the committee can see, the domestic refining industry has major 
challenges ahead. NPRA's members ask that policymakers help by 
insisting that future fuel specification changes be carefully timed and 
sequenced consistent with the National Petroleum Council's 
recommendations. This should be adopted as part of the nation's energy 
policy revisions.
    In addition, NPRA asks that an updated energy policy adopt the 
principle that in the case of new environmental initiatives the 
environmental objectives must be balanced with energy supply 
requirements. As explained above, the refining industry is in the 
process of redesigning much of the current fuel slate to obtain needed 
improvements in environmental performance. This trend will persist 
because consumers desire higher-quality and less-polluting fuels. And 
our members want to satisfy their customers. We ask only that the 
programs be well-designed, appropriately timed and cost-effective. The 
committee can advance both the cause of cleaner fuels and preservation 
of the domestic refining industry by adopting this principle as part of 
the nation's energy policy.
Industry Diversity Benefits Consumers and the Nation
    As demonstrated above, a healthy and diverse U.S. refining industry 
best serves the nation's interest in maintaining a secure supply of 
energy products. Rationalizing and balancing our nation's energy and 
environmental policies will protect a key American resource, the 
domestic refining industry. Given the challenges of the current and 
future refining environment, the Nation is fortunate to retain a 
refining industry that has many diverse and specialized participants. 
Some of the largest companies in the world maintain their positions in 
U.S. refining, while a vibrant set of entrepreneurial independents, 
among the largest in the industry, are increasing their prominence and 
importance in that industry. At the same time, regional and smaller 
independents reliably and conveniently serve regional or smaller niche 
markets. The U.S. refining industry has experienced difficult periods 
before, but the continuing diversity within the industry suggests that 
it has more than enough vitality to continue the industry's important 
work, especially with the help of a supply oriented national energy 
policy.
The Market Situation Demonstrates a Need to Focus on Supply
    NPRA believes that a new national energy policy initiative is long 
overdue. And our testimony thus far has shown why that new policy must 
be supply oriented, and why it should view the need for a healthy and 
diverse domestic refining industry as a cornerstone of a pro-supply 
policy. We believe that any neutral observer would see the wisdom of 
these two policy elements, especially because current events in the 
crude oil and product markets demonstrate the need for them.
    As this testimony is written, speculation about crude and product 
price and supply is a hot topic in the media. Once again, the supply of 
crude and products is stretched tight due to a confluence of external 
factors. In this case, those factors are: the consequences of a strike 
in Venezuela that crippled that country's export capability for months; 
weather much colder than normal in parts of the country where energy 
use is extremely sensitive to temperature; and uncertainty over crude 
oil supply in the immediate future due to the international situation 
involving Iraq.
The U.S. Energy Information Administration (EIA) Helps Explain the 
        Market
    NPRA urges anyone interested in how we got where we are to take a 
look at EIA's webpage in order to read the articles ``This Week in 
Petroleum'' since the beginning of this year. They will find each step 
in the process explained, along with accurate predictions of subsequent 
developments.
    In summary, according to EIA, these are the facts: the strike in 
Venezuela deprived the U.S., that country's largest customer, of a 
significant amount of crude imports for several weeks. This happened 
when crude oil inventories were at modest levels because OPEC lowered 
production quotas for most of 2002. That action had already limited the 
supply of crude.
    Refiners tried to keep up refinery runs, and hence production, by 
utilizing the crude available in the market and by drawing on crude 
stocks. This delayed the impact of the Venezuelan disruption for a 
short period and helped meet strong product demand. That is a 
considerable achievement, given the extent of the crude supply impact 
and the difficult time of year in which it occurred. It is another 
example of the expertise and resourcefulness of the domestic refining 
industry.
    As crude inventories fall, crude runs to refineries decrease 
because less crude is available. When crude runs are reduced, product 
output declines. This may require tapping product inventories to meet 
demand. The reduced product inventories then give rise to concerns 
about the sufficiency of gasoline, diesel and heating oil supplies. EIA 
refers to these possible occurrences as ``Dominos'' in its January 15 
``This Week in Petroleum.'' Subsequent issues of that analysis 
described what happened as the domino scenario unfolded. We have 
attached the January 15 publication for your information.
    Strong evidence such as this, and broad agreement that these are 
the key factors should answer questions about the genesis of today's 
crude and product supply situation. The fact that the Nation is on the 
brink of war in Iraq certainly offers an additional reason to believe 
that these are uncertain times when concern about crude availability 
and supply are understandably present. And those concerns have impacts 
in the marketplace.
Refiners are Working Hard to Supply Needed Products
    Unfortunately, some of the media and a few policymakers have 
alleged that industry misconduct is somehow responsible for the current 
situation. This is not so now, just as it was proven not so in past 
supply disruptions and uncertainties. Refinery runs are close to where 
they were last year at this time, despite general agreement that crude 
supplies are tight. Slightly lower utilization rates this time of year 
are often due to planned maintenance when product demand is usually 
low. Refinery maintenance is often nondiscretionary and scheduled well 
in advance of a largely inflexible date. The need for the refining 
industry to run at high rates of utilization, 92-93 percent on average, 
well above the 85 percent utilization rate considered full utilization 
in other industries, is an important reason why the time available for 
turnarounds is at a premium and hard to change. Another factor is that 
some maintenance cannot be postponed for safety reasons, which cannot 
be compromised.
    This is also a difficult time of the year for refiners to face so 
many market uncertainties. They will soon implement the required 
changeover from winter to summer grade gasoline, which often requires a 
delicate balance as winter product is drawn down to make way for summer 
gasoline in time for the required certification date.
    Many California refiners will experience the first seasonal 
turnaround involving CARB3 and California RFG with ethanol, due to the 
partial phase-out of MTBE in California this year. Please do not 
misunderstand this point. It is not clear that today's market 
conditions reflect problems involving seasonal changeovers. We mention 
this subject to remind nonindustry observers that this time of year is 
an especially sensitive one if available crude supplies are stretched 
thin and demand remains high, which is the case at present.
    The current situation is not totally dissimilar to the summer of 
2000 and early summer of 2001, when supply problems surfaced due to 
market-related and operational difficulties beyond industry's control. 
Investigations conducted of industry behavior at that time found no 
basis for legal action against the industry. We are certain that the 
investigations now being called for will result in the same findings 
which exonerate the industry. And please bear in mind that resources 
spent to answer these charges every time prices increase could be spent 
to improve industry operations and production. EIA responded very 
effectively to recurrent charges of ``price gouging'' in last week's 
issue of ``This Week In Petroleum'' which is attached.
    Refiners are constantly responding to difficult situations like the 
present one, which make it a challenge to maintain adequate product 
supplies. Modern energy policy has given them a tool which helps them 
determine the most efficient way to continue meeting consumer demand. 
The free market swiftly provides the industry with price and supply 
information which they can respond to. Refiners also need maximum 
flexibility to respond to this market information in their decisions 
about product manufacture and distribution. Mandates and other command-
and-control policy mechanisms reduce flexibility and add unnecessary 
cost to gasoline manufacture. Congress should remove existing mandates 
and avoid legislating new ones, such as the proposed ethanol mandate.
    A modern, supply oriented fuels policy would give refiners greater 
flexibility to meet fuel demand within broad performance standards. 
Such a fuels policy would also rely on the free market to determine 
appropriate product supply and allocation. It would avoid inflexible 
command-and-control regulation such as prescriptive mandates, and 
emphasize the development of new fuel legislation and regulation 
through an open process involving all stakeholders, aimed at obtaining 
the best practical answer rather than one that satisfies temporary 
political aims. But most importantly, such an energy policy must focus 
on balancing the dual goals of increased energy supply and continued 
environmental progress.
NPRA Policy Recommendations
    With this concept of a supply oriented energy policy as a backdrop, 
NPRA has reviewed the National Energy Policy legislation approved by 
the House in 2001 and by the Senate last year. The Association offers 
the subcommittee these specific recommendations regarding the fuels 
provisions that may be under consideration for inclusion in this year's 
energy bill.
    First: Repeal the 2 percent by weight RFG oxygenation requirement 
[Clean Air Act section 211(k)] to provide refiners with more 
flexibility to meet supply and air quality requirements.
    Elimination of this 2 percent requirement will give refiners 
increased flexibility to deal with changing market conditions. It will 
also allow them to blend gasoline to meet the standards for 
reformulated gasoline most efficiently and economically, without 
mandated oxygenate content. In some cases, refiners would probably 
continue to use some MTBE, because of its good blending qualities and 
demonstrated ability to reduce air emissions. The overall volume of 
MTBE in gasoline would very likely decline, while providing relief to 
those who are concerned about MTBE usage.
Second: Reject calls for an ethanol mandate
    Imposing an ethanol mandate on gasoline suppliers will make it more 
difficult and expensive to manufacture gasoline and provides no 
compensating benefit to consumers or the environment. An ethanol 
mandate immediately creates winners and losers among fuel providers and 
regional consumers based on their geographic location and history of 
ethanol usage or nonusage. It is thus both highly arbitrary and unfair. 
Inclusion of a credit trading mechanism in the mandate proposal does 
nothing to temper the injustice and economic inefficiency of the 
provision, because it requires fuel manufacturers and their customers 
to pay for the ``privilege'' of not using ethanol in their gasoline.
    Many NPRA members already use significant volumes of ethanol, and 
they expect to increase their ethanol usage in the years ahead. EIA and 
other policy analysts also predict a large increase in ethanol markets 
in coming years, without a mandate. In short, given the relative 
scarcity of quality gasoline blend stocks, ethanol has a bright future 
without any need to resort to the dubious policy of a national ethanol 
mandate.
    Ethanol already enjoys a generous subsidy in the form of a 52 cent 
exemption from the gasoline excise tax; this subsidy costs the Highway 
Trust Fund in excess of $1.2 billion annually. A Federal tariff offsets 
the benefit of the gasoline tax exemption for most imports, making them 
uncompetitive with domestic ethanol production. Ethanol also receives 
tax incentives in 17 States.
    The 5 billion gallon ethanol mandate included in last year's Senate 
ethanol bill was the product of private discussions among a limited 
group of stakeholders. It was never considered by the committee of 
jurisdiction in the Senate. NPRA opposes that provision. We urge the 
subcommittee to make a clean break with the market intervention theory 
typified by both the existing 2 percent requirement and proposals for a 
cumbersome, expensive and unnecessary ethanol mandate.
    The Senate-approved language includes language intended to require 
widespread usage of ethanol even in the summer months, when ozone 
concerns are most severe. This despite the fact that the increased 
volatility of ethanol blends requires additional investment and 
extraordinary measures to allow ethanol use in gasoline during these 
periods. Extra pollution caused for the local environment, supply 
problems for fuel suppliers, or cost problems for consumers should be 
no less important than the desire of one industry for consistent 
demand.
    Few proposals on any subject unite the editorial pages of the Wall 
Street Journal, New York Times and Washington Post. But the ethanol 
mandate is one of them. All three papers have denounced the ethanol 
mandate proposal in no uncertain terms. NPRA agrees with this unusual 
consensus, and hopes that the Senate will reject the mandate proposal.
    Third: Avoid a Federal ban or mandatory phase-out of MTBE use in 
order to maintain adequate gasoline supplies at reasonable cost; direct 
DOE and EPA to work with any States that implement limitations on MTBE 
usage to coordinate the implementation of these restrictions and to 
maintain adequate supply.
    NPRA is concerned about proposals to ban MTBE nationally or to 
mandate a national phase-down of MTBE. Last year's Senate bill called 
for an MTBE ban in 4 years. (A Governor could allow continued use of 
MTBE in his own State, but this would be unlikely.) EIA predicts that 
an MTBE ban would raise the national average price of RFG in 2006 by 
several cents per gallon and reduce supply. (``Supply Impacts of an 
MTBE Ban,'' September 2002)
    MTBE elimination may cause an 11 percent reduction in some gasoline 
volumes when fully implemented. (MTBE provides over 10 percent of RFG 
volume in many RFG areas.) NPRA is concerned about the possible impact 
of this change on supply and manufacturing costs. The supply and demand 
balance in the nation's gasoline market is increasingly tight. Supply 
and price can be affected by weather, unforeseen outages, and 
accidents, resulting in economic losses and negative public reaction, 
and we are seeing this happen with increasing frequency.
    Therefore, we should not exacerbate a tight supply situation by 
arbitrarily eliminating a significant contributor to the nation's 
gasoline supply. If concerns about MTBE usage continue, more deliberate 
but responsive measures can be taken. But recent experience in the 
gasoline market suggests that such significant changes should be taken 
only with caution, and with full disclosure to the public regarding any 
possible supply and cost impacts.
    NPRA also does not believe that current evidence warrants the 
drastic step of a national ban on MTBE. Taking such action based on 
limited current knowledge would set a dangerous precedent for all 
chemicals in widespread commerce. EPA is currently evaluating MTBE's 
status under TSCA (the Toxic Substances Control Act), and NPRA suggests 
that is the only appropriate course of action based on the evidence 
today.
    As EIA noted in a presentation last October: ``MTBE is a very clean 
component from an air emission standpoint. It contains oxygen and has 
no sulfur, no aromatics, no olefins and an RVP that is very close to 
the RVP of the remaining gasoline components.''
    The author also wrote: ``What is not appreciated by many people 
outside of the petroleum business, is that losing MTBE is more than 
just losing the volumes of this blending component . . . no other 
hydrocarbon or oxygenate equals the emission and engine performance 
characteristics of MTBE. Hence, losing a barrel of MTBE results in 
losing more than a barrel of gasoline production. When you remove a 
clean, high performance gasoline stream from the gasoline pool, it is 
difficult to find material to replace its volume and quality 
contributions.'' (EIA, J. Shore, ``Supply Impact of Losing MTBE & Using 
Ethanol,'' October 2002, pp. 10, 12)
    Recent EIA studies confirm that elimination of MTBE will also 
affect many refiners' abilities to comply with the Mobile Source Air 
Toxics rule, which requires refiners to maintain their average 1998-
2000 gasoline toxic emission performance levels. Loss of MTBE would 
make it difficult to match historical toxics performance, and the 
result might be that those refineries would have to reduce their 
production of RFG to achieve compliance.
    NPRA believes that these circumstances support a policy of 
considerable caution toward any proposal to eliminate the option of 
continued MTBE use, at least until there is certain and convincing 
evidence that adequate supplies of replacement fuel components are 
available.
    Some stakeholders advocate a Federal ban or phase-down of MTBE as a 
means of securing an ``orderly'' market transition away from that 
product in States where large quantities of MTBE are currently used. 
This is a largely theoretical argument that assumes that Federal 
regulators and those who seek to eliminate MTBE can choose the one 
appropriate date when MTBE usage should end. This argument ignores 
actual experience in which affected States have modified their plans to 
limit MTBE usage as they become aware of the difficulties inherent in 
replacing it without adverse impact on gasoline supply.
    In short, imposition of a uniform Federal scheme to restrict or 
eliminate MTBE usage runs a considerable risk that the decision will be 
uniformly wrong. Experience with the 2 percent RFG oxygenation mandate 
has taught us that if this occurs, political power can be brought to 
bear to block the changes necessary to meet unanticipated problems.
    For example, even the largest State in the Nation found it 
impossible to obtain a waiver of the 2 percent provision under similar 
conditions, when it was clear to most observers that a waiver was 
justified. This suggests that supply problems arising from an arbitrary 
Federal phase-out or ban of MTBE might be difficult or impossible to 
correct, or that they might only occur accompanied by dubious new 
policy initiatives influenced by the politics of the moment.
Fourth: Extend product liability protection to MTBE and any mandated 
        fuel component
    When it passed the Clean Air Act Amendments of 1990 with the 2 
percent RFG oxygenation requirement, Congress clearly understood that 
MTBE would be widely used to comply with that provision. In fact, the 
percentage of oxygen required by weight was selected to allow MTBE and 
perhaps other ethers to be used for that purpose. It was so clear that 
MTBE usage would predominate, in fact, that the Clinton Administration 
came forward with a rule that would have required some of the oxygen 
content to be met by ``renewable'' oxygenates, i.e. ethanol, to ensure 
usage of that product in the RFG pool. [That attempt, a clear end-run 
of the statute and subsequent reg-neg agreement, was overturned by the 
U.S. Court of Appeals for the District of Columbia in the case API and 
NPRA v. EPA, 52 F.3d 1113, 1119 (D.C. Cir. 1995). In the decision, the 
court also noted that U.S. EPA had ``conceded that use of ethanol might 
possibly make air quality worse.''
    The amendment establishing the reformulated gasoline program was 
added to the Clean Air Act amendments in the Senate by Senator Daschle. 
When the 2 percent requirement became part of the final bill, the 
refining industry acted to comply. As foreseen, MTBE became the 
oxygenate of choice because of its good blending characteristics, the 
fact that, unlike ethanol, it could be shipped in pipelines, and the 
reality that the higher volatility of ethanol blends makes their use in 
RFG during the summer ozone season problematic.
    U.S. MTBE production increased from 146 thousand barrels per day in 
1993 to roughly 230 thousand barrels per day in both 2001 and 2002. The 
air quality improvements made possible by RFG use in the cities where 
it has been required are well known. MTBE has contributed to those air 
quality improvements.
    In recent years, product liability suits have been brought against 
refiners and petrochemical manufacturers due to MTBE contamination 
found in groundwater. Those suits seek to overlook the fact that the 
Clean Air Act amendments clearly required and contemplated widespread 
usage of MTBE in the RFG program. As discussed above, Congress was also 
aware that large quantities of MTBE would be needed in the RFG program.
    No one should be penalized for obeying the law. Yet this is the 
position in which refiners and petrochemical producers find themselves 
because of these liability suits. Money spent to defend against these 
unfair suits could be better used to produce additional supplies of 
petroleum and petrochemical products for consumers and the nation's 
economic benefit.
    During the energy bill conference last year, the House recognized 
the need for product liability language that would help fuel suppliers 
defend themselves against these unfair charges. NPRA encourages 
Congress to include the same or similar language in the energy bill 
this year. It is only fair that any fuel producer who responds to a 
congressional mandate for use of a product be protected against legal 
action based solely upon production or use of the mandated product.
Fifth: Avoid unnecessary changes in fuel specifications
    As discussed previously, the refining industry faces significant 
investment requirements in order to comply with regulations to improve 
the environmental performance of both gasoline and diesel fuel in 
coming years. Significant investments will also be required to respond 
to regulations affecting facilities. NPRA urges the subcommittee and 
committee to limit additional fuel specification changes while work is 
in progress to comply with these existing requirements. Although we do 
expect a proposed rule this year to reduce the sulfur level in off-road 
diesel over the period 2007-10, industry has been consulting with EPA 
and OMB in the hope of coordinating the off-road requirements with the 
existing highway diesel rule. We ask that this subcommittee monitor 
developments on that regulation.
    Particular care should be used in considering so-called ``boutique 
fuel'' gasoline programs. In many cases these programs represent a 
local area's attempt to address its own air quality needs in a more 
cost-effective way than with reformulated gasoline. NPRA welcomes 
further study of the ``boutique fuels'' phenomenon, but urges members 
of the committee to resist imposition of additional fuel specification 
changes in a vain attempt to curtail State and local experimentation.
    NPRA is also concerned about provisions in last year's bill that 
facilitated certain opt-ins to the reformulated gasoline program. In 
creating the RFG program, Congress established requirements for RFG 
opt-ins that recognized the need to limit access to that program due to 
supply and investment considerations. If anything, the reasons 
underlying those concerns are stronger now than they were 10 years ago. 
Therefore, NPRA urges that current Clean Air Act language regarding 
access to the RFG program be retained, rejecting any changes to current 
language that limits participation in the RFG program to those areas 
with a demonstrated need for that fuel.
    NPRA looks forward to working with the subcommittee and full 
committee to accomplish these and other objectives as part of a supply 
driven national energy policy. I would be glad to answer any questions 
raised by our testimony today.
                                 ______
                                 
                              attachments
                  [From the Energy Information Agency]
                       ``This Week In Petroleum''
                     (Released on January 15, 2003)
Dominoes
    Many of us remember when as kids we would stand dominoes up, one in 
front of the other, and then tip the first one so that it would fall 
into the one behind it, starting a chain reaction in which all of the 
dominoes fell down, one after another. Well, one theory is that this 
image is analogous to what is currently happening in the U.S. oil 
market following the disruption in Venezuela oil exports.


    Although the origins of weekly crude oil imports are very 
preliminary and thus not published, it appears that some crude oil from 
Venezuela continues to arrive into the United States. And, while crude 
oil imports from Venezuela have increased some over the last 2 weeks, 
they continue to be much lower than normal. As Venezuela's largest 
customer, a dramatic cut in oil exports from Venezuela as a result of 
their ongoing strikes, has led to U.S. oil imports declining. U.S. 
crude oil imports over the last 3 weeks are more than 300,000 barrels 
per day less than over the same period a year ago. With U.S. oil 
production relatively flat and unable to increase to make up for the 
lost Venezuelan imports, less supply into the U.S. crude oil market 
means either that less crude oil gets processed through refineries, 
crude oil inventories are drawn down to replace the lost supply, or a 
combination of both. As the accompanying graph shows, while crude oil 
refinery inputs did initially decline following the Venezuela 
disruption, they recovered somewhat, while inventories have continued 
to drop. U.S. crude oil inventories now are less than 3 million barrels 
above the Lower Operational Inventory level of 270 million barrels. 
While there is nothing to prevent inventories from falling below 270 
million barrels, were that to occur, less flexibility would be 
expected, and according to the National Petroleum Council, localized 
disruptions in refinery operations could be expected. Clearly, 
refiners, for many reasons (healthy refinery margins, expectations of 
higher prices ahead encouraging stock building for the future, building 
product inventories ahead of schedule refinery maintenance, etc.), have 
decided to use inventories to maintain refinery inputs.
    But just as the reduction of Venezuela imports led to lower U.S. 
oil imports, which led to lower crude oil inventories, if the situation 
continues, the next likely domino to fall could be a reduction in crude 
oil refinery inputs. If crude oil inventories fall further, they will 
be down to levels that couldn't be drawn down much further, forcing 
refiners to curtail crude oil inputs into refineries. If this happens, 
refinery output would also fall and product inventories would need to 
be drawn down to supply demand for these products. So while all of the 
dominoes haven't fallen yet, unless additional crude oil supply arrives 
in the near future, we could be watching the dominoes topple each other 
over the next month or two.


Retail Gasoline Price Increases For Fifth Week In A Row
    The U.S. average retail price for regular gasoline rose for the 
fifth week in a row last week, increasing by 1.0 cent per gallon as of 
January 13 to end at 145.4 cents per gallon. This price is 34.3 cents 
per gallon higher than last year. Prices throughout most of the country 
were up, with the largest increase occurring in the Midwest, where 
prices rose 2.3 cents to end at 144.2 cents per gallon. The Gulf Coast 
was the only region that saw a price decrease, with prices falling by 
0.2 cent to end at 139.9 cents per gallon.
    Retail diesel fuel prices decreased last week, falling to a 
national average of 147.8 cents per gallon as of January 13. Retail 
diesel prices were down throughout the country, with the largest price 
decrease occurring in the Midwest, where prices dropped 2.8 cents per 
gallon to end at 146.7 cents per gallon.
Heating Fuel Prices Show Modest Gains This Week
    Residential heating fuel prices increased slightly for the period 
ending January 13, 2003. The average residential heating oil price was 
143.1 cents per gallon, up 0.3 cent per gallon from the previous week. 
Residential propane prices also continued to move upward by 0.7 cent 
per gallon, rising from 126.8 to 127.5 cents per gallon. Heating oil 
prices are 26.5 cents per gallon higher than last year at this time 
while residential propane prices are 14.1 cents per gallon higher than 
1 year ago. Wholesale heating oil prices decreased 6.3 cents per gallon 
this week, to 88.5 cents per gallon, while wholesale propane prices 
decreased from 62.9 to 62.0 cents a gallon, down 0.9 cent per gallon.
Propane Inventories Sharply Lower
    U.S. inventories of propane reported the largest weekly decline of 
the heating season last week, dropping by more than 3 million barrels 
just ahead of an arctic air mass that swept through most areas east of 
the Rockies. As of the week ending January 10, 2003, U.S. inventories 
stood at an estimated 47.6 million barrels, a level that continues to 
track within the average range for this time of year. Regionally, Gulf 
Coast inventories accounted for about two-thirds of the weekly stock 
draw with a nearly 2.0 million decline, followed by a 0.5 million-
barrel drop in the Midwest and a 0.4 million-barrel decline in the East 
Coast during this same period. All regional inventories remain within 
their respective average ranges as of last week.
    Note: Text from the previous editions of ``This Week In Petroleum'' 
is now accessible through a link at the top right-hand corner of this 
page.




















                                 ______
                                 
                         This Week In Petroleum
                      (Released on March 12, 2003)
Do Current High Petroleum Product Prices Reflect Price Gouging?
    As of Monday, March 10, EIA's weekly survey of retail gasoline 
prices showed the U.S. average price for regular grade at $1.712 per 
gallon, only a tenth of a cent below the highest nominal (not 
inflation-adjusted) national average price on record. On the same day, 
EIA's weekly retail diesel fuel price survey reported a national 
average of $1.771 per gallon, setting a new record price (in the 
history of this survey, which dates from 1994) for the fourth 
consecutive week. Residential prices for heating oil and propane are 
also near record levels. With prices this high, and tight supplies and 
the possibility of war in Iraq raising fears that they may go still 
higher, some have raised the question of whether price gouging is 
occurring.
    ``Price gouging'' is a term laden with emotion, and is in fact 
difficult to define objectively. In a technical sense, it refers to a 
situation where a seller attempts to extract a higher price (and 
profit) than would normally result from underlying supply and demand 
fundamentals. It is that last phrase, however, that makes gouging so 
hard to define, because in a free market, when supply and demand are 
out of balance, prices change to restore equilibrium. What consumers 
seem to expect is that no matter how much demand may exceed supply in 
the short run, prices should not rise to more than an ``acceptable'' 
level, which may leave sellers unable to cover their own increased 
costs, or fail to provide sufficient incentive to bring increased 
supplies into the market.
    So do current prices for petroleum products, particularly gasoline, 
reflect gouging? In EIA's estimation, the answer is ``no.'' EIA 
continually monitors and analyzes data and trends in the U.S. petroleum 
markets. Gasoline prices are currently elevated largely due to high 
crude oil prices, and to a lesser extent, strong refining margins. 
Distribution and marketing margins are not unusually high, and there is 
no evidence of price gouging at any level. There are a number of 
factors driving gasoline prices higher:

      The price of crude oil on the world market. Increases or 
decreases in crude oil prices, based on global supply and demand, 
translate almost instantly into changes in petroleum product spot and 
futures prices. Crude oil prices have recently reached their highest 
levels since October 1990, and are more than $8 per barrel higher than 
when the previous record gasoline price was set in May 2001.
      Seasonal price patterns, also driven by supply and 
demand. Gasoline tends to be more expensive in the spring and summer, 
when demand for it is highest.
      Other supply/demand factors, such as refinery output, 
availability of imports, and inventory levels. Inventories are 
significant both as an indicator of a tight supply demand balance, and 
as a buffer supply source, and are now significantly below their normal 
seasonal range.

    At $1.712 cents per gallon as of March 10, 2003, the U.S. average 
retail price of regular gasoline is at its highest level ever at this 
time of year, and 49 cents higher than a year ago. However, it should 
be noted that West Texas Intermediate crude oil is up about $13 per 
barrel (31 cents per gallon) over the same period, and average spot 
gasoline prices are up 38 cents. Thus, about two-thirds of the year-
over-year increase in gasoline prices can be ascribed to crude oil, 
while refining margins are up about 7 cents over year-ago and 
distribution/marketing margins are up 11 cents (from unusually low 
levels in March 2002).
    The Energy Information Administration has found that retail 
gasoline and diesel fuel prices are almost entirely driven by changes 
in spot prices over the previous few weeks, to such an extent that 
near-term retail prices can be predicted with accuracy. (See Gasoline 
Price Pass-Through and Diesel Fuel Price Pass-Through.) Price gouging, 
when it occurs (which is rare), is usually a very localized phenomenon, 
and only at the retail level. As long as retail prices conform to the 
predicted pattern of pass-through, it can be assumed that no 
significant gouging is occurring.
    Unfortunately, incidents of apparent gasoline price gouging have 
been seen, most recently in the wake of the terrorist attacks of 
September 11, 2001. In that case, a few local marketers quickly raised 
retail prices to exorbitant levels, apparently fearing that supplies 
would be interrupted, and/or that wholesale prices would rise 
dramatically, making replacement supplies much more expensive. 
Reassurances by major suppliers, that they would hold the line on 
prices, quickly stabilized the markets, and reportedly some of those 
marketers that had briefly raised prices granted refunds to customers 
who had bought during that period. A number of States now have anti-
gouging laws and enforcement programs in place to prevent this type of 
problem. Unfortunately, the greater test would come if there were 
indeed a major global, national, or even regional supply interruption. 
While anti-gouging laws, if enforceable, might keep prices under 
control, they cannot assure continuity of supply.
    The Department of Energy maintains a toll-free hotline for 
consumers to report suspected gasoline price gouging, at (800) 244-
3301.
U.S. Retail Gasoline Price Continues To Climb
    The U.S. average retail price for regular gasoline rose last week 
for the twelfth time in 13 weeks, increasing by 2.6 cents per gallon as 
of March 10 to reach 171.2 cents per gallon, which, as noted above, is 
48.9 cents per gallon higher than a year ago. This price is only 0.1 
cent lower per gallon than the highest price in nominal dollars since 
EIA began recording this data in August 1990. While the outlook could 
go either way, strong gasoline demand ahead of the normal seasonal 
increase, extensive refinery maintenance, and still tight crude oil 
supply, may be pointing to added price pressure in the months ahead. 
Prices were up throughout the country, with the largest increase 
occurring in California, where prices rose 7.2 cents to end at 208.4 
cents per gallon, the highest price ever in our survey, which for 
California goes back to May 2000. This is the second week in a row that 
California prices have been above $2 per gallon. Prices for all of the 
West Coast are on the brink of that $2 mark, hitting 199.3 cents per 
gallon on March 10, and prices in PADD 5 appear to be an important 
driver in the increase of national prices.
    Retail diesel fuel prices increased for the eighth straight week, 
rising 1.8 cents per gallon to a national average of 177.1 cents per 
gallon as of March 10. This is the highest diesel price since EIA began 
recording this data in March 1994, and the fourth week in a row that 
diesel fuel has topped its previous record price. Retail diesel prices 
were up throughout most the country, with the largest price increase 
occurring on the West Coast, where prices rose 8.1 cents per gallon to 
end at 188.6 cents per gallon. Prices in New England rose again, by 4.7 
cents to reach 200.1 cents per gallon, the highest price in the Nation. 
The Gulf Coast was the only region that saw a price decrease, with 
prices falling by 0.3 cent to end at 169.7 cents per gallon.
Heating Oil Price Shows Slight Increase While Propane Price Begins to 
        Decline
    Residential heating oil prices increased 1.6 cents per gallon for 
the week ending March 10, 2003, averaging 185.4 cents per gallon, and 
are 68.6 cents per gallon higher than last year at this time. 
Meanwhile, wholesale heating oil prices decreased 2.3 cents per gallon 
this past week, reaching 127.0 cents per gallon.
    Residential propane prices decreased 6.9 cents per gallon for the 
week ending March 10, 2003 to reach 165.3 cents per gallon, but are 
still 53.2 cents higher than 1 year ago. Wholesale propane prices 
decreased 34.4 cents per gallon, from 114.8 cents per gallon to 80.4 
cents per gallon, reversing the increase seen in the previous week.
Propane Inventories Continue Lower
    Continued bouts of cold weather in some areas of the Nation 
contributed to last week's robust stock draw that positioned U.S. 
inventories of propane as of the week ending March 7, 2003 at an 
estimated 18.9 million barrels, just 0.4 million barrels above the 
Lower Operational Inventory (LOI) for propane. While not implying 
shortages or operational problems, an inventory level below the LOI is 
indicative of a situation where supply flexibility could be 
constrained. Since March stockdraws typically average about 3 million 
barrels during the month, last week's relatively hefty 2.1 million 
barrel stockdraw accounted for about 70 percent of the average monthly 
total, perhaps setting the stage for yet another record monthly draw 
following those reached during January and February 2003. But with 
inventories at or near historical lows in most regions, the March 
record of 7.4 million barrels reached during 1999, may not occur as the 
industry struggles to overcome sporadic operational and/or distribution 
problems associated with inventories at these low levels. Nevertheless, 
the severe winter of 2002-03 may prove to be the new benchmark against 
which future winters will be gauged.
    Note: Text from the previous editions of ``This Week In Petroleum'' 
is now accessible through a link at the top right-hand corner of this 
page.






















                               __________
 Statement of Scott H. Segal, Bracewell & Patterson, L.L.P., Counsel, 
                      Oxygenated Fuels Association
    Chairman Voinovich, Senator Carper and members of the subcommittee, 
thank you for this opportunity to testify regarding national motor 
fuels policy and the Clean Air Act. My name is Scott Segal, and I am a 
partner at the law firm of Bracewell & Patterson. In that capacity, I 
have represented clients here in Washington on environmental policy 
matters for 13 years. Today, I am here in my capacity as counsel to the 
Oxygenated Fuels Association. In addition, I serve on the adjunct 
faculty of the University of Maryland (University College) in the area 
of Science and Technology Management.
    Founded in 1983, the Oxygenated Fuels Association (OFA) is an 
international trade association established to advance the use of 
oxygenated fuel additives to improve the combustion performance of 
gasoline, thereby significantly reducing automotive tailpipe pollution.
    OFA gathers, develops and analyzes technical information on the 
blending, performance, handling, health benefits and environmental 
properties of oxygenates used in gasoline. OFA works with Federal, 
State and local governments, national health organizations, 
environmental groups and major allied industries, such as automotive 
manufacturers, oil companies, and gasoline marketers and other 
interested parties. OFA sponsors numerous technical analyses and health 
science studies showing the automotive performance and health benefits 
of oxygenated fuels.
1. General Considerations for U.S. Motor Fuels Policy
    Mr. Chairman, the decision to examine the impact of energy policy 
on U.S. motor fuels issues could not be more timely. As today's hearing 
is underway, disturbing trends are emerging regarding the security, 
supply and price of motor fuels. Despite the fact that the spring 
driving season is not yet upon us, gasoline prices at the pump are 
already elevated. While much of the blame for gas prices rests squarely 
on crude oil prices stimulated by current international uncertainties 
in the Middle East and Venezuela, other self-imposed policy decisions 
are also playing a role.
    Recently, one analyst at the Oil Price Information Service 
described current prices this way, ``It's Ash Wednesday, and we're 
going to be asked to give up disposable income for Lent.'' The analyst 
noted that ``high fuel prices rob consumers of money to pay for 
computers, cars, home improvements and other economy-boosting goods and 
services.'' (``No Stopping Gas Prices,'' USA Today, March 5, 2003, 
citing Tom Kloza). The article in which he was cited went on to assess 
complicating factors. And one of these was:
    Conversion to ethanol instead of potential pollutant MTBE as an 
ingredient in summer-season gas. The change is cumbersome, and States 
such as California rely on distant States for corn-based ethanol. ``Not 
a lot of folks can help them out if they get into trouble'' with 
ethanol supplies, says Joanne Shore, senior analyst at DOE's Energy 
Information Administration. (Id.)
    In particular, problems in California are complicated by conversion 
from MTBE to ethanol fuels. The noted oil analyst Trilby Lundberg put 
the California situation in a national context, stating in part that, 
``The increase of just over a nickel in the U.S. average is nearly 
entirely due to California refineries switching over to corn-based 
additives . . . Some refineries are changing over to a more expensive 
blend of gasoline and ethanol, which temporarily cut the State's 
gasoline supply by 10 percent.'' (Gas Prices Up to Near-Record Level, 
Associated Press, March 10, 2003). Californians familiar with the 
State's energy situation question whether moving away from MTBE makes 
sense right now, particularly in light of the international situation. 
The Daily Bulletin of California's Inland Valley reported:
    Rising prices now are not due to a true shortage . . . but simply 
to uncertainty. ``We've been living the good life for 22 years. We've 
had some of the cheapest gas in the world,'' said Bob van der Valk, 
bulk fuels manager for Cosby Oil in Santa Fe Springs. Market factors 
like the major oil companies' decision to start blending their summer 
gas a different way are playing a role as well, van der Valk said. Gas 
blended for summer usage has always required more refining than the 
winter variety, he said. But starting Monday, the major companies will 
mix their summer gas with ethanol additives instead of MTBE (methyl 
tertiary butyl-ether) for the first time--an added cost, and 
complication, at a time when a potential war in Iraq throws the 
reliability of Middle Eastern crude oil into question. ``The last 
Persian Gulf War when hostilities broke out, we had an interruption in 
crude oil supply, and there was an instant spike in the price of gas on 
the street 25 to 30 cents. That hasn't even happened,'' van der Valk 
said. ``That time we didn't have the MTBE-to-ethanol switch. Last time 
it was just strictly crude oil.'' (``Gas prices keep pumping up: No end 
in sight as a gallon climbs to $1.97,'' March 3, 2003).
    One problem associated with ethanol blends of gasoline is simply 
that such blends lessen volumes because ethanol contains comparatively 
greater amounts of oxygen than MTBE. According to Jeremy Bulow, a 
Stanford University economist, the transition to ethanol simply means 
California will be able to make less of its own gasoline and will have 
to increase the amount of supply it imports from elsewhere. ``It 
reduces the capacity of the refiners in California to produce 
gasoline,'' Bulow noted. (Alan Zibel, San Mateo County Times, Mar. 14, 
2003). Further, making gasoline with ethanol can be tricky and 
expensive, necessitating changes in blendstocks that are quite 
expensive. David Hackett, president of Irvine-based consulting firm 
Stillwater Associates, said spot market prices for gasoline meant for 
blending with ethanol jumped up 10 cents last week and 17 cents amid a 
``dramatic shortfall'' of that fuel in recent weeks. Ethanol-blended 
gasoline is ``tough to make. It's trading at very high levels,'' 
Hackett said. ``The correct kind of gasoline is in short supply.'' 
(Id.)
    A consensus of studies confirms the price-supply impact of 
switching from MTBE to ethanol. 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. Verleger is a principal at PKVerleger LLC and BP Senior Fellow 
at the Council on Foreign Relations.
    As OFA has noted many times, the impact of MTBE on the national 
motor fuels pool is extraordinarily significant. Today, many of 
America's drivers use cleaner-burning gasoline designed to cost-
effectively reduce harmful motor fuel emissions and improve the air we 
breathe. Introduced in 1995, Reformulated Gasoline (RFG) is used today 
in the most polluted urban areas in 17 States and the District of 
Columbia. RFG usage accounts for about 34 percent of the total U.S. 
gasoline market (i.e., 2.5 million barrels/day or 100 million 
gallons/day).
    While the undeniable environmental benefits of RFG will be 
discussed later in this statement, I want to keep our eyes on the 
impact of MTBE volumes on fuel supply. DOE Under Secretary Bob Card 
testified before the U.S. Senate in 2001 that,
    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. (Statement 
before the Senate Energy and Natural Resources Committee, June 21, 
2001).
    Not only do policies designed to hasten MTBE's exit from the 
marketplace, therefore, complicate the existing picture for gasoline 
price and supply; they also undermine our clear and present needs for 
national security. It is no secret that as these hearings are 
occurring, hundreds of thousands of U.S. men and women are being 
mobilized in the Middle East. What few recognize is that a robust 
supply of motor fuels is an essential prerequisite for a safe and 
effective mobilization. The National Defense Council Foundation (NDCF) 
noted that five different Presidents--Eisenhower, Kennedy, Nixon, Ford 
and Carter--recognized that maintaining a healthy refining sector was 
essential to national security. (National Defense Council Foundation, 
The Growing Refining Gap, A Threat to National Security vi--Apr. 29, 
1994).
    As mobilization continues, one would be hard pressed to think of a 
worse time to remove 10 percent of the capacity of motors fuels 
capacity in the nation's most populous cities. The amount of refined 
products required to supply a modern military far exceeds the amount 
required in the past. For example, during the peak of Operation Desert 
Storm, the half million U.S. military personnel involved consumed more 
than 450,000 barrels of light refined products per day, nearly four 
times the amount used in World War II by the two million strong Allied 
Expeditionary Force that liberated Europe.
    While ethanol currently has a significant and growing share of the 
fuel pool, some have suggested that mandating its further use could 
answer price and supply questions. We believe that an ethanol mandate 
does not provide an acceptable answer to U.S. energy security needs, 
given ethanol's heavy dependence on fossil fuel inputs and its net 
negative energy yield. David Pimental of Cornell University further 
noted that, ``Numerous studies have concluded that ethanol production 
does not enhance energy security, is not a renewable energy source, is 
not an economical fuel, and does not insure clean air. Further its 
production uses land suitable for crop production and causes 
environmental degradation.'' (The Limits of Biomass Utilization, August 
16, 2001 at 9). In a new study, published in BioScience in December 
2002, Pimental and his associates at Cornell analyzed 10 alternative 
energy sources. Of the ten, two--ethanol and geothermal production--
were found to be ``not sustainable.'' The studies authors stated that, 
``Ethanol production requires more than 30 percent more fossil energy 
to produce a gallon of ethanol than the energy yield in a gallon of 
ethanol.'' Also, the ethanol technology causes serious environmental 
problems, including air, water, biological and soil pollution, the 
study found (for a review, see Geotimes, Feb. 2003, at 
http://www.agiweb.org/geotimes/feb03/resources.html) John Krummel, 
a senior research analyst at the Argonne National Labs, funded by 
the U.S. Department of Energy, said that Pimental's work on ethanol 
efficiency ``shows the Achilles' heel of renewable energy: large 
land areas are needed for full deployment.'' Id.
2. The Role of RFG in Environmental Protection
    By every measure, clean-burning RFG blended with MTBE has exceeded 
all pollution reduction goals and substantially and cost-effectively 
improved the nation's air quality. RFG has cut smog-forming pollutant 
emissions by over 17 percent, the equivalent of removing 64,000 tons of 
harmful pollution from the air we breathe or taking 10 million vehicles 
off our roads. RFG has reduced emissions of benzene, a known human 
carcinogen, by some 43 percent, while reducing total toxic air 
emissions by about 22 percent. Cleaner-burning MTBE accounts for a 
large part of the overall emission reductions from RFG. In 1998, the 
Northeast States for Coordinated Air Use Management found that RFG with 
MTBE substantially reduced ``the relative cancer risk associated with 
gasoline vapors and automobile exhaust compared to conventional 
gasoline,'' concluding that today's RFG reduces cancer risk by 20 
percent over conventional gasoline. More recently, the California Bay 
Area Air Quality Management District (BAAQMD) concluded that a 
substantial reduction in cancer risk in the region is directly 
attributable to MTBE.
    OFA has consistently taken the position that an essential 
prerequisite for substantive revision of the Clean Air Act is that the 
actual reductions in air emissions that result from use of oxygenated 
RFG be preserved in any subsequent formulation of fuel.
3. Issues Related to Water Quality
    Opponents of the continued use of MTBE point to allegations 
regarding MTBE in certain water sources. Is this fair commentary? The 
answer is--no--providing gasoline is properly contained and accidental 
spills and leaks promptly cleaned up. In 1996, MTBE was discovered at 
low levels in groundwater sources in California. MTBE has also been 
detected at low concentrations in other parts of the country. MTBE has 
since received an inordinate amount of attention from US public 
officials who have attempted to ban MTBE in their jurisdictions.
    Initially, the US problem resulted almost entirely from a serious 
lapse in the regulation of underground gasoline storage tanks (UGSTs), 
which resulted in thousands of leaking UGSTs by the late 1980's. So 
widespread was the problem that the EPA established a program in 1988, 
the Leaking Underground Storage Tank (LUST) Trust Fund, to provide 
financial assistance to close down or bring these tanks up to 
standards. Yet by 1999, over 10 years later, only 80 percent of leaking 
tanks had been closed down or repaired. By 1999, EPA also estimated 
that almost 400,000 releases from regulated USTs had been identified. 
In spite of these sobering statistics, however, US public debate has 
focused only on MTBE detected at some of these leak sites, and not on 
larger problems associated with gasoline.
    Claims have been made that MTBE is more water-soluble than other 
gasoline components. What has been completely overlooked, or ignored is 
that MTBE can only be introduced into the environment mixed with much 
larger quantities of the gasoline in which it is blended, usually 
through gasoline leaks or spills. The much larger problem in fact, is 
that where you find MTBE, which is not toxic or hazardous to health and 
the environment, you also find gasoline, containing compounds that are. 
More information on toxicity is attached as an addendum to this 
statement.
    This committee itself has recently considered material improvements 
in the UST program, and OFA looks forward to working with you on such 
legislation. Frankly, UST implementation, enforcement and recently 
introduced legislation are the most direct and appropriate ways to deal 
with instances of gasoline components appearing in water.
    Objective analysis points to MTBE having become a convenient 
scapegoat as the one entity to which blame for a collective failure to 
protect US groundwater resources can be conveniently transferred. An 
Australian fuels expert recently characterized this phenomenon as 
``shooting the messenger'', a reference to the fact that some 
countries, such as Canada, actually use MTBE detections in water as an 
``early warning'' of potentially significant gasoline leaks into the 
ground that need to be cleaned up as quickly as possible.
    Citizens in the Americas are well aware that gasoline and water do 
not mix. Many countries around the world have safely and securely used 
MTBE extensively as an octane enhancer since the early 1970's, and 
ethanol enriched gasoline--another water soluble, but toxic oxygenate--
since the 1980's. Where strict compliance with and strong enforcement 
of gasoline storage and handling regulations is observed, MTBE and 
other water-soluble additives have a statistically insignificant 
likelihood of ever contaminating water supplies.
    Recent California experience also suggests that MTBE water quality 
issues have been overstated. At a National Groundwater Association 
conference held June 6-7, 2002, Kevin Graves of the California Water 
Resources Control Board gave the address at lunchtime. His question to 
the crowd: ``What are you doing at an MTBE Conference? MTBE is not the 
big water quality problem in California.'' He told the story of a 
recent investigation done in their office to verify an environmentalist 
press statement that 4,000 drinking water wells had been abandoned in 
California due to contamination. His investigators found that, in 
actuality, only 1,200 of those wells had ever experienced an exceedance 
of any contaminant. They further found that the majority of the 
exceedances were from natural, not manmade contaminants--such as 
arsenic and metals. They also found that of the wells closed due to 
synthetic contaminants, the vast majority were solvents from dry-
cleaning, pesticides from agriculture, or nitrates, from either 
agricultural or other industrial use. Only 10 of the closed wells had 
ever had exceedances of gasoline constituents of concern constituents, 
and only 10 had had exceedances of the MCL for MTBE''
4. Product Bans Set Dangerous Precedents
    Mr. Chairman, it is our understanding that you do not support 
product bans, as a general rule, and that the case for a ban of MTBE is 
unacceptably weak. Yet there are some who would urge the adoption of a 
ban as a matter of political expediency. We urge the subcommittee in 
the strongest terms not to ban MTBE.
    While Congress has acted to ban certain toxic chemicals, it has 
never done so without an extensive scientific record of confirmed risks 
and, in some cases, with an opportunity for the appropriate 
administrative agency to revisit the prohibition based on additional 
factual information. Congress has enacted only one statutory 
prohibition on a toxic chemical, a ban on PCBs in the Toxic Substances 
Control Act, enacted in 1976. Even this prohibition allowed EPA to 
permit the use of PCBs where it could be shown that there was no 
unreasonable risk. Furthermore, while EPA has taken regulatory action 
before to take chemicals out of commerce or limit their use, such as 
asbestos, lead, and a few major pesticides, EPA only exercised its 
authority after substantial scientific analysis and an opportunity for 
public review and comment. None of the product bans thus far proposed 
allows EPA to make additional findings concerning the actual risk to 
human health nor allows EPA to exercise its regulatory expertise to 
provide for exceptions or changes based on changed circumstances. In 
fact, the data cited in the addendum below disproves toxicity claims. 
In this respect, a ban of MTBE is both arbitrary and unprecedented.
    A ban of MTBE is also objectionable because of the typically short 
phase-in periods for such actions (some to be implemented in 4 years or 
less). In other parts of the Clean Air Act, Congress has taken action 
to prohibit the sale of certain chemicals or change the design of 
certain products, but never according to such an abrupt schedule. In 
Title VI of the 1990 Clean Air Act Amendments, for example, Congress 
mandated a phase-out of Class I chlorofluorocarbons (CFCs) over a 10-
year period, and a phase-out of Class II CFCs over a 30-year period. 
Likewise, in Title IV of the 1990 Clean Air Act Amendments, Congress 
ordered a reduction in emissions of sulfur dioxide over a 10-year 
period. Title II of the 1990 Clean Air Act Amendments provides for a 
tightening of standards for automobile emissions that extends in a two-
step process over 11 years. Indeed, the investments required to make 
the Clean Air Act RFG work were substantial enough to warrant a 5-year 
planning and implementation period alone.
    Restrictions on MTBE not only harm MTBE manufacturers, but they 
also set a dangerous precedent that could inhibit the success of 
federally mandated environmental programs in the future. To encourage 
the development of environmentally protective products and processes in 
the future, Congress must ensure that the rules for participating in 
markets are clear and fair, and that the participant has a reasonable 
expectation to earn a return on an investment. Proposed bans on MTBE in 
4 years or less send a disquieting message that Congress can 
arbitrarily change the rules at any time, with potentially ruinous 
consequences for those who have taken risks and made good faith 
investments.
5. Liability Issues
    Mr. Chairman, as you know, instances of alleged contamination of 
water sources by gasoline containing MTBE have recently been the source 
of a number of lawsuits. These suits are now ongoing, and I am not in a 
position to comment on any particular lawsuit or settlement 
discussions. However, I would like to address some of the underlying 
issues relevant to public policy on litigation.
    By way of review, I would note that last year's Senate energy 
proposal contained a safe-harbor provision applicable only to ethanol 
fuels. That provision stood for the proposition that because the 
government would be mandating renewable fuels, no plaintiff's attorney 
should be able to sustain the legal argument that merely complying with 
the law--that is, making gasoline that satisfies the requirement--could 
be the basis for strict products liability. If the government tells you 
to make a particular fuel, it makes little sense to regard such a 
product as ``unreasonably dangerous.'' If the purpose of products 
liability is to deter unwanted behavior, such liability cannot do so 
when the government mandates the product.
    When the House entered into conference discussions with the Senate 
last year, House negotiators correctly realized that the same argument, 
as a matter of law, fairness and policy, was clearly applicable to MTBE 
and other ethers.
    First, it is important to recognize that MTBE usage in RFG derives 
from compliance with a Federal mandate--the requirement that RFG 
contain 2 percent (by weight) oxygen in order to achieve the goals of 
the Act to clean the air. An honest assessment of the conditions 
surrounding the adoption of the 2-percent oxygen standard leaves little 
doubt but that Congress intended substantial use of MTBE. For example, 
Senator Tom Daschle, the author of the floor amendment that established 
the 2-percent standard, stated during debate, ``The ethers, especially 
MTBE and ETBE, are expected to be major components of meeting a clean 
octane program.'' (Clean Air Act Amendments of 1989, Cong. Rec., March 
29, 1990 at S3511). Under certain forms of an oxygenate mandate, 
Senator Daschle went as far as to note that, ``EPA predicts that the 
amendment will be met almost exclusively by MTBE , a methanol 
derivative.'' (RFG: Whose Recipe Is It Anyway, and Will It Work?, Cong. 
Rec., May 16, 1990 at S6383).
    Senator Daschle recognized what we all know: there are substantial 
benefits to using MTBE as far as environmental protection is concerned. 
In the floor debate on the 2 percent standard, Senator Daschle cited 
evidence that, ``NOx, hydrocarbons, and carbon monoxide are 
dramatically reduced by adding the oxygenate MTBE to gasoline.'' (Id.).
    Even opponents of MTBE concede that the Federal mandate lies at the 
heart of MTBE use. California Governor Gray Davis wrote to EPA, ``The 
only reason such MTBE-free gasoline is not being made available today 
is U.S. EPA's enforcement of the 2.0 percent oxygen requirements.'' 
(Letter from Hon. Gray Davis, Governor of the State of California, to 
Hon. Carol M. Browner, Administrator of U.S. EPA, April 12, 1999).
    Some argue that because the text of Clean Air Act is silent as to 
which oxygenate should be used, that somehow there was no intention to 
use MTBE. However, the overwhelming consensus of those supporting the 
2-percent standard was that the provision was intended to be satisfied 
in a cost-effective manner that would not cause unacceptable price and 
supply disruptions. Given the dynamics of ethanol price and supply, it 
is inconceivable that the 2-percent standard was intended to be a de 
facto ethanol mandate. In fact, farm-state proponents of the 2-percent 
standard vigorously denied such an intention throughout the debates on 
the standard.
    Given that the action of the Congress clearly underscored the 
requirement for MTBE use, it makes little sense to allow for the 
propagation of a legal theory that complying with Congress' wishes is 
sufficient for products liability. Of course, if gasoline containing 
MTBE is negligently spilled, liability may still be an issue. Last 
year's debate on liability did not extend to negligence theories, and 
every MTBE case thus filed contains in whole or in part such negligence 
theories. The safe harbor provision in question here is narrowly 
tailored and does not interfere with the ability of plaintiffs to 
obtain relief for truly negligent behavior that results in diminished 
value of resources.
    There are many examples of the Congress adopting such narrowly 
tailored provisions dealing with liability in specific contexts. We 
have included a short list of such examples as an addendum to this 
statement. Perhaps the closest fact-pattern deals with a flame 
retardant, TRIS. The Federal Government required its use in children's 
sleepwear, only to learn that the retardant was carcinogenic, whereupon 
it was banned. The Federal Government not only limited liability, but 
it set up a settlement fund to deal with claims made by companies that 
manufactured TRIS.
    Some have argued that imposition of strict product liability is a 
prerequisite for appropriate remedial actions. We respectfully 
disagree. First, negligence theories more than suffice to address 
remedial questions. Second, the use and improvement of the UST program, 
as discussed above, provides a far fairer and efficient mechanism to 
address the problems of alleged contamination. Third, one can hardly 
think of a less efficient mechanism for addressing water quality 
concerns than imposition of inflexible strict liability theories. A 
recent report from the Council of Economic Advisors found that using 
the tort system in this way ``is extremely inefficient, returning only 
20 cents of the tort cost dollar for that purpose.'' (Council of 
Economic Advisors, Who Pays for Tort Liability Claims? An Economic 
Analysis of the U.S. Tort Liability System, April 2002, at 9). Surely 
we can construct a policy that addresses UST leaks such that greater 
than 20 cents out of every dollar spent goes to actual cleanup!
6. A Look to the Future
    The problems of tightness in supply and refining capacity are 
likely to be with us for the time being. The need to maximize energy 
security will continue as well. As new fuel choices present themselves, 
we should adopt public policies that do their best to minimize external 
costs associated with new fuels and fuel additives. We must maintain a 
robust and competitive market in fuel additives, and not allow one 
particular approach to dominate.
    One thing we can do is adopt responsible liability protections when 
fuel choices are or have been mandated. Failure to do so undermines the 
introduction of new fuel additives that will be essential for a 
competitive marketplace. The Council of Economic Advisors is clear on 
this point: ``At higher levels of expected liability costs, however, 
firms will choose to forgo innovation or to withhold a product from 
market, resulting in a net negative effect of expected liability costs 
on innovation.'' (Id. at 6). Given the current dynamics of the fuel 
market, we can ill afford less alternatives.
    Another approach to consider is support for transition assistance 
for additive manufacturers. In the event that policies are adopted that 
make continued use of MTBE less likely, Congress should make clear that 
it will make adequate resources available on a timely basis to 
transition current additive manufacturers to new and different products 
capable of meeting America's energy needs.
    If Congress should choose to adopt some form of ethanol mandate, 
then policies must be put in place that facilitate such mandates on the 
most acceptable terms. For example, mere splash blending of ethanol is 
likely to prove to be unacceptable on a number of fronts. The 
volatility of splash-blended ethanol will cause unacceptable 
environmental and performance complications, particularly in certain 
regions of the country not currently using the product. In addition, 
ethanol's requirement for segregated pipeline transportation poses high 
hurdles to efficient movement and allocation of product to distant 
markets. As both coasts are enforced to embrace ethanol, this problem 
will only get worse.
    One way to address the problems with splash-blended ethanol is to 
incorporate ethanol into an ether, ETBE. An ether with less affinity 
for water than MTBE, ETBE addresses both the volatility and pipeline 
transportation issues. However, in order to facilitate greater ETBE 
use, ETBE must be placed on equal-footing with splash-blended ethanol. 
This means that ETBE must be treated fairly in tax and regulatory 
contexts. For more information, please see a separate statement 
submitted for the record in this hearing by the Lyondell Chemical 
Company.
    Mr. Chairman, Senator Carper, and other members of the 
subcommittee, thank you for your careful attention to these matters. 
OFA and its members look forward to working with you on a fair and 
effective national fuels policy--one that protects consumers, human 
health and the environment.
                                 ______
                                 
Addendum One: Summary of Critical Risk Assessments: MTBE Does NOT Pose 
                    Human Health Risks; January 2003
         statement by john kneiss, oxygenated fuels association
    Methyl tertiary-butyl ether (MTBE) is an oxygenated compound 
blended in gasoline as: 1) an octane enhancer, and 2) a cleaner-burning 
fuel component used to reduce harmful air pollution from automotive 
emissions, particularly as part of the Reformulated Gasoline (RFG) 
program. RFG is used today in the most polluted urban areas of the U.S. 
Overall, RFG accounts for about 33 percent of the total U.S. gasoline 
market (about 105 million gallons per day). About 85 percent of the RFG 
program relies on MTBE blending to achieve the substantial reductions 
of vehicle emissions that lead to improved air quality and public 
health.
    MTBE is one of the most widely studied chemicals in commerce. 
Numerous government and world-renowned independent health organizations 
have conducted assessments of MTBE--none found sufficiently compelling 
reasons to classify MTBE as a possible cancer-causing agent for humans. 
This brief summary of critical risk assessments and related studies 
(e.g., taste/odor characteristics and drinking water occurrence) help 
demonstrate that incidental exposure to MTBE due to its use in gasoline 
does not pose increased human health risks.
    European Union Risk Assessment/Risk Reduction Strategy for MTBE
    In 1997, methyl tertiary-butyl ether (MTBE) was included in the 
third Priority List of substances selected for risk assessment under 
the European Union (EU) Existing Substances Regulation. The EU risk 
assessment was conducted within the very well defined regulatory 
framework established by the EU's technical agencies. In this process, 
health and environmental data are evaluated, together with the 
potential for human exposure and environmental occurrence, to assess 
the over-all risk potential that MTBE may pose. This process leads to a 
formal decision on how MTBE should be classified, and whether or not 
regulatory action is needed in Europe.
    The full EU risk assessment for MTBE was recently completed and 
findings published December 2001 Official Journal of the European 
Communities. The principle findings of the risk assessment and risk 
reduction strategy review are as follows:

      The human health risk assessment concludes that consumers 
are NOT expected to be at risk from exposures to MTBE, and that 
protective measures already being applied are considered sufficient.
      Regarding worker exposure, the findings indicate 
attention for repeated local skin exposures during maintenance 
operations and automotive repair--for which the use of skin protective 
equipment already used to guard against exposure to other gasoline 
components is deemed adequate as a risk reduction measure.
      The assessment recognized the need for specific measures 
to protect aesthetic quality of drinking water (primarily sourced from 
groundwater); that is, avoidance of any taste or odor impacts. The risk 
protective measures address the construction and operation of 
underground gasoline storage tanks and delivery systems at service 
stations. The EU adopted recommendations on MTBE in connection with 
gasoline UST installation and maintenance in March 2001. In general, 
the EU concluded that measures being applied to prevent and minimize 
gasoline and MTBE releases aimed at protection of groundwater will 
contribute to preventing impacts to drinking water.

    Based on the risk assessment and recognition of current risk 
reduction strategies, the EU is not expected to limit the use of MTBE 
in gasoline or proceed with additional regulatory actions.
IARC Hazard Assessment for MTBE
    The International Agency for Research on Cancer (IARC), established 
in 1965 by the World Health Organization, coordinates and conducts 
research on the causes of human cancer, and to develop scientific 
strategies for cancer control. IARC conducts highly objective, 
scientific reviews of health and toxicological data on chemicals 
substances to evaluate the potential for human cancer hazards. IARC 
reviews are carried out by expert panels convened from around the 
world--scientists representing research centers, academic institutions, 
governmental agencies, environmental and industry groups. The results 
of these expert reviews are published as monographs and made available 
worldwide. (IARC use a classification system to rank cancer hazard to 
humans: Group 1 is known human carcinogen; Group 2A is probable; Group 
2B is possible; Group 3 is not classifiable as to its carcinogenicity; 
and Group 4 is probably not carcinogenic to humans). The IARC 
monographs are valuable tools for scientific bodies and persons 
advising policymakers addressing issues on human cancer risks.
    The IARC Working Group met from 13-20 October 1998 to examine data 
on various chemicals, one of which was MTBE. The outcome of the IARC 
expert panel's deliberations on MTBE is contained in detail in the 
Volume 73 Monograph, published in 1999. Based on the extensive 
consideration made by the IARC expert panel of these data, the 
conclusions drawn are as follows:

      There is inadequate evidence in humans for the 
carcinogenicity of MTBE.
      There is limited evidence in experimental animals for the 
carcinogenicity of MTBE.
      MTBE is considered as Group 3 (not classifiable) as to 
its carcinogenicity to humans. This means that the expert panel 
concluded the available data did NOT warrant a more severe (higher) 
classification.
HHS National Toxicology Program
    The National Toxicology Program (NTP), administered by the U.S. 
Department of Health & Human Services' National Institutes of Health, 
examined the MTBE data in 1998 and declined to list it as either known 
or ``likely'' to be carcinogenic to humans. The NTP is made up of 
various U.S. Federal environmental and health agencies, with an 
independent advisory Board of Scientific Counselors. This findings by 
the NTP is contained in the HHS 9th Report on Carcinogens (1999) 
submitted to Congress.
California Science Advisory Board for Proposition 65
    In December 1998, the California Science Advisory Board (Carcinogen 
Identification Committee), under the State's Proposition 65 law, did 
not list MTBE as ``known to the State to cause cancer.'' Another 
committee of the Advisory Board separately determined that MTBE does 
not cause reproductive toxicity or birth defects.
    Based on current understanding of the available health and toxicity 
information, MTBE does not represent a threat to human health from 
exposure at the extremely low levels reported in the environment as a 
result of MTBE's current use in gasoline.
MTBE Taste & Odor Characteristics
    The U.S. EPA Health Advisory Program provides information and 
guidance to individuals or agencies concerned with potential impacts to 
drinking water supplies for substances for which no national 
regulations currently exist. Advisories are not mandatory standards for 
action; are used only for guidance in determining actions; and are not 
legally enforceable. In late 1997, the EPA examined available data on 
MTBE and developed a consumer acceptability guidance to avoid levels 
that could impact the taste and/or odor of drinking water.
    The EPA advisory on MTBE recommends that``. . . keeping 
concentrations in the range of 20 to 40 micrograms per liter (mg/L) of 
water or below will likely avert unpleasant taste and odor effects . . 
.'' (mg/L is equivalent to parts per billion or ppb). The 
advisory level will protect sensitive individuals of the population, 
although some may potentially detect taste and odor at lower levels. 
The EPA noted that occurrences of groundwater contamination observed at 
or above this level generally resulted from leaks in gasoline storage 
tanks or pipelines, not from other sources. The EPA advisory level of 
20 to 40 ppb as protection of the water source from unpleasant taste 
and/or odor will also protect consumers from potential health effects 
with a wide margin of safety.
Drinking Water Sampling Data (Occurrence)
    The U.S. Geological Survey (USGS) has conducted a new national 
survey of MTBE (and other volatile organic compounds--VOCs) in 
community drinking-water sources, as part of the National Water-Quality 
Assessment Program (NAWQA). This multi-year and widely geographic 
sampling and analytical survey has shown that MTBE was detected at any 
level in only 8.7 percent of samples. More significantly, the median 
level of detected concentration for MTBE was only 0.54 ug/L (ppb). The 
maximum concentration detected in drinking water sources did not exceed 
the EPA consumer acceptability guidance level of 20 to 40 ppb. The USGS 
has stated that these``. . . studies suggest that MTBE levels do not 
appear to be increasing over time and are almost always below levels of 
concern from aesthetic and public health standpoints.''
    The California Department of Health Services has the most 
comprehensive dataset on MTBE occurrence in drinking water sources. 
Monitoring began in early 1997. MTBE has been detected in less than 1 
percent (0.9 percent) of all sources tested--88 of 10,010 total 
sources--providing supply to about 92 percent of the State's population 
(about 31.4 million people) from nearly 3,000 systems. Furthermore, the 
trend on sample analysis since 1997 indicates that detections and 
levels of MTBE have been declining in the State.
    As more comprehensive data are acquired, MTBE detection frequency 
and levels appear to be declining (factually, they were never 
substantial to begin with), and this trend is expected to continue, 
especially as compliance and enforcement of underground gasoline 
storage tank rules progress.
References
    Official J. of European Communities. 2001. Risk assessment and 
strategy for limiting risks. European Union, Brussels, Belgium. 7 
November 2001.
    International Agency for Research on Cancer. 1999. IARC Monograph 
Volume 73: Some chemicals that cause tumours of the kidney or urinary 
bladder in rodents and some other substances. World Health 
Organization, IARC, Lyon, France.
    National Toxicology Program. 2000. 9th Report on Carcinogens. U.S. 
Department of Health and Human Services, Public Health Service, 
National Toxicology Program, Research Triangle Park, North Carolina.
    California Environmental Protection Agency. 1998. Prop 65 
scientific review panels conclude MTBE is neither a reproductive or 
developmental toxicant nor a carcinogen. www.calepa.ca.gov.
    U.S. EPA. 1997. Drinking water advisory: consumer acceptability 
advice and health effects analysis on methyl tertiary-butyl ether 
(MTBE). U.S. EPA, Office of Water. EPA-822-F-97-009.
    Stocking AJ, et al. 2001. Implications of an MTBE odor study for 
setting drinking water standards. J. Amer. Water Works Assn. March 2001 
(95-105).
    U.S. Geological Survey. 2001. National survey of MTBE, other ether 
compounds, and other VOCs in community drinking-water sources. U.S. 
Department of Interior, U.S.G.S. www.sd.water.gov/nawqa/vocns.
                                 ______
                                 
Addendum Two: Examples of Narrow Liability Provisions Recently Adopted 
                              by Congress
    a. Section 162 of the Amtrak Reform and Accountability Act of 1997. 
Pub. L. No. 105-134, Sec.  111 Stat. 2570 (codified at 49 U.S.C.A. 
Sec.  28103).
    This section delimits the award of punitive damages in accidents 
resulting in loss of life or damage to property that result from rail 
projects or operations. The language set a very high standard for 
punitive damages, even preempting State law and practice on the 
subject. The legislation also capped total damages related to any one 
incident.
    This provision seeks to vindicate the important Federal interest in 
ensuring safe and cost-effective rail travel in the United States. Like 
provision of adequate clean-fuel additives, one of the reasons that 
legislation encourages rail travel is to advance Clean Air Act 
compliance goals. One of the specific criteria for providing Federal 
assistance for rail construction is: ``whether the work to be funded 
will aid the efforts of State and local governments to comply with the 
Clean Air Act (42 U.S.C. 7401 et seq.).'' 49 U.S.C. Sec.  26101(c)(6).
    b. Biomaterials Access Assurance Act of 1998. Pub. L. No. 105-230, 
112 Stat. 1519 (1998)(codified at 21 U.S.C. Sec.  1601-06).
    Here, Congress was concerned that liability potential would keep 
plastics manufacturers from producing the specialty plastics needed for 
the construction of biomechanical devices to be placed inside the human 
body. Essentially, such biomaterial manufacturers were relieved of 
liability that may arise by simply being included in malpractice cases 
otherwise undertaken against doctors and device manufacturers. Only if 
the alleged facts related to a failure to meet specifications or a 
breach of contract could the biomaterials manufacturer be brought into 
the case.
    In this case, MTBE (like biomaterials) is simply a component part 
incorporate into another product (reformulated gasoline) designed to 
achieve a socially useful purpose (cleaning the air). The analogy seems 
fairly compelling.
    c. General Aviation Revitalization Act of 1994. Pub. L. No. 103-
298, 108 Stat. 1552-54 (1994) (codified at 49 U.S.C. Sec.  40101 note).
    Another transportation example. Here, Congress was concerned that 
the increasing liability burden for personal aircraft was driving the 
industry out of the market for this mode of transportation. As a 
result, Congress accepted an 18-year Federal statute of repose for 
manufacturers of such aircraft.
    d. Good Samaritan Food Donation Act. Pub. L. No. 104-210, 110 Stat. 
3011 (codified at 42 U.S.C. Sec.  1791).
    This statute exempts persons who donate food and grocery products 
to non-profits for distribution to the needy from civil or criminal 
penalties for foods that were ``apparently wholesome'' in order to 
encourage certain forms of donation activities.
    e. No Child Left Behind Act of 2001. Pub. L. No: 107-110. (not yet 
codified, signed into law by the President on Jan. 8, 2002).
    This statute includes a title sets forth, as II-C-5, Teacher 
Liability Protection. Preempts State law, except where it provides 
additional protection of teachers from liability. Provides that no 
teacher in a school shall be liable for harm caused by an act or 
omission on behalf of the school if the teacher was acting within the 
scope of employment or responsibilities relating to providing 
educational services, subject to specified requirements and exceptions. 
Limits punitive damages and liability for non-economic loss. Added in 
the House and agreed to by recorded vote: 239--189.
    In short, there are numerous targeted examples of specialized 
liability relief, with a particular emphasis on punitive damage relief. 
In none of the above reference cases were the issues related to a 
product utilized pursuant to a Federal performance standard that in 
turn was banned. The one example where this situation obtained, the 
children's sleepwear flame retardant TRIS, is discussed in the text of 
the statement.
                               __________
Statement of Richard E. Wagman, First Vice Chairman, American Road and 
                  Transportation Builders Association
Introduction
    Good morning, Mr. Chairman and members of the committee. I am 
Richard Wagman, President of G.A. & F.C. Wagman, a highway contractor 
based in York, Pennsylvania, and First Vice Chairman of the American 
Road and Transportation Builders Association.
    ARTBA, which celebrated its 100th anniversary in 2002, has over 
5,000 member firms and member public agencies from across the Nation. 
They belong to ARTBA because they support strong Federal investment in 
transportation improvement programs to meet the needs and demands of 
the American public and business community. The industry we represent 
generates more than $200 billion annually in U.S. economic activity and 
sustains 2.5 million American jobs.
    At the outset, I would like to thank you for giving our industry an 
opportunity to testify at this important hearing. Your understanding 
of, and long support for, transportation improvement programs and 
investment is deeply appreciated by the transportation and construction 
communities.
    This morning I want to focus on how Federal policies to promote the 
use of alternative fuels impact the nation's surface transportation 
programs, the potential impact of a proposed renewable fuels standard 
on Highway Trust Fund revenues, and the ability of the Federal highway 
program to help meet the nation's highway investment needs. At the 
outset of this discussion, I want to make it abundantly clear that 
ARTBA strongly supports the use of renewable fuels. Our goal in this 
debate, however, is to ensure that Federal policies to promote 
alternative fuel use not be undertaken at the expense of another 
national priority-a safe and efficient transportation network.
    ARTBA has a long history of involvement in this critical issue. We 
presented testimony to this subcommittee in June 2000 on the impact of 
ethanol's tax treatment on Highway Trust Fund revenues. We also 
delivered similar messages in appearances before the House Ways and 
Means Committee and Senate Finance Committee.
    Last year, when the Senate was debating a renewable fuels standard 
as part of comprehensive energy legislation, Chairman Inhofe and others 
pursued amendments that would have rectified the impact of current 
renewable fuel tax incentives on Highway Trust Fund revenue. A 
coalition of Senate leaders and interest groups supporting the 
renewable fuels standard made the case that the energy bill was not the 
right vehicle for this issue and pointed to the 2003 reauthorization of 
TEA-21 as the appropriate legislative vehicle for that action.
    Mr. Chairman, Congress is in the throe of reauthorizing TEA-21 as 
we speak. Now is the time to resolve the zero sum game that exists 
between promoting ethanol and other alternative fuels on the one hand, 
and the ability to meet the nation's highway and transit needs on the 
other.
    As context for my remarks, you should know that ARTBA believes the 
U.S. highway program must emphasize five key principles:
    1. Highway capital improvements should be financed primarily 
through the collection of highway user fees. And these fees, which 
should be levied and collected by government, must be adjusted as 
warranted to provide a source of funding that is consistent with the 
investment requirements necessary to meet the conditions and 
performance needs of the nation's highway, bridge and mass transit 
network.
    2. Safety must be a paramount concern in the design, construction, 
maintenance and traffic operations of the nation's highway system.
    3. Critically deficient bridges should be repaired or replaced.
    4. Improved rideability and pavement durability should be program 
goals; and
    5. The capacity and efficiency of the highway system should be 
improved as necessary to meet public demand and the needs of the 
economy.
    In line with our support for the user-fee concept of financing 
surface transportation improvements, we also believe all energy sources 
powering motor vehicles that use the nation's highway and bridge system 
should be taxed to pay for system improvements through the Federal 
Highway Trust Fund. The current investment needs of our highway system 
dictates that the excise on each motor vehicle powering source, from an 
energy content basis, should be at least equivalent to that currently 
levied on gasoline.
    These views are supported by virtually all State and national 
organizations representing highway transportation and construction 
concerns.
The Tax Nexus Between Federal Transportation, Energy, Environmental 
        Policies
    My primary purpose today is to bring to your attention the unique 
nexus between Federal transportation, energy and environmental 
policies. Policy in all three areas have a common thread-the use of 
Federal tax law involving motor fuels to advance national objectives.
    Unfortunately, these tax policies are often debated and decided 
separately and thus in a vacuum-during a transportation bill . . . an 
energy bill . . . or an environmental bill. As a result, positive 
impacts for one policy area sometimes contradict-or even undermine-
goals and objectives in another policy area.
    The Federal Government first levied a highway user fee on the sale 
of motor fuels in 1956, when it established the Federal Highway Trust 
Fund. The original congressional intent in establishing the user fee-an 
excise on gasoline and diesel fuel-is clear: to ensure that America 
would have a ``pay-as-you-go'' system for funding needed highway and 
bridge improvements.
    The principle was-and remains today-that the more you drive, or use 
the roads, the more you pay to build and maintain them.
    This user fee principle was reaffirmed by the Congress in 1998 with 
the enactment of the Transportation Equity Act for the 21st Century, or 
TEA-21.
    Unfortunately, current public investment in road, bridge and mass 
transit improvements financed by highway user fees levied at all levels 
of government is grossly insufficient to maintain the physical 
conditions of the system, much less improve its overall performance for 
the American public and business community. The essentially status quo 
investment that would be provided by the fiscal year 2004 budget 
resolution proposals demonstrate that existing Highway Trust Fund 
revenues are falling further and further behind the growing needs of 
the nation's highway and transit network.
Status of the Nation's Highway Network
    Under the landmark TEA-21, Federal highway investment will have 
averaged just under $29 billion per year by the time the program 
expires at the end of Fiscal Year 2003. This represents a substantial 
increase over the funding provided under the Intermodal Transportation 
Efficiency Act of 1991 (ISTEA).
    Under TEA-21, however, investment by government at all levels has 
barely been enough to maintain the physical condition of the nation's 
highways and bridges, according to the U.S. Department of 
Transportation's (U.S. DOT) 2002 biennial report on the condition and 
performance of the nation's highways, bridges and transit systems. 
Worse, investment has fallen far short of the amount needed to maintain 
travel times and prevent traffic congestion from increasing-concerns 
which are of equal, if not greater, importance to highway users.
    While the nation's roadway and bridge network has benefited from 
increased Federal investment under TEA-21, the system still has 
enormous, unmet capital needs. Based on data published in the 2002 U.S. 
DOT report, adjusted to reflect OMB's estimate for future inflation and 
a traditional 43 percent Federal share of highway capital outlays, a 
Federal highway program close to $50 billion per year is necessary just 
to maintain the system conditions and performance levels over the 
period 2004-2009, which is the expected duration of the next Federal 
surface transportation authorization bill.
    Current forecasts of revenues into the Highway Account of the 
Highway Trust Fund would only support a Federal highway program of 
approximately $33 billion by fiscal year 2009, or less than two-thirds 
the amount needed just to maintain current conditions.
Promoting Alternative Fuels and the Highway Trust Fund
    Clearly the intent of Congress in enacting TEA-21was to make 
surface transportation investment a Federal priority. But as Congress 
discusses and debates TEA-21 reauthorization legislation in the months 
ahead, this committee should be aware that some current Federal energy 
and tax policies work against the goals of TEA-21.
    Consider the impact of the current Federal tax treatment of 
ethanol-gasoline motor fuel blend sales. And again, I must make clear 
ARTBA has no brief against the promotion and use of ethanol as a motor 
fuel beyond the way it impacts the Highway Trust Fund.
Current Federal Tax Treatment of Alternative Fuels
    A motorist purchasing gasoline contributes 18.3 cents per gallon to 
the Highway Trust Fund through the Federal user fee-15.44 cents per 
gallon to the trust fund's Highway Account and 2.86 cents per gallon to 
the fund's Mass Transit Account. (An additional 0.1 cents per gallon is 
contributed to the Leaking Underground Storage Tank Trust Fund.)
    Under current Federal law, a motorist purchasing gasohol (with 10 
percent ethanol), however, pays a 13.1 cents per gallon excise, or 5.2 
cents per gallon less than those who purchase straight gasoline. A 
slightly higher excise is applied to gasohol sales with less ethanol. 
Of the 13.1 cents per gallon Federal excise paid on a gallon of 10 
percent gasohol, a user fee of 10.6 cents per gallon goes into the 
Highway Trust Fund-7.74 cents per gallon to the trust fund's Highway 
Account and 2.86 cents per gallon to the fund's Mass Transit Account. 
Two-and-a-half cents is deposited in the Federal General Fund for 
deficit reduction purposes. (There is also a 0.1 cents per gallon 
contribution to the Leaking Underground Storage Tank Trust Fund.)
    The combination of the 5.2 cent per gallon tax incentive for 10 
percent gasohol and the 2.5 cent per gallon contribution to the general 
fund reduces deposits in the Highway Trust Fund Highway Account by 7.7 
cents per gallon sold. (It is also worth pointing out that the Mass 
Transit Account of the Highway Trust Fund receives the same 
contribution from either the purchase of gasoline or gasohol. This 
means the cost of Federal policies to promote the use of ethanol fuels 
comes exclusively at the expense of the Highway Account.)
    As a result of TEA-21's provisions that directly link incoming 
Highway Account revenues to annual Federal highway and bridge 
investment, the ethanol tax incentive has a direct consequence of 
making less revenue available for investment in needed highway and 
bridge improvements.
Impact of Alternative Fuel Incentives on Federal Highway Investment
    The most current example of the impact of alternative fuel tax 
incentives on Federal highway investment is the case of ethanol-based 
motor fuels. The computations in Table 1, based on 2001 ethanol use 
data from the Federal Highway Administration's ``2001 Highway 
Statistics'' report, show current Federal tax policy on ethanol motor 
fuel sales in that year resulted in approximately $1.3 billion per year 
of foregone Highway Trust Fund Highway Account revenues. Of the $1.3 
billion, roughly $900 million per year is attributable to the 5.2 cents 
(10 percent ethanol) and 4.16 cents per gallon (less than 10 percent 
ethanol) tax incentive for gasohol and over $400 million is due to the 
2.5 cents per gallon of the gasohol excise that is deposited in the 
Federal general fund. As ethanol usage has increased in recent years, 
these foregone revenues have also increased.

                                 Table 1
 
 
 
10 percent usage (gallons)..................           10,098,118,000
5.3 cents per gallon tax incentive..........             $535,200,254.00
2.5 cents per gallon to General Fund........             $252,452,950.00
Lost Highway Account revenues...............             $787,653,204.00
 
Less than 10 percent gasohol usage                      7,345,983,000
 (gallons)*.................................
4.081 cents per gallon tax incentive........             $353,486,082.00
2.5 cents per gallon to General Fund........             $183,724,575.00
Lost Highway Account revenues...............              537,210,657.00
                                             ---------------------------
    Total lost Highway Account revenues.....           $1,324,863,861.00
 
* According to the U.S. DOT, less than 10 percent gasohol is generally a
  7.7 percent blend. Source: 2001 Highway Statistics, Table MF-33E.

    To put this number in perspective, $1.3 billion would resurface 
over 13,000 lane miles of interstate highway or replace almost 1,400 
outdated unsafe two-lane bridges.
    Federal tax treatment of ethanol-based motor fuels impacts 
individual States differently. TEA-21's highway funding distribution 
formula requires the apportionment of Interstate Maintenance and 
Surface Transportation Program funds to be based, in large part, on a 
States contribution to the Federal Highway Trust Fund's Highway 
Account. States that sell ethanol-based motor fuels are, therefore, at 
a relative disadvantage to States that don't. States that sell more 
ethanol than other States are also at a competitive disadvantage.
    Ohio is one of those States. As Governor Robert Taft testified last 
year before the House Transportation and Infrastructure Committee, ``In 
Ohio ethanol comprises 40 percent of our fuel use. That means that 
Ohio's contribution to the Federal Highway Trust Fund is reduced about 
$166 million annually. . . . We estimate that Ohio's Federal highway 
apportionment is reduced by $150 million annually as a result of our 
substantial use of ethanol. . . . The contradiction is obvious. If an 
Ohio or a California use these domestically produced, clean burning 
fuels they then face a loss of Federal funds. I call this the ethanol 
penalty. We are penalized for responding to the explicit Federal policy 
which encourages us-and which creates market forces which compel us-to 
use alternative fuels. . . . I urge Congress to recognize that current 
Federal formulas penalize States for using this domestically produced, 
clean-burning fuel.''
Increased Alternative Fuel Use Impact on Highway Trust Fund
    Mr. Chairman, what I have just described is a historical review of 
how the current tax treatment of ethanol fuels has impacted the Highway 
Trust Fund. Table 2 below demonstrates how this situation could be 
exacerbated in the future, based on the U.S. Department of Energy's 
projections for increased ethanol usage, if the tax treatment of 
ethanol fuels is not modified to protect the Highway Trust Fund. To 
make a bad situation even worse, Table 2 also demonstrates how Highway 
Trust Fund revenues would be reduced even further if proposals to 
establish a renewable fuels standard are enacted without resolving the 
Highway Trust Fund issue.
    The proposed renewable fuels standard would require refiners to 
incorporate a target amount of ethanol into motor fuels, beginning with 
2.3 billion gallons of ethanol in 2004 and growing to 5.0 billion 
gallons by 2012. While I am not qualified to comment on the merits of 
ethanol, I can assure you that requiring an increase in the use of 
gasohol would also increase the amount of lost revenues to the Highway 
Account and, therefore, further diminish the nation's ability to meet 
its highway infrastructure needs.
    If Congress continues to provide a tax incentive from the Highway 
Trust Fund for gasohol of just over 5 cents per gallon and continues to 
deposit 2.5 cents per gallon of the gasohol excise tax into the General 
Fund rather than the Highway Trust Fund, the proposed renewable fuels 
standard would reduce Highway Trust Fund revenues by approximately 
$25.7 billion during the nine fiscal years fiscal year 2004--fiscal 
year 2012 that are covered by the proposed legislation, or about $2.9 
billion annually.
    Before discussing this table, I think it is important to note that 
the use of gasohol as a motor fuel is projected to grow significantly 
in the future with or without a renewable fuels standard. In 2001, the 
Nation used almost 1.6 billion gallons of ethanol in motor fuels. The 
Energy Department predicts that this will jump to 2.7 billion gallons 
by 2004, largely because of the continued oxygenation requirement under 
the Clean Air Act and the phase-out of MTBE.
    Between 2004 and 2012, ethanol use in motor fuel is expected to 
grow another 600 million gallons to 3.3 billion gallons under current 
market forecasts, even without a renewable fuels standard.


    As the first set of columns in Table 2 shows, the projected market 
growth of ethanol in motor fuels will cost the Highway Trust Fund 
almost $21.5 billion in foregone revenues between 2004 and 2012. Of 
this total, $7.6 billion would result from the current practice of 
depositing 2.5 cents per gallon of the excise tax on gasohol into the 
General Fund for deficit reduction. The remaining $13.8 billion of the 
projected loss would be due to the ethanol tax incentive, which works 
out to 5.2 cents per gallon (5.1 cents per gallon starting in 2005) for 
gasohol that is 10 percent ethanol and 3.93 cents per gallon for 
gasohol that is 7.7 percent ethanol.
    The proposed renewable fuel standard would increase the revenue 
loss to the Highway Trust Fund. For 2004 and 2005, the cost of the 
proposed standard would be negligible because the market demand for 
gasohol is expected to exceed the proposed minimum. But starting in 
2006, the required use of ethanol in motor fuels would begin to exceed 
the projected market demand.
    The second set of four columns in Table 2 shows the total projected 
cost of the renewable fuels standard to the Highway Trust Fund. As 
explained above, much of this cost would occur anyway because of the 
projected growth of demand for ethanol in motor fuels.
    The incremental cost of the renewable fuels standard is shown in 
the final set of four columns in Table 2. There should be no 
incremental cost in 2004 and 2005 because market demand those 2 years 
is projected to exceed the minimum standard. Between 2006 and 2012, 
however, the proposed standard would have an incremental cost, which 
the table shows is projected to total $4.7 billion. This includes a 
projected $1.7 billion loss to the Highway Trust Fund from the 2.5 
cents per gallon of gasohol deposited into the General Fund and $3.0 
billion from the ethanol tax incentive. Chart 1 clarifies these 
overlapping impacts on the Highway Trust Fund revenues.


    Let me put these figures into perspective.
    The $21.5 billion total revenue loss from the projected market 
growth of ethanol in motor fuels would be sufficient to repave every 
rural Interstate Highway in the United States at least once in the next 
9 years. It would completely cover the construction costs, including 
rail lines and stations, for a 90-mile urban subway system or 
approximately a system like Washington, DC's Metro.
    The $4.7 billion extra cost of the renewable fuels standard over 
current gasohol projections would repave two-thirds of all of the urban 
Interstate Highway miles or build a 120-mile light rail mass transit 
system.
Conclusion
    With the reauthorization of TEA-21 and debate over comprehensive 
national energy policy scheduled for this year, Congress has a unique 
opportunity to formally acknowledge the nexus among transportation, 
energy and environmental policies.
    The Nation is at a critical juncture.
    It is clear America needs to reduce its dependence on foreign 
energy sources that power our U.S. transportation fleet.
    It is clear that meeting Federal air and water quality standards 
without compromising American mobility and the economy will require 
even cleaner transportation vehicles and motor fuels.
    It is also clear that America has a growing transportation 
infrastructure capacity crisis-not just in its road network, but also 
in our airport, water port, rail and mass transit systems. If we do not 
meet our transportation network challenges, we will also compromise 
American mobility, air and water quality goals, and the U.S. economy.
    Mr. Chairman and members of the committee, as you develop 
legislation to reauthorize TEA-21 and other relevant measures, we urge 
you to ensure that Federal funding for much needed transportation 
improvements is not shortchanged in the pursuit of promoting use of 
alternative motor fuels.
    And we will support you in any legislative effort that seeks to 
address the concerns we have raised. Among the suggested proposals to 
resolve this issue are either eliminating the ethanol fuel tax 
incentive directly or providing a Federal General Fund reimbursement 
for Highway Trust Fund revenues foregone due to ethanol's tax 
treatment. We also understand Senators Grassley and Baucus are 
developing a proposal to provide ethanol refiners a General Fund tax 
credit in lieu of an excise tax incentive.
    It should also be recognized that the fiscal year 2004 budget 
proposals from the Bush Administration and the House and Senate Budget 
Committees all propose redirecting the 2.5 cents per gallon of the 
ethanol fuels excise from the General Fund to the Highway Trust Fund. 
This is an excellent first step and we urge Congress to build on these 
recommendations to ensure the Highway Trust Fund is fully compensated 
for the use of all alternative fuels.
    We commend all Members of Congress, the Administration and those in 
the transportation and renewable fuels communities that are working to 
find a solution to this issue. From our perspective, the primary 
objective must be that this issue is fully resolved once and for all so 
that our nation's transportation and energy priorities are in sync, 
rather than at odds.
    Mr. Chairman, that concludes my testimony. Again, thank you for the 
opportunity to present our views to this subcommittee. I will try to 
answer any questions you or other committee members might have.
                               __________
       Statement of A. Blakeman Early, American Lung Association
    Mr. Chairman, my name is A. Blakeman Early. I am pleased to appear 
today on behalf of the American Lung Association to discuss the use of 
MTBE in Reformulated Gasoline (RFG) and conventional gasoline. The 
American Lung Association has long been a supporter of the use of RFG 
as an important tool that many areas can and should use to reduce 
unhealthy levels of ozone.
Clean Fuels Help Reduce Smog
    As has been demonstrated in California, ``clean'' gasoline can be 
an effective tool in reducing car and truck emissions that contribute 
to smog. Based on separate cost effectiveness analyses conducted by 
both the U.S. EPA and the State of California, when compared to all 
available control options, reformulated gasoline (RFG) is a cost-
effective approach to reducing the pollutants that contribute to 
smog.\1\ Compared to conventional gasoline, RFG has also been show to 
reduce toxic air emissions from vehicles by approximately 30 
percent.\2\
---------------------------------------------------------------------------
     \1\ U.S. Environmental Protection Agency, Regulatory Impact 
Analysis, 59 FR 7716, Docket No. A-92-12, 1993
     \2\Report of the Blue Ribbon Panel on Oxygenates in Gasoline, 
September 1999, pp. 28-29
---------------------------------------------------------------------------
Background of RFG Proposed Changes
    The American Lung Association was a member of the Blue Ribbon Panel 
on Oxygenates in Gasoline. We endorsed the recommendations of the Panel 
in a report issued in 1999. And the American Lung Asociation engaged in 
extensive negotiations with the oil industry, ethanol industry, corn 
growers and many other stakeholders regarding needed legislative change 
to the RFG program. Throughout these discussions we maintained that 
three recommendations of the Blue Ribbon Panel were preeminent and must 
be included in legislation that modified the RFG provisions of the 
Clean Air Act. These were: 1) that MTBE must be eliminated from all 
gasoline, not just RFG 2) the mandatory oxygen requirement for RFG must 
be eliminated, and 3) ``anti-backsliding'' provisions must be added to 
the law to ensure that when refiners produced RFG without oxygen and 
without MTBE, the resulting fuel reduced toxic air emissions just as 
much as currently produced RFG. The American Lung Association endorsed 
legislation in the 106th Congress that contained these critical 
elements plus a Renewable Fuel Standard (RFS) designed to compensate 
the ethanol industry for its loss of market associated with the 
elimination of the oxygen requirement in RFG.
    As negotiations continued, a large numbers of stakeholders(except 
the MTBE industry) supported the elimination of MTBE over 4 years, and 
anti-backsliding provisions for air toxics. Other elements of the Blue 
Ribbon Panel recommendations gained wide acceptance including: 
expanding EPA's authority to address MTBE in groundwater under the 
Leaking Underground Storage Tank (LUST) program, and augmenting EPA's 
authority to test and regulate gasoline constituents based on threats 
to public health or the environment from water contamination. But 
further progress on compromise legislation was thwarted over a 
disagreement between the ethanol industry which wanted an Renewable 
Fuel Standard that ``grew'' the industry by increasing over time and 
the API which opposed mandatory use of ethanol in volumes above those 
needed for octane in RFG and conventional gasoline.
    When the energy bill in the Senate gained momentum last year, the 
ethanol industry and the API announced an agreement that introduced a 
completely new element to the discussion. While agreeing on a level of 
mandatory ethanol use through an RFS that would grow the ethanol 
industry, the API and the ethanol industry announced that a necessary 
element of any compromise legislation must include a ``safe harbor'' 
that shielded both industries from defective product liability under 
Federal or State law for the use of either MTBE or renewable fuels 
including ethanol. The American Lung Association opposed this new 
concept. Ultimately, the Senate adopted many of the recommendations of 
the Blue Ribbon Panel as well as a ``safe harbor'' that applies only to 
renewable fuels. The American Lung Association endorsed the passage of 
the bill with the removal of the safe harbor provision.
    Unfortunately, during the conference on the energy bill, the house 
conferees proposed changes to the Senate language highly favorable to 
the MTBE industry. This response killed the possibility for agreement. 
Not only did the House offer extend the safe harbor from defective 
product liability to MTBE contamination incidents, it eliminated the 
Senate ban of MTBE in fuel, preempted States from prohibiting MTBE in 
fuel after enactment, and it eliminated Senate language that authorized 
EPA to regulate fuel additives to prevent water contamination. (See 
Appendix A for details) For areas suffering from MTBE contamination, 
the House offer was the worst of both worlds. It eliminated the most 
important tools in the Senate compromise bill to stem MTBE 
contamination and obtain cleanup assistance from refiners, while still 
imposing the burden of a Renewable Fuels Standard nationwide.
The American Lung Association Supports the Phase Out of MTBE in All 
        Gasoline
    As a member of the Blue Ribbon Panel on Oxygenates in Gasoline, the 
American Lung Association learned of the significant threat that MTBE 
poses to the nation's water supplies. Subsequent data collected by the 
USGS and presented in testimony by Mr. Erik Olson from Natural 
Resources Defense Council which I submitted with my testimony, only 
heightens the concern over MTBE contamination. USGS found that about 15 
percent of drinking water tested in the high MTBE use areas of the 
Northeast contained MTBE.\3\ It is estimated that over 18 million 
people are served by drinking water contaminated by MTBE. (See 
Attachment A) The struggle that Mr. Paul Granger provides in testimony 
presented to the subcommittee today will likely be repeated in many 
areas, as the USGS estimates that about 35 percent of community water 
system wells are located within 1 km of a Leaking Underground Storage 
Tank (9000 wells)\4\ We also came to understand that the continued use 
of MTBE in RFG undermines public support for the RFG program. In 
addition, EPA found in its boutique fuels study that the antipathy 
toward MTBE has lead many States to adopt ``boutique fuels'' in lieu of 
Federal RFG in order to avoid high amounts of MTBE dictated by the 
mandatory oxygen requirement.These factors provide compelling reasons 
to assure that any legislation requires MTBE be phased out of all 
gasoline, not just RFG. We believe there is a broad consensus in 
support of the MTBE phase-out. In short, removing MTBE from our 
nation's fuel supply is both a political and environmental imperative 
that must accompany any other fuel changes that Congress adopts. We 
believe the introduction of MTBE phase-out authority in the Senate 
energy bill, along with ``anti-backsliding'' and other provisions that 
would implement recommendations of the Blue Ribbon Panel represents a 
unique opportunity to legislate constructive changes to RFG and 
conventional gasoline. This legislation has been introduced in the 
108th Congress by Senators Daschle and Hagel as S. 385, The Fuels 
Security Act of 2003.
---------------------------------------------------------------------------
     \3\Moran, Zogorski, Squillace, ``Occurrence and Distribution of 
MTBE and Gasoine Hydrocarbons in Groundwater and Groundwater Used as 
Source Water in the United States and in Driniking Water in 12 
Northeast and Mid-Atlantic States,1993-2002'' (March,2003, in press) 
available online at http://sd.water.usgs.gove/public--naw/ 
pubs/journal/GW.MTBE.moran.pdf.
     \4\Ibid.
---------------------------------------------------------------------------
American Lung Association Opposes A Liability ``Safe Harbor'' for MTBE
    Providing a defective product liability shield to MTBE, as provided 
in the House offer last year is truly unsupportable. As explained in 
detail in Mr. Olson's testimony, refiners and MTBE producers had 
extensive knowledge of MTBE's hazards as a contaminant in groundwater. 
For instance in 1983, in response to an API survey, a Shell expert 
stated, ``In our situation the MTBE was detectable (by drinking) in 7 
to 15 part per billion so even if it were not a factor to health, it 
still had to be removed to below detectable amount in order to use the 
water.'' They also knew that underground storage tanks of gasoline were 
leaking across the Nation. By 1982, an Exxon annual testing program for 
underground gasoline storage tanks found that 38 percent were leaking. 
In 1981, Shell and ARCO estimated 20 percent of all U.S. underground 
storage tanks were leaking. Yet the neither the refiners nor the MTBE 
industry informed Congress of the dangers of adopting a clean fuels 
program that they were advocating and that they knew would vastly 
increase MTBE use. Indeed, the industry used MTBE extensively before 
the RFG program was enacted in 1990. While they now call for liability 
protection because Congress made them use MTBE by enacting the Clean 
Air Act Amendments of 1990. However, in 1991, the year before fuel 
requirements went into effect refiners were putting approximately 4.2 
million gallons a day of MTBE into gasoline. This represents a level of 
usage that is only half the 9.8 million gallons used in 1998 when the 
RFG and oxyfuel programs were in full force.
    Given the complicity of the industry in the creation of the MTBE 
contamination problem, we see absolutely no justification for the 
removal a legal tool that should be available to MTBE contamination 
victims to help address the cleanup of widespread MTBE contamination. 
The predicament described by Mr. Granger illustrates well that every 
tool must be available to address MTBE cleanup. In addition, we see no 
impending tidal wave of adverse court decisions that compels Congress 
to provide the industry special legal protections. We also note that 
the language adopted in the House offer, protects the industry from 
defective product liability regardless of whether a MTBE leak may have 
occurred prior to enactment of the 1990 amendments and regardless of 
whether the leak came from RFG or conventional gasoline which would 
contain MTBE only because a refiners voluntarily chose to add it.
    One frustrating aspect of this debate is that, essentially, history 
may be repeating itself. Refiners chose to use MTBE in gasoline in part 
to replace tetra-ethyl lead. You may recall that as a result of the 
lead refiners placed in gasoline and paint manufacturers placed in 
paint, 88 percent of children aged one to five had blood lead levels 
above the threshold believed to have the potential to impair cognitive 
development in the late 1970's. It took 10 years to get lead out of 
gasoline. Ironically, Congress banned the use of lead in gasoline in 
the 1990 Clean Air Act Amendments. Hopefully Congress can get rid of 
MTBE in gasoline more quickly than lead. Yet in testimony before the 
House Subcommittee on Energy and Air Quality, the Oxygenated Fuels 
Association called for regulatory and tax changes to facilitate greater 
use of ETBE because it has ``less affinity for water than MTBE'' and 
can address volatility and pipeline issues associated with ethanol use. 
What the OFA did not tell the committee is that while ETBE in gasoline 
is approximately 60 percent less soluble in water than MTBE, it is 
still 30 times more soluble than benzene, is resistant to degradation, 
and most importantly has a an odor detectability in drinking water at 
one fourth the concentration of MTBE. (See Attachment B) We would hope 
after all this history that Congress would not allow itself to be 
hoodwinked once again by the oxygenated fuels industry by accepting 
OFA's recommendation. Indeed, any sensible fuels policy would 
affirmatively prevent the use of ETBE in gasoline.
The American Lung Association Opposes a Liability ``Safe Harbor'' for 
        Renewable Fuels
    The Congress must not adopt the ``safe harbor'' provisions that 
were adopted in the Senate compromise that reduce the incentives to 
avoid renewable fuel additives to gasoline that replicate in any way 
the problems of lead or MTBE. Unfortunately, Section 819(e) of the 
Senate compromise bill (Section 101(e) of S. 385) provides that no 
renewable fuel can be deemed to be defective in design or manufacture 
``by virtue of the fact that it is, or contains such a renewable 
fuel''. The liability shield in this provision reduces the incentive 
renewable fuel producers and purveyors have to be vigilant and provide 
a safe renewable fuel product. Therefore, the provision increases the 
likelihood of another MTBE situation developing rather than decreasing 
it.
    Since the oil refining industry is insisting on the ``safe harbor'' 
a question is clearly raised. What do they know about the dangers of 
renewable fuels that we do not? Are there dangers that they know about, 
as they did with MTBE in the 1980's that they are not telling Congress 
as it contemplates mandating the use of renewable fuels? Why does the 
ethanol industry support the ``safe harbor'' for renewable fuels? Are 
there adverse consequences from ethanol use that they know about that 
prompt their support for the ``safe harbor''?
Without the Senate Compromise bill, Massive Amounts of Ethanol Must be 
        Used in California and the Northeast
    The Senate compromise bill represents a significant compromise that 
the American Lung Association believes provides the best basis for 
achieving modifications to RFG that meets the needs of the oil 
industry, the ethanol industry, State air regulators, and air quality. 
With the removal of the safe harbor for renewable fuels, the Senate 
compromise should be able to be enacted and avoid an impending ``train 
wreck'' if existing State bans of MTBE go into effect beginning with 
Connecticut in October of this year.
    In a world where 14 to 19 States individually ban MTBE but oxygen 
requirement is maintained in Federal RFG, large amounts of ethanol will 
be needed. The difference between this scenario and implementing the 
Senate compromise is that the ethanol demand is inflexibly centered on 
California and the Northeast where ethanol is not currently produced or 
used in any significant volumes. According to the API, if MTBE bans in 
California and the Northeast take effect with no change to Federal RFG 
requirements, California would need 843 million gallons of ethanol and 
the Northeast would need 713 million gallons.(See Tab 2 and 3) We 
believe the cost and price spike impact of such a scenario would be 
much more significant than under the Senate compromise. This is because 
ethanol must be transported and stored separately from the base 
gasoline it is mixed with until it reaches consumer distribution.
    Under the Senate compromise, the RFS credit and banking provisions 
allow some refiners to use ethanol in the most economically efficient 
manner, most likely where it is already made and used. These refiners 
can sell RFS credits to those who cannot use ethanol economically. We 
expect that octane for RFG used in the Northeast and California will be 
met substantially by the use of iso-octane and alkylates. Refiners 
supplying these regions would then be obligated to purchase RFS credits 
from refiners using ethanol in mid-west markets where it has been 
traditionally sold. Such an approach is far more practical than the 
``forced'' ethanol use under the status quo scenario.
Congress Must Adopt Needed Fuel Changes As Soon As Possible
    The Congress has been deadlocked over legislation to eliminate MTBE 
and improve Federal requirements for RFG and conventional gasoline for 
years. With the exception of the liability safe harbor, the provisions 
in the Senate compromise bill adopted last year represent a compromise 
that addresses widely varying concerns in a reasonable fashion. We urge 
you to grasp this opportunity, remove the safe harbor provisions from 
S. 385 and support this compromise.
    Study of Boutique Fuels & Issues Relating to Transition from Winter 
to Summer Gasoline, Office of Transportation and air Quality, U.S. 
Environmental Protection Agency, October 24, 2001, p. 10.
                              attachments












































                               __________
   Statement of Paul J. Granger, PE, Water District Superintendent, 
                   Plainview Water District, New York
    I would like to thank the Senate Committee on Environment and 
Public Works for providing an opportunity to the Plainview Water 
District to comment publicly on the use of the fuel additive methyl 
tertiary butyl ether (hereinafter, ``MTBE'') and the adverse impact on 
drinking water supplies.
    My name is Paul Granger and I have 15 years of engineering and 
management experience in the water supply field. I am a licensed 
Professional Engineer, New York State Certified I-B water treatment 
plant operator and have a Bachelor of Science degree in Civil 
Engineering from Polytechnic University. Presently, I am the 
Superintendent of Engineering and Business Administration of the 
Plainview Water District. I also serve on the Board of Directors for 
the Long Island Water Conference and as Vice-chair of the New York 
State Water Utility Council. Prior to my employment with the Water 
District, I was a project manager with the Long Island consulting 
engineering firm, H2M Group, for 8 years. My experience with the firm 
included the design of water supply and treatment facilities and the 
preparation of water supply, management and treatment studies for many 
Long Island water purveyors.
    The Plainview Water District is located in Nassau County, New York 
and encompasses all of Plainview and Old Bethpage as well as portions 
of Syosset and Woodbury. The district is one of the larger water 
systems on Long Island and strictly relies on groundwater as the sole 
source of drinking water in the community.
    Potable water, meeting all local, State and Federal standards is 
furnished to 10,510 accounts within a 9 square mile area through 130.4 
miles of water main servicing approximately 32,100 residents 
(population is estimated based on 2002 Long Island Power Authority 
Census data). The Water District maintains 11 supply wells at six sites 
providing a maximum design capacity of 22.44 million gallons per day 
(MGD). All of the supply wells are screened into the Magothy aquifer, 
which is the primary water supply source for more than three million 
residents of Long Island.
    My comments today specifically address my first-hand experience and 
knowledge of the adverse impact of the fuel additive MTBE on our 
drinking water supply. MTBE was touted by the EPA as the panacea for 
providing clean air and has been in use since 1979 as a gasoline 
additive. It was originally intended to be used to help gasoline burn 
more efficiently and prevent engine knocking after lead was phased out 
of the fuel supply. More recently, with the promulgation of the 1990 
Clean Air Act, MTBE has been widely used as an additive in reformulated 
gasoline for reducing carbon monoxide emissions from motor vehicles. 
All of the gasoline sold on Long Island since 1992 contains 
approximately 15 percent MTBE. On a national basis, the use of MTBE 
translates into absolutely staggering quantities. In 1999 alone, more 
than 200,000 barrels of MTBE were manufactured per day in the United 
States. As a result, MTBE is one of the highest volume chemicals 
produced in the country. MTBE can also be present in fuel oil or other 
petroleum products, perhaps due to cross production contamination.
    The registration of MTBE with the Federal Government as an 
acceptable additive for reducing air pollution had initially perceived 
good intentions, but failed to assess the additive's environmental and 
public health consequences. Available toxicological data demonstrate 
that MTBE can cause cancers and non-cancerous health effects. The EPA 
in 1993 stated that ``MTBE supports a hazard classification of possible 
human carcinogen . . . . based on limited animal research.'' Recent and 
``after the fact'' research and experience has revealed that MTBE can 
and inevitably will poison our nation's water supply.
    The widespread use of MTBE in reformulated gasoline and impact of 
the compound on water supply systems throughout the country has raised 
the serious concerns of the Plainview Water District and regional water 
purveyors. MTBE has much different characteristics when compared to 
typical petroleum based compounds and additives. When gasoline-
containing MTBE is released into the ground through a leaking tank or 
spill, it tends to migrate downward due to the force of gravity. If the 
ground is not saturated with water, the gasoline/MTBE mixture initially 
spreads through the aerated soils as a liquid and then volatilizes into 
soil gas vapor. If the gasoline/MTBE mixture encounters saturated 
groundwater, the MTBE dissolves into the groundwater and migrates in 
the direction of prevailing flow. Once in the groundwater supply this 
compound does not biodegrade, has a propensity to sink in the aquifer 
system and is soluble in water. Furthermore, MTBE is difficult to 
remove from groundwater with the traditional methods of air stripping 
and granular activated carbon filtration. Therefore, treatment for MTBE 
removal would be far more expensive. Ultimately the cost for MTBE 
removal from the water supply is borne by the consumer.
    MTBE primarily makes its way into the groundwater supply through 
fuel spills. Anywhere gasoline-containing MTBE is manufactured, stored, 
used, handled, transported or released in any way into the environment, 
the potential exists for MTBE pollution problems. The bigger the 
release, the bigger the potential for pollution problems. For example, 
a cup of gasoline/MTBE dumped on the ground will typically not migrate 
far before most of it evaporates into the air. Ten thousand gallons of 
gasoline/MTBE leaking from a tank could spread from hundreds of feet to 
more than one mile depending on soil and environmental conditions if 
the spill is not cleaned up.
    Gaseous MTBE spreads outward from its point of origin and can 
penetrate nearby homes, buildings or structures through holes, cracks 
or other openings. Gaseous MTBE can follow ``preferential pathways,'' 
such as porous soils or sewer, water, gas and electric conduits. Indoor 
air quality problems can result.
    Groundwater is generated when rain, snow and other forms of 
precipitation fall on the ground and migrates downward into the 
underlying saturated zone of soil or rock. Groundwater contaminated 
with MTBE migrates freely through the environment and can cause indoor 
air quality problems by flooding into structures. It can also threaten 
drinking water.
    MTBE-contaminated groundwater typically flows downward and 
eventually outward into surface waters. Drinking water drawn from MTBE-
contaminated rivers, lakes or reservoirs can be polluted, though MTBE 
is often diluted in surface waters. More typically, wells screened into 
MTBE contaminated groundwater draw the pollution into their supply 
system. Wells generate an area of hydraulic influence. Small private 
wells drawing hundreds of gallons of water per day from the ground have 
a much smaller area of hydraulic influence than public water supply 
wells drawing millions of gallons of water per day. MTBE discharged 
near a well or migrating through its area of hydraulic influence is 
slowly, but surely, drawn into the well.
    Once MTBE is introduced into the environment, it can be extremely 
difficult and expensive to investigate or remediate. First, the 
pollution is underground and tricky to locate. Delineating an MTBE 
plume often requires dozens of groundwater monitoring wells or 
extensive subsurface investigations. Second, removing MTBE from 
impacted soil, soil gas vapor or polluted groundwater can be 
technically challenging. Since the pollution may have migrated over a 
large area, vast quantities of contamination may have to be removed or 
treated.
    Clean-up delays occur because regulatory standards for MTBE in 
groundwater and drinking water are not comprehensive. For example, New 
York adopted a groundwater remediation guideline of ten parts per 
billion in late 1999, but failed for 4 years to adopt a proposed 
Maximum Contaminant Level in drinking water.
    Enforcement of applicable clean-up standards is also lax. It is not 
at all unusual for cleanup of major tank failures to be delayed for 10 
years or longer. In many cases, it is all but impossible to remediate a 
large spill after that length of time. Given all of these shortcomings, 
it is no surprise that the Nation has inherited an MTBE groundwater 
pollution crisis that could prove unprecedented in our environmental 
history.
    During November 2000, the MTBE threat to the Plainview Water 
District became a sudden and un-welcomed reality when a large gasoline 
spill containing a very high concentration of MTBE was found within 450 
feet of a vital drinking water supply well facility. An MTBE level of 
840 parts per billion (ppb) was detected in the groundwater beneath the 
spill site. This is more than 80 times the 10 ppb State groundwater 
clean-up guideline. The MTBE spill will eventually impact two local 
drinking water supply wells unless immediate and determined action is 
taken to remediate the spill and provide treatment at the supply wells. 
Exhibit A depicts the close proximity of the spill site with respect to 
the aforementioned water district supply facility. At this time the 
polluter, Exxon-Mobil, has not taken action to fully delineate the 
groundwater contamination and cleanup the impacted aquifer. It should 
be noted that Exxon-Mobil officially reported the MTBE spill to New 
York State Department of Environmental Conservation during 1997. What 
is unfortunate and disturbing is that the Plainview Water District 
discovered the spill on its own volition more than 3 years after the 
incident was reported. Both Exxon-Mobil and the State environmental 
agency failed to notify the water district of the significant and 
threatening spill. What is further disturbing is that more than 6 years 
has elapsed and the contamination continues to migrate unabated toward 
our vital water supply facility.
    At this time the Plainview Water District is undertaking prompt 
proactive legal action against Mobil to ensure that the spill will be 
cleaned and MTBE does not pollute our supply wells. Furthermore, our 
legal action will rightfully shift the enormous financial burden of 
wellhead treatment onto the polluter (responsible party) rather than 
onto the ratepayer. The water district is looking to the future and 
does not want to wait for the aforementioned pollution problem to 
become a crisis. The Plainview Water District is the first water 
supplier in New York State to undertake such progressive and proactive 
action. No matter what the outcome of the legal action is, we will take 
every responsible measure to protect public health, while also 
protecting the financial interest of our residents. To illustrate this 
point, the water district has constructed an outpost early detection 
monitoring well system. This cluster of monitoring wells will provide 
the water district with advanced warning should the MTBE plume continue 
to move toward our supply wells at Plant 1.
    Since the November 2000 MTBE spill discovery by the Water District, 
three other significant spills have been documented within our service 
area. These additional spills also threaten our supply wells and other 
facilities operated by neighboring water systems. It must be noted that 
all Plainview Water District supply wells are free from MTBE at this 
time and we are carefully monitoring them. Residents can be assured 
that the water district is taking every proactive measure to protect 
public health.
    As a result of vigilant monitoring by water utilities and regional 
health departments, the chemical is now being detected in many public 
and private water supply wells throughout the country. In some 
instances the chemical is being detected in only trace levels while in 
other cases, MTBE has been found in very high concentrations. On Long 
Island, MTBE has been detected primarily in trace levels in more than 
130 supply wells. At this time, only a handful of public supply wells 
have been shut down on Long Island due to MTBE contamination. This does 
not mean that we should not be concerned. Based on present day pumpage 
conditions, it can take many years before the contaminant travels into 
the deep regions of the groundwater system and impacts our public water 
supply wells. It should be noted that hundreds of shallow private wells 
on Long Island have been contaminated with MTBE and have been taken out 
of service. To underscore my concern and the concerns of the water 
supply community, New York has identified some 1,970 MTBE spill sites 
with 430 of them on Long Island alone. Exhibit B provides a map of the 
MTBE spills documented in New York State that do not meet clean-up 
standards. While the map depicted in Exhibit C provides an illustration 
of the magnitude of the MTBE crisis in the downstate region. New York 
State is not alone in this crisis, since California itself has 10,000 
MTBE-contaminated sites. At least 21 States have reported well closures 
due to MTBE groundwater contamination. During January 2000, the MTBE 
and water supply contamination crisis captured national attention when 
60 Minutes broadcasted a rare double segment on the topic. The American 
Water Works Association estimates that water suppliers are already 
faced with a national cost exceeding $1 billion to prevent, cleanup, 
and treat MTBE-contaminated supplies. It is clearly evident that MTBE 
must be immediately banned before the problem worsens.
    According to a 1998 study from the University of California at 
Davis it was concluded that `` there is no significant additional air 
quality benefit to the use of oxygenates such as MTBE in reformulated 
gasoline.'' Furthermore, the 800 page study noted that while Federal 
law mandates the use of oxygenates in reformulated gasoline, MTBE 
addition has ``no significant effect'' on the emissions from modern 
vehicles while presenting ``significant risks and costs associated with 
water contamination.'' The report authors recommended phasing out MTBE 
use, giving refiners flexibility to achieve air quality objectives by 
improving non-oxygenated reformulated gasoline and conducting a full 
environmental assessment of any MTBE alternative. A fact sheet summary 
of the aforementioned study is provided in Exhibit D. It should also be 
noted that the National Research Council concluded that there is no 
significant additional air quality benefit to the use of oxygenates 
such as MTBE in reformulated gasoline.
    It is encouraging to see that the EPA Blue Ribbon Panel, 
commissioned to assess the use of MTBE, has recommended the elimination 
of the chemical from all gasoline. In addition, the panel recommended 
that the mandatory oxygen requirement for reformulated gasoline be 
eliminated. Vigilance must be maintained by our government 
representatives to ensure that the Blue Ribbon Panel recommendations 
are followed and the MTBE threat is eliminated. If any other additives 
mandates (such as the mandate for ethanol) are considered for the 
replacement of MTBE, let us hope that the government performs a 
``full'' environmental and health assessment before it is implemented. 
However, based on the findings made in past studies, the present 
mandate for oxygenates, such as MTBE and ethanol, is inapplicable.
    It is my understanding that a ``safe harbor'' provision is under 
serious consideration as Congress deliberates proposals for amending 
the Clean Air Act regarding fuel additives and renewable fuels. The 
proposed provision would unjustly shield the petroleum and ethanol 
industries from defective product liability under Federal and State law 
for the use of either MTBE or renewable fuels including ethanol. Such a 
provision would unfairly place the monumental clean-up and treatment 
costs on water suppliers and ultimately the customer. The evidence is 
clear that the contamination of water supplies across the Nation by 
MTBE will only worsen. Swift and determined action must be taken to 
eliminate the MTBE threat. Providing a ``safe harbor'' for the parties 
that created the problem shifts the enormous economic and public health 
burden ultimately onto the innocent parties, namely the water consumer. 
Furthermore, based on my experience as a water supplier on Long Island, 
the MTBE problem will only worsen since we are only seeing the ``tip of 
the iceberg'' at this time.
    I respectfully request that our Federal legislators take careful 
note of the substantial MTBE drinking water contamination problems 
already experienced by and currently facing water suppliers throughout 
the country. In addition, it is very important to consider the 
scientific facts concerning the use of MTBE as it relates to public 
health and the environment. It is extremely important that legislative 
proposals mandating other oxygenates (such as ethanol) be considered 
based on sound science. To re-emphasizes this concern, previous 
credible scientific studies concluded that there is no significant 
additional air quality benefit to the use of oxygenates in reformulated 
gasoline. Therefore, why run the risk of repeating the MTBE mistake all 
over again.
    It is apparent that risks associated with the use of MTBE far out 
weigh benefits. Prompt action needs to be taken in order to eliminate 
the MTBE threat to our water supply once and for all. The Senate and 
government as a whole still has time to prevent MTBE from becoming a 
national drinking water catastrophe if prompt and proper action is 
undertaken at this time. In conclusion, I recommend that the following 
be strongly considered as the Senate deliberates proposals for amending 
the Clean Air Act regarding fuel additives and renewable fuel:

      Based on the present impact and expanding threat to water 
supplies nationally, MTBE must be swiftly phased out of all gasoline.
      The oxygenate mandate contained in the present Clean Air 
Act must be removed based on the conclusions and recommendations made 
by prominent studies and the EPA Blue Ribbon Panel.
      The legal rights of water suppliers and consumers must be 
upheld so that the vast clean-up burden is not placed on taxpayers. 
Providing a liability ``safe harbor'' eliminates a vital tool to 
protect the economic, environmental and public health interests of the 
water consumer.
      Comprehensive environmental and health assessments must 
be performed on other fuel additives before they go into use so that we 
do not repeat the same MTBE mistake.
      Establish and strictly enforce national groundwater and 
drinking water standards for MTBE.
      Implement and properly fund a national study to address 
the MTBE crisis. An emphasis should be placed on groundwater cleanup 
and the treatment of impacted drinking water supplies.
      Provide Federal funding for local water utilities to 
address the MTBE contamination crisis. Regional water suppliers have 
been or will be forced to remediate pollution hazards that they did not 
create.

    Vigilance and care must be undertaken to ensure that our sources of 
drinking water are of high quality, ample quantity and of reasonable 
cost for the present population and future generations throughout the 
Nation. Let us rest assured that the public water suppliers will 
undertake the necessary measures to ensure that safe drinking water is 
supplied to the public. We need immediate help from the Federal 
Government to insure that our water supply remains safe and 
economically viable for public consumption.
    Thank you for your time and providing me with the opportunity to 
address you today.
                              attachments












                               __________
 Statement of Craig Perkins, Director of Environment and Public Works, 
                    City of Santa Monica, California
    On behalf of the Mayor and City Council of the city of Santa Monica 
I want to thank you for the opportunity to give testimony before this 
subcommittee. I am the Director of Environment and Public Works for 
Santa Monica and one of my major areas of responsibility is management 
of the City's drinking water production and distribution system. I 
would like to share with you today our experiences with MTBE in Santa 
Monica. Santa Monica is a city of nearly 90,000 permanent residents and 
over 250,000 daily commuters and visitors. The City depends heavily on 
groundwater for its drinking water supply. After many years of effort, 
by 1995 we had been able to maximize the use of local groundwater 
supplies and achieve 70 percent water self-sufficiency. This was an 
extraordinary accomplishment in arid Southern California. By using our 
sustainable local water resources we were therefore able to reduce our 
reliance on increasingly scarce water transferred from Northern 
California and the Colorado River. This all changed in 1996 when Santa 
Monica was hit with a drinking water catastrophe caused by MTBE. Within 
a 6-month period, MTBE forced Santa Monica to shut down most of its 
water wells. These wells had accounted for about one-half of our total 
daily water supply. We now purchase more than 80 percent of our 
drinking water from outside sources, putting further strain on 
California's already fragile water supply system.
    By now, we all know too well the pernicious characteristics of 
MTBE:

      Once it leaks from a tank or pipeline, MTBE travels 
quickly and readily dissolves in groundwater;
      MTBE has an uncanny ability to find its way into drinking 
water wells that may have never been impacted in the past by any of the 
other chemicals in gasoline;
      MTBE attacks swiftly. MTBE levels in the City's wells 
rose more quickly than any other water contaminant we had ever 
encountered; and
      MTBE strikes at the heart of public confidence in the 
safety of drinking water supplies. People will not drink water that 
smells and tastes like turpentine, nor should they be expected to.

    Although the effects of MTBE on Santa Monica have been devastating, 
what has perhaps been the most frustrating for us is the recalcitrance 
of the polluters (oil companies and MTBE manufacturers and 
distributors) to accept their responsibility and cleanup the mess they 
have caused. Initially, the significant financial burden to investigate 
the MTBE contamination, identify who was responsible for the releases, 
evaluate clean-up alternatives, and purchase replacement water was 
placed unfairly on the backs of Santa Monica's citizens.
    It was not until 18 months after we had started shutting down our 
wells that we were able to reach an interim agreement with two large 
oil companies to reimburse the City's past costs and pay for the 
ongoing costs of dealing with the MTBE problem. This interim agreement 
lasted only two and one-half years before it was allowed to fall apart 
by the oil companies; most likely, due to the quickly escalating 
projections for the cost of MTBE remediation. The estimated cost to 
clean-up Santa Monica's main well field is now over $250 million. 
Current estimates for the total cost of nationwide MTBE clean-up are 
$30 billion and counting.
    With no other acceptable options available to us, Santa Monica 
filed a lawsuit against 18 oil companies and MTBE 
manufacturers/distributors in June, 2000. Santa Monica did not 
want to file a lawsuit. From the start, our motivation has been to 
reach a settlement and get on with the task of restoring our 
drinking water supply. But, we do not believe it is right for our 
water customers to pay for any of the costs to do so. Two years 
after filing our lawsuit, we were able to reach a new settlement 
with two of the major oil companies. This settlement, if approved 
by the courts, guarantees that Santa Monica's water will be cleaned 
up as quickly as possible, with the full cost borne by the 
polluters. Our best case projection, however, is that our 
local drinking water supplies will be back on line by 2008, fully a 
dozen years after our MTBE problem started.
    Our lawsuit against the other companies continues, and must 
continue under the terms of our settlement to make sure that every 
responsible party ends up paying their fair share to restore Santa 
Monica's groundwater resources. Santa Monica will eventually overcome 
this MTBE crisis, but the price will be steep. It is only fair that 
costs for remediation of MTBE and other water contamination must 
ultimately be paid for by the polluters. But, as we have found in Santa 
Monica through painful experience, it is frequently only the prospect 
of a very expensive jury judgment intended, perhaps, to punish them for 
their past misconduct that will bring many of the MTBE polluters to the 
negotiating table.
    Public water agencies need to make use of every legal tool at their 
disposal to ensure that polluters ultimately do what's right. If a 
defective product is produced and sold, then the damages caused by such 
a product should be the responsibility not of the customer, but of the 
companies that made it and sold it. If MTBE is a defective product, 
then there is no legitimate justification for treating it differently 
than any other product in the economy. It would be very harmful to 
Santa Monica and many other communities to prevent product defect 
liability claims against MTBE just as we are struggling to ensure that 
MTBE polluters deal expeditiously with the serious water contamination 
problems they have caused. We need your support, and I thank you for 
your consideration and assistance.
                               __________
Statement of Erik D. Olson, Senior Attorney, Natural Resources Defense 
     Council, on Behalf of NRDC and the Environmental Working Group
                                abstract
    MTBE and reformulated gasoline probably have contributed to 
reductions in air emissions. However, MTBE is extremely soluble in 
water, persistent, and smells and tastes foul. It renders water 
containing fairly low levels (about 20-40 parts per billion according 
to EPA) unusable for drinking, because the public refuses to consume or 
use it. There also are potential health concerns with MTBE, including 
possible carcinogenicity and other toxicity issues. Moreover, it is 
nearly impossible, and very expensive, to remove MTBE from water 
supplies once they become contaminated.
    Because of its properties, MTBE has caused widespread contamination 
of water across the country. New USGS data show about 3 percent of 
wells, 5 percent of source waters, and 9 percent of Northeastern 
drinking water supplies have detectable MTBE; nationally, about 5 
percent of public supplies contain MTBE. In the Northeast, about 15 
percent of drinking water supplies in high MTBE use areas contain this 
chemical. Large numbers of underground storage tank leaks, spills, and 
other sources have lead to releases of MTBE-containing fuel, and MTBE 
migrates in the environment very quickly. Most MTBE contamination to 
date apparently is below EPA's 20 ppb advisory level, but many 
contamination incidents above this level have been reported. A map of 
MTBE contamination incidents is included in this testimony.
    It has been argued that the oil industry was ``forced'' to use MTBE 
as part of the 1990 Clean Air Act's oxygenate mandate, and that 
therefore the industry should not be held responsible for the 
widespread water contamination. However, this is a distortion of the 
truth. Neither EPA nor Congress ever mandated that industry use MTBE. 
Elements of the petroleum industry urged the use of MTBE as an 
oxygenate. Moreover, internal industry documents that were not released 
to the public until litigation recently pried them loose show an 
entirely different story. The industry knew at least in the early 
1980's that MTBE was highly mobile, highly water soluble, highly 
persistent, and could render water unusable at low levels of 
contamination. Moreover, the industry was aware that many of its tanks 
were leaking fuel, often including MTBE. A court recently held major 
oil companies responsible for acting ``with malice'' in failing to warn 
the public about MTBE.
    We support legislation that would phase-out MTBE and would 
eliminate the 2 percent oxygenate requirement, while maintaining air 
quality benefits. We do not favor an ethanol mandate. The ``deal'' that 
was struck previously in the Senate was marred by a deal-breaker 
amendment that preempted both State and Federal liability for oil 
company contamination of water supplies by ``renewable fuels.'' This 
was expanded in a House counter offer to include MTBE. We strongly 
oppose any provision that would eliminate any legal tools available to 
local governments, water suppliers, or others harmed by contamination 
of water supplies. Industry knew about MTBE problems and could have 
controlled them, and must have the incentive to minimize and address 
the impacts of new fuels and additives
    Finally, there is a related issue involving potential groundwater 
contamination with MTBE and other toxic materials that may arise in the 
energy bill. Hydraulic fracturing is a process of injecting fluids 
under high pressure, sometimes containing MTBE, diesel fuel, or other 
toxins, to fracture underground formations to remove natural gas. A 
court has ruled that HF must be regulated under the Safe Drinking Water 
Act, and the congressionally chartered National Drinking Water Advisory 
Council has recommended that EPA retain its authority to regulate this 
potentially harmful practice. Congress should not impede this current 
EPA authority.
Introduction
    I am Erik D. Olson, a Senior Attorney at the Natural Resources 
Defense Council (NRDC), a national non-profit organization with over 
500,000 members dedicated to the protection of public health and the 
environment. I also serve as chair of the Campaign for Safe and 
Affordable Drinking Water, an alliance of over 300 public health, 
medical, consumer, environmental, and other organizations seeking to 
assure safe drinking water at a reasonable price to all Americans, 
though today I do not appear on behalf of the Campaign.
    Part 1 of this testimony focuses primarily on MTBE. Part 2 briefly 
notes another important water issue likely to be addressed in the 
energy legislation, the use of hydraulic fracturing in oil and gas 
activities, which may harm water supplies. Part 3 highlights what the 
oil industry knew about MTBE problems, and when they knew about them, 
and was written by the Environmental Working Group, which authored the 
report summarized in that section, and joins in this testimony.
    part 1. mtbe: water quality concerns, and the need for federal 
                              legislation
Why MTBE?
    Because of serious air pollution triggering smog alerts in many 
``non-attainment'' areas around the Nation, EPA began investigating 
changes in fuel supplies that could result in air quality improvements. 
For many years EPA was investigating the possible widespread use of 
methanol (a chemical cousin of ethanol) as a fuel. The petroleum 
industry, on the other hand, had another idea: reformulated gasoline 
that was produced from a byproduct fraction of petroleum cracking that 
for years had little market, called methyl tert-butyl ether (MTBE). 
MTBE could be used as an ``oxygenate,'' elements of the petroleum 
industry argued, and would reduce carbon monoxide emissions and ozone 
levels in the atmosphere, leading to air quality benefits.
1990 Clean Air Act Amendments
    In enacting the Clean Air Act Amendments (CAA) of 1990, Congress 
required the use of oxygenates in gas, in order to improve air quality. 
The use of oxygenates makes gas burn cleaner. The oxygenate requirement 
also was enacted in part because Congress hoped to give a big boost to 
the ethanol industry, which can use distilled ``biomass'' to make this 
alcohol. Instead of switching mostly to ethanol, the petroleum industry 
chose to use MTBE as the oxygenate of choice. MTBE use skyrocketed (see 
figure 1). By 1998, MTBE became ``the second most-produced organic 
chemical in the U.S.,'' with about 10 million gallons used per day.\1\
---------------------------------------------------------------------------
     \1\Personal Communication with John Zogorski, USGS, March 11, 
2003; Johnson, Pankow, Bender, Price, and Zogorski, USGS, ``MTBE: To 
What Extent Will Past Releases Contaminate Community Water Supply 
Wells?'' Environmental Science & Technology at 2A (May 1, 2000).
---------------------------------------------------------------------------
EPA Blue Ribbon Panel on MTBE
    EPA's Blue Ribbon Panel on MTBE concluded that the Reformulated 
Gasoline Program (RFG) established in the Clean Air Act Amendments of 
1990 ``has provided substantial reductions in the emissions of a number 
of air pollutants from motor vehicles. . . .'' The reductions were 
greater, in fact, than legally required. The panel also noted that 
``there is disagreement about the precise role of oxygenates [such as 
MTBE] in attaining the RFG air quality benefits,'' though oxygenated 
fuels did, the panel concluded, probably reduce emissions. But in large 
because of the water quality problems caused by MTBE, the panel 
recommended:

      ''Action . . . to reduce the use of MTBE substantially 
(with some members supporting its complete phase-out), and action by 
Congress to clarify Federal and State authority to regulate and/or 
eliminate the use of gasoline additives that threaten drinking water 
supplies;
      ''Action by Congress to remove the current 2 percent 
oxygen requirement to ensure that adequate fuel supplies can be blended 
in a cost-effective manner while quickly reducing usage of MTBE; and
      ''Action by EPA to ensure that there is no loss of 
current air quality benefits.''


Serious Concerns about Water Quality
    While MTBE may have contributed to improved air quality in some 
communities, the bad news is that MTBE is extremely soluble in water, 
far more soluble than hydrocarbon components such as benzene, toluene, 
and xylene (see Figure 2).
Industry Knew Long Before 1990 CAA Amendments MTBE Was a Problem
    As discussed at length in Part 3 in this testimony, internal oil 
industry documents that were only released in litigation show that the 
oil industry well aware of MTBE's water-contaminating properties before 
the 1990 Clean Air Act Amendments. These documents also show that the 
industry was aware that spills or leaks containing MTBE spread very 
fast, and were extremely difficult and expensive to clean up. Indeed, 
by 1981, a Shell scientist wrote an internal report on an MTBE 
contamination problem and the difficulties of cleanup. The joke inside 
Shell was that MTBE really stood for ``Most Things Biodegrade Easier;'' 
later, other versions of the joke circulated, including ``Menace 
Threatening Our Bountiful Environment,'' or ``Major Threat to Better 
Earnings.'' (Attachment 5)
    These and many other facts, documents, and testimony were 
considered by the jury that found that there was ``clear and convincing 
evidence'' in the South Tahoe case that Shell Oil and Lyondell Chemical 
Company (ARCO chemical Company) acted ``with malice'' in selling 
gasoline containing MTBE both because it was ``defective in design'' 
because the risks of harm outweighed its benefits, and because of their 
failure to disclose the threats posed by MTBE.\2\ Several other oil 
company defendants opted to settle the case before these findings were 
rendered.
---------------------------------------------------------------------------
     \2\South Tahoe Public Utility District v. ARCO, No. 999128 
(Superior Court, S.F., March 4, 2002), SPECIAL VERDICT PHASE 1 
(Attachment 4).
---------------------------------------------------------------------------
Other MTBE Chemical Cousins May Also Present Problems
    Other ethers being considered as gasoline additives, such as ethyl-
tert-butyl ether (ETBE), tert-amyl methyl ether (TAME), and di-isoproyl 
ether (DIPE) also are extremely soluble, like MTBE. (Figure 2). The 
high solubility of MTBE has lead to widespread contamination of 
groundwater and surface waters across the Nation.


Widespread MTBE Contamination of Water
    According to estimates from U.S. Geological Survey (USGS) experts, 
there may be 250,000 leaking underground storage tank (LUST) releases 
of MTBE.\3\ Pipeline releases, gas spills, and other sources also 
contaminate groundwater and surface water with MTBE. USGS estimates 
that about 35 percent of community water system wells are located 
within 1 km of a LUST (9000 wells).\4\
---------------------------------------------------------------------------
     \3\Johnson, Pankow, Bender, Price, and Zogorski, USGS, ``MTBE: To 
What Extent Will Past Releases Contaminate Community Water Supply 
Wells?'' Environmental Science & Technology at 2A (May 1, 2000).
     \4\Ibid.
---------------------------------------------------------------------------
    Newly released (March 2003) USGS data indicates that about 3 
percent of groundwater wells in the U.S. contain MTBE, and about 5 
percent of source waters contain MTBE (Figures 3 and 4).\5\ Testing 
also indicates that MTBE is often found in tap water--about 9 percent 
of water supplies in the Northeast that were tested.\6\ About 15 
percent of drinking water in the high MTBE use areas in the Northeast 
contained MTBE.\7\ Most is found at relatively low levels; about 1 
percent of northeastern drinking water exceeded the low end of EPA's 
advisory level (20 ppb).\8\
---------------------------------------------------------------------------
     \5\Moran. MJ, Zogorski, JS,Squillace PJ, ``Occurrence and 
Distribution of MTBE and Gasoline Hydrocarbons in Groundwater and 
Groundwater Used as Source Water in the United States and in Drinking 
Water in 12 Northeast and Mid-Atlantic States, 1993-2002'' (March 2003, 
in press) available online at http://sd.water.usgs.gov/public--naw/ 
pubs/journal/GW.MTBE.moran.pdf
     \6\Ibid.
     \7\Ibid.
     \8\Ibid.
    
    
    
    
Health Concerns With MTBE
    MTBE contamination of drinking water poses health concerns, but as 
is usually true with chemical contaminants, there remains some 
uncertainty as to how serious these risks are. EPA has found that MTBE 
may be a carcinogen, but has not reached a final verdict on the issue. 
There have been reports of acute human-health effects of MTBE such as 
nausea, dizziness, and headaches by people exposed to MTBE-containing 
fuel vapors in air, though some argue that these symptoms have not been 
clearly linked to MTBE exposure.\9\ The human-health effects of long-
term inhalation or oral exposures to MTBE are unknown.\10\ However, 
there is some evidence of possible reproductive and developmental 
effects.\11\
---------------------------------------------------------------------------
     \9\Toccalino, P., ``Human Health Effects of MTBE: A Literature 
Summary,'' USGS, available on the web at http://sd.water.usgs.gov/ 
nawqa/vocns/mtbe--hh--summary.html; citing inter alia Agency for Toxic 
Substances and Disease Registry, 1996, Toxicological profile for methyl 
t-butyl ether (MTBE): Atlanta, GA, U.S. Department of Health and Human 
Services, Public Health Service, August 1996, 268 p., http:// 
atsdr1.atsdr.cdc.gov/toxprofiles/tp91.html; Health Effects Institute, 
1996, The potential health effects of oxygenates added to gasoline. A 
review of the current literature. A special report of the Institute's 
oxygenates evaluation committee: Cambridge, MA, Health Effects 
Institute, April 1996, http://www.healtheffects.org/Pubs/oxysum.htm; 
National Institute of Environmental Health Sciences, 2002, MTBE (in 
gasoline): National Institute of Environmental Health Sciences, March 
13, 2002, http://www.niehs.nih.gov/external/faq/gas.htm; National 
Research Council, 1996, Toxicological and performance aspects of 
oxygenated motor vehicle fuels: Washington, DC, National Academy Press, 
160 p.; National Science and Technology Council, 1996, Interagency 
assessment of potential health risks associated with oxygenated 
gasoline: Washington, DC, National Science and Technology Council, 
Committee on Environment and Natural Resources, February 1996, 
http://www.ostp.gov/NSTC/html/MTBE/mtbe-top.html; Office of Science 
and Technology Policy, 1997, Interagency assessment of oxygenated 
fuels: Washington, DC, Office of Science and Technology Policy, 
National Science and Technology Council, Executive Office of the 
President of the United States, June 1997, 264 p., www.epa.gov/oms/ 
regs/fuels/ostpfin.pdf.
     \10\Toccalino, supra; citing inter alia National Institute of 
Environmental Health Sciences, 2002, MTBE (in gasoline): National 
Institute of Environmental Health Sciences, March 13, 2002, 
http://www.niehs.nih.gov/external/faq/gas.htm; U. S. Environmental 
Protection Agency, 1995, Proceedings of the conference on MTBE and 
other oxygenates: a research update. Conference summary session 
seven: Research Triangle Park, NC, U.S. Environmental Protection 
Agency, National Center for Environmental Assessment, 
EPA/600/R-95/134, August 1995, 274 p., www.epa.gov/ncea/pdfs/mtbe/ 
0850-A.pdf; National Research Council, 1996, Toxicological and 
performance aspects of oxygenated motor vehicle fuels: Washington, 
DC, National Academy Press, 160 p.; National Science and Technology 
Council, 1996, Interagency assessment of potential health risks 
associated with oxygenated gasoline: Washington, DC, National 
Science and Technology Council, Committee on Environment and 
Natural Resources, February 1996, http://www.ostp.gov/NSTC/html/ 
MTBE/mtbe-top.html' Office of Science and Technology Policy, 
1997, Interagency assessment of oxygenated fuels: Washington, DC, 
Office of Science and Technology Policy, National Science and 
Technology Council, Executive Office of the President of the United 
States, June 1997, 264 p., http://www.epa.gov/oms/regs/ 
fuels/ostpfin.pdf.
     \11\Hartley, W.R., A.J. Englande, Jr., and D.J. Harrington. 1999. 
``Health risk assessment of groundwater contaminated with methyl 
tertiary butyl ether.'' Water Science & Technology 39, no. 11: 305-310.
---------------------------------------------------------------------------
    There are no published studies evaluating MTBE and cancer in 
humans, but MTBE has been shown to cause cancer in rats and mice 
exposed by inhalation or orally.\12\ Federal agency reports indicate 
that MTBE should be regarded as posing a potential cancer risk to 
people based on animal cancer data.\13\ Although EPA has concluded that 
``MTBE poses a potential for human carcinogenicity at high doses'' 
based on animal data, EPA says that these animal data ``do not support 
confident, quantitative estimation of risk at low exposure''\14\ EPA 
has based its Drinking Water Advisory upon taste and odor thresholds 
(20 to 40 mg/L) in humans, and has not yet established any enforceable 
health standard for MTBE.\15\ Consumer rejection due to taste and odor 
of MTBE often has been a factor in water utility decisions to stop 
using or to treat water sources contaminated with MTBE.
---------------------------------------------------------------------------
     \12\Toccalino, supra citing inter alia, Health Effects Institute, 
1996, The potential health effects of oxygenates added to gasoline. A 
review of the current literature. A special report of the Institute's 
oxygenates evaluation committee: Cambridge, MA, Health Effects 
Institute, April 1996, http://www.healtheffects.org/Pubs/oxysum.htm; 
National Institute of Environmental Health Sciences, 2002, MTBE (in 
gasoline): National Institute of Environmental Health Sciences, March 
13, 2002, http://www.niehs.nih.gov/external/faq/gas.htm;
     \13\Toccalino, supra citing inter alia; National Science and 
Technology Council, 1996, Interagency assessment of potential health 
risks associated with oxygenated gasoline: Washington, DC, National 
Science and Technology Council, Committee on Environment and Natural 
Resources, February 1996, http://www.ostp.gov/NSTC/html/MTBE/mtbe-
top.html; Office of Science and Technology Policy, 1997, Interagency 
assessment of oxygenated fuels: Washington, DC, Office of Science and 
Technology Policy, National Science and Technology Council, Executive 
Office of the President of the United States, June 1997, 264 p., 
http://www.epa.gov/oms/regs/fuels/ostpfin.pdf; U. S. Environmental 
Protection Agency, 1997, Drinking water advisory: Consumer 
acceptability advice and health effects analysis on methyl 
tertiary-butyl ether (MTBE): Washington, DC, U. S. Environmental 
Protection Agency, Office of Water, EPA-822-F-97-009, December 1997, 
48 p., http://www.epa.gov/waterscience/drinking/mtbe.pdf.; 
California Department of Health Services, 2001, Proposed 
Regulations, California Code of Regulations, Title 22, Chapter 15, 
Section 64468.2. health effects language--volatile organic 
chemicals: Sacramento, CA, California Department of Health Services, 
R-16-01, April 12, 2001, 26 p., http:// 
www.dhs.cahwnet.gov/ps/ddwem/publications/Regulations/R-16-01- 
RegTxt.pdf.
     \14\U.S. Environmental Protection Agency, 1997, Drinking water 
advisory: Consumer acceptability advice and health effects analysis on 
methyl tertiary-butyl ether (MTBE): Washington, DC, U. S. Environmental 
Protection Agency, Office of Water, EPA-822-F-97-009, December 1997, 48 
p., http://www.epa.gov/waterscience/drinking/mtbe.pdf
     \15\Ibid.
---------------------------------------------------------------------------
State Actions Banning or Restricting MTBE
    In response to widespread concerns about MTBE contamination, at 
least 17 States have adopted bans or serious restrictions on MTBE 
usage, and two have required intensive studies of MTBE contamination 
(Attachment 1).
Need for Federal Legislation
    There is an urgent need for Federal legislation that would:
      Ban MTBE, while maintaining air quality. Congress needs 
to step in and enact a clear MTBE ban, but should accompany this with a 
requirement that air quality benefits of reformulated gas not be 
reduced. While there have been huge pollution reductions in smog and 
cancer-causing air toxics from the switch to reformulated gasoline, 
Congress can no longer ignore the harm being done by gasoline and MTBE 
leaking into drinking water supplies. Oil refiners have the ability to 
produce gasoline that achieves just as much air pollution reduction 
without oxygenates such as MTBE, but the law currently mandates their 
use. Congress should act immediately to repeal the mandate. It makes no 
sense to have a patchwork approach to this problem with 15 to 20 States 
banning MTBE; if Congress doesn't act and State bans go into effect, 
this could create needless confusion and burdens for consumers.
      Prohibit oil companies from producing a fuel that is less 
effective at reducing smog and toxic air pollutants than the RFG sold 
today when they remove oxygenates. We do not need to take a step 
backward in combating air pollution in order to protect groundwater.
      Eliminate the 2 percent oxygen mandate. We agree with 
numerous State officials, health groups, and API that Congress must 
lift the oxygenate requirement (and ban MTBE) while maintaining air 
quality benefits.
      Give EPA clear authority to regulate fuel additives based 
upon air and water quality impacts (the Senate energy bill last 
Congress would embody this authority; the House counter-offer last year 
did not).
      No ethanol mandate. The legislation should set standards 
for gasoline performance, rather than mandate a particular solution to 
the problem.
      Encourage use of clean, renewable biofuels made from 
biomass, which reduce global warming while improving air quality and 
reducing water risks.
No Waiver or Preemption of State or Other Liability for Fuel 
        Contamination
    Our most overwhelming concern is that the legislation should not 
include any waiver or preemption of State or other liability for 
renewable fuels or MTBE. Introduced legislation (Rep. Peterson's H.R. 
837 and Sen. Daschle's S. 385) include a so-called ``safe harbor'' 
provision that would preempt State law and effectively remove tools 
available to States and municipalities to remedy tap water 
contamination problems from fuel containing ``renewable fuels.'' The 
provision would block lawsuits alleging that gasoline is a defective in 
design or manufacture because it contains such renewable fuels. A 
similar Senate measure last year was answered by a House conferees' 
offer that would have expanded this waiver of liability and preemption 
to MTBE.
    Such a waiver of liability and preemption of State law is an 
unacceptable overreach that will hurt the public, local governments, 
the environment, and will encourage irresponsible corporate behavior. 
As the South Tahoe jury found after an extensive trial and review of an 
enormous number of industry documents and witnesses, many in the oil 
industry knew of the risks of MTBE, and irresponsibly failed to act or 
to warn the public or their customers.
    Well before Congress enacted the 1990 CAA, the oil industry was 
aware of the risks posed by MTBE to water supplies, of the difficulty 
of cleaning up spills and leaks, of the persistence of MTBE, and of the 
fact that many oil storage tanks were leaking. Elements of the oil 
industry knew of problems a long time ago, and according to the 
California jury, acted ``with malice'' in failing to disclose these 
risks. (Attachment 4). As between this highly culpable oil industry 
that knew about the problem, failed to remedy it, and profited from the 
sale of their defective product, and the public water supplies that had 
nothing to do with creating the problem, and would have to bill their 
customers to remedy it, who should pay for the cleanup? Clearly, the 
oil industry should not be let off the hook for this liability. Why 
deny an important tool to local government and water utilities to 
address this important drinking water quality and potential health 
problem?
    A liability waiver and preemption also would create unacceptable 
incentives for manufacturers to introduce defective products. What will 
be the next MTBE? TAME? DIPE? ETBE? Why do the renewable fuels 
manufacturers need such liability protection? Do they know of problems 
with their products that they are not telling Congress or us about, 
much like the oil industry was not very forthcoming about the problems 
with MTBE before it came into such widespread use?
    The petroleum industry is clearly in best position to know about 
and to take action to avoid another MTBE. Industry must have the 
incentive to minimize the impacts of new fuel additives or new fuels.
    . Last year, there was a strong alliance behind a sensible solution 
to the MTBE and oxygenate problem, which included API. The liability 
waiver and preemption was added after that deal was cut, and is a deal 
breaker. We oppose the safe harbor provision in the bill offered by 
Senator Daschle (S. 385) and others this year in the Senate, and we 
would oppose any legislation that contains the provision as part of the 
energy bill.
     part 2: the need to regulate hydraulic fracturing to protect 
                 underground sources of drinking water
    There is another threat to drinking water and groundwater by 
chemicals also used in gasoline and diesel fuel that is worthy of 
discussion and protective action by Congress. Hydraulic fracturing is a 
well development process that is designed to increase the yield of 
natural gas from underground rock formations, including coal. Fluid is 
injected down a well and into a rock formation at very high pressure in 
order to break up the rock formation and enable more gas to flow toward 
the well after all the groundwater has been removed.
    Hydraulic fracturing fluid commonly contains many toxic chemicals 
that pose a significant threat to underground sources of drinking 
water. The carcinogen benzene, and MTBE, diesel fuel, and many other 
chemicals are known to be used in hydraulic fracturing fluids. It is 
well known that very small volumes of potent chemicals like benzene and 
MTBE can contaminate millions of liters of groundwater. In recent 
years, that has been painfully obvious as MTBE contaminated groundwater 
and surface water across the country. Just 28 tablespoons of MTBE could 
contaminate millions of liters of groundwater at concentrations that 
would render it unusable.\16\ It is important to note that the large 
number of coal bed methane wells planned in the US are of particular 
concern because their depths are relatively shallow and 10 of the 11 
coal basins in the United States are likely to lie, at least in part 
within existing underground sources of drinking water.\17\
---------------------------------------------------------------------------
     \16\Johnson, R., et al., ``MTBE: To What Extent Will Past Releases 
Contaminate Community Water Supply Wells?'', Environ. Sci. Technol. 
2000, 34 (9), 210 A-217.
     \17\USEPA, 2002, Evaluation of Impacts to Underground Sources of 
Drinking Water by Hydraulic Fracturing of Coalbed Methane Reservoirs, 
p. ES-11, 5-14, and 7-2.
---------------------------------------------------------------------------
    News from the Groundwater Protection Council found at http:// 
www.gwpc.org/News-2003/states-weigh.htm .
    A draft report by EPA reveals that many of the estimated 
concentrations of chemicals used in hydraulic fracturing fluids at the 
edge of the fracturing zone exceed the drinking water maximum 
contaminant levels (MCL)--even with an estimated dilution effect of 
30.\18\ The EPA report reveals that the estimated concentration of the 
carcinogen benzene is twice the drinking water MCL. The estimated 
concentrations of other chemicals exceed their MCLs by much greater 
factors--431 times the MCL in the case of methanol.\19\
---------------------------------------------------------------------------
     \18\Ibid., p. 4-4.
     \19\Ibid., p. 4-4.
---------------------------------------------------------------------------
    There are a very limited number of empirical scientific studies 
that have evaluated the behavior of these chemicals in the subsurface 
and their effects on groundwater quality. The toxic chemicals used in 
fracturing fluid can be continuous sources of groundwater contamination 
since, as the EPA report reveals, as much as 39-75 percent of 
fracturing fluids remain in the ground.\20\
---------------------------------------------------------------------------
     \20\Ibid., p. 3-10.
---------------------------------------------------------------------------
    After briefing some staff from the House Energy & Commerce 
committee last September, it was discovered that EPA's calculations for 
estimated subsurface concentrations of chemicals of concern were based 
on values that were not consistent with data in their report that 
resulted in estimated concentrations 10 times lower.\21\ \22\ A January 
2003 article in Environmental Science & Technology includes the 
suggestion by a USGS hydrologist that EPA's dilution factor of 30 is 
not justified and that even if ``only 20-30 percent of the fracturing 
fluids remain in the formation and the fluids include diesel fuel, the 
aquifer would be destroyed because the diesel will remain as a 
contaminant for generations.''\23\
---------------------------------------------------------------------------
     \21\Gurney, S., 2002, Comments submitted by the Natural Resources 
Defense Council about US EPA draft report Evaluation of Impacts to 
Underground Sources of Drinking Water by Hydraulic Fracturing of 
Coalbed Methane Reservoirs., US EPA Water Docket ID No. W-01-09-11
     \22\First letter to EPA Administrator Christine Todd Whitman from 
Congressman Henry Waxman, October 1, 2002. Available at http:// 
www.house.gov/waxman/news--letters.htm.
     \23\``Does Hydraulic Fracturing Harm Groundwater?,'' Environ. Sci. 
Technol. 2003, 37 (1), 11A-12A.
---------------------------------------------------------------------------
    The near-impossibility of cleaning up underground sources of 
drinking water once they have become contaminated is precisely why 
Congress acted with precaution to protect existing and future sources 
of drinking water in the Underground Injection Control provisions of 
the Safe Drinking Water Act. Preventing widespread contamination of 
drinking water is far less expensive than attempting to clean it up 
later.
    EPA's congressionally chartered National Drinking Water Advisory 
Council, comprised of representatives of the water industry, State and 
local governments, public health experts, consumers, environmental 
groups, and others, unanimously adopted a resolution December 12, 2002 
urging the Administrator ``to work through voluntary and/or regulatory 
means as appropriate in order to eliminate the use of diesel fuel and 
related additives in fracturing fluids that are emplaced in geologic 
formations containing sources of drinking water.'' (Attachment 2). 
Furthermore, the National Drinking Water Advisory Council urged the 
Administrator ``to defend as necessary the US EPA's existing authority 
and discretion to implement the Underground Injection Control Program 
in a manner that advances the protection of our groundwater resources 
from contamination.'' Support for oversight of State Underground 
Injection Control programs by EPA is growing in many States as they 
face serious budget shortages.\24\
---------------------------------------------------------------------------
     \24\
---------------------------------------------------------------------------
    We are very concerned about Section 2201 of the legislation filed 
by Congressman Barton that addresses hydraulic fracturing. EPA should 
not finalize its report entitled ``Evaluation of Impacts to Underground 
Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane 
Reservoirs'' until meaningful field investigation has been accomplished 
that includes collection and analysis of groundwater samples and 
installation of monitoring wells. In addition, EPA must retain its 
authority to oversee State regulation of hydraulic fracturing through 
the Underground Injection Control program to prevent contamination of 
underground sources of drinking water--consistent with Congress' 
intentional precautionary action via the Safe Drinking Water Act.
    part 3: mtbe: what the oil companies knew and when they knew it
Internal Industry Documents Are Rewriting The MTBE Pollution Story
    In 2002, the Environmental Working Group released a report 
summarizing a series of internal oil industry documents that highlight 
the true story about MTBE. That report, available in full at 
www.ewg.org, is excerpted in this section of the testimony (web links 
to electronic versions of the industry documents cited in this 
testimony are included for readers of the electronic version of the 
testimony; copies of some of the key documents are attached to the hard 
copy version of the testimony).
    Congress is considering legislation to strictly limit oil company 
liability for contaminating groundwater in at least 35 States with 
MTBE. The industry says it's only fair to shield MTBE makers from 
lawsuits, since, they claim, it was the government that mandated oil 
companies to reformulate gas with MTBE in the first place, to clean the 
air.
    But a different story has emerged from internal industry documents 
and depositions, made public in recent successful lawsuits brought by 
cities and Communities for a Better Environment that want oil companies 
to pay to clean up water made undrinkable and unhealthy by MTBE. The 
documents, provided to EWG by CBE's lawyers Scott Summy and Celeste 
Evangelisti, show that the oil industry itself lobbied hard for the 
MTBE mandate because they made the additive and stood to profit. A top 
ARCO executive admitted under oath, ``The EPA did not initiate 
reformulated gasoline. . . .'' He clarified that ``the oil industry . . 
. brought this [MTBE] forward as an alternative to what the EPA had 
initially proposed.'' (Attachment 3)
    By 1986, the oil industry was adding 54,000 barrels of MTBE to 
gasoline each day. By 1991, 1 year before the EPA requirements went 
into effect, the industry was using more than 100,000 barrels of MTBE 
per day in reformulated gasoline. Yet secret oil company studies, 
conducted at least as early as 1980, showed the industry knew that MTBE 
contaminated groundwater in numerous locations where it was used.
    Oil companies are pressing Congress for liability protection 
because hundreds of communities have serious MTBE contamination 
problems, and company documents are coming back to haunt them in the 
courtroom. In April 2002, the documents convinced a California jury to 
find Shell, Texaco, Tosco, Lyondell Chemical (ARCO Chemical), and 
Equilon Enterprises liable for selling a defective product (gasoline 
with MTBE) while failing to warn of its pollution hazard, forcing a $60 
million settlement with the water district for South Tahoe. (Attachment 
4).
''The Government Made Us Do It''
    As noted earlier in this testimony, MTBE is an ``oxygenate'' that 
makes gasoline burn cleaner and more efficiently. Unfortunately, it is 
also a foul-tasting, nasty-smelling, potential carcinogen that spreads 
rapidly when gasoline escapes from leaky underground storage tanks, 
contaminating sources of groundwater and drinking water from New York 
to California. Once in soil or water, MTBE breaks down very slowly 
while it accelerates the spread of other contaminants in gasoline, such 
as benzene, a known carcinogen.
    Some communities, including Santa Monica and South Lake Tahoe, 
Calif., face tens or hundreds of millions of dollars in costs of 
cleaning up MTBE or replacing contaminated water supplies. At least 17 
States already have passed measures to ban or significantly limit the 
use of MTBE in gasoline; two more have required intensive studies. We 
believe that a Federal ban is more a question of when than if.
    Pressure is building to follow the lead of many States and ban MTBE 
nationally by the year 2006. Members of Congress from corn-producing 
States support the phase-out in part because ethanol made from corn is 
the primary MTBE substitute. Other members sympathetic to oil industry 
concerns, in turn, are demanding that any ban on MTBE shield its makers 
from product-defect liability. The proposal apparently would not 
preclude suits against parties responsible for allowing MTBE to leak 
from storage tanks, but would provide immunity from suits claiming that 
MTBE itself was a defective product--precisely the charge that won a 
$60 million settlement for the South Tahoe Water District this year. 
The jury in that case found five oil and chemical companies liable for 
selling a defective product--MTBE--while failing to warn of its 
pollution risks. (Attachment 4)
The MTBE Papers
    The paper trail, dating at least to 1980, tells a different story: 
How the oil companies took a byproduct fraction of gasoline refining 
that had little profitable use and created a profitable market. 
Beginning in the mid-1980's, well in advance of the 1992 Federal 
mandate to reformulate gasoline to meet the standards of the Clean Air 
Act, elements of the petrochemical industry promoted MTBE to U.S. and 
State regulators as the additive of choice.
    Thousands of pages of internal documents and sworn depositions from 
the producers at Shell, Exxon, Mobil, ARCO, Chevron, Unocal, Texaco and 
Tosco (now Valero) have come to light through a lawsuit by Communities 
for a Better Environment, a California public interest group. Many of 
the same documents were used in a suit by the South Lake Tahoe Water 
District against four oil companies and Lyondell Chemical Co. of 
Houston (ARCO Chemical Company), the nation's largest MTBE producer. In 
the CBE suit, several of the companies settled by agreeing to clean up 
MTBE spills at more than 1,300 California gas stations; the others 
continue to contest the case.
    In 2002, a jury in the Tahoe case found Lyondell, Shell, Texaco, 
Equilon, and Tosco guilty of irresponsibly manufacturing and 
distributing a product they knew would contaminate water. In addition, 
the jury found by ``clear and convincing evidence'' that both Shell Oil 
Company and Lyondell Chemical Company acted with ``malice'' by failing 
to warn customers of the almost certain environmental dangers of MTBE 
water contamination.
    In an interview with The Sacramento Bee, the jury foreman said he 
found the MTBE papers, which demonstrated the industry's early 
knowledge that MTBE would threaten water supplies ``among the most 
compelling evidence he recorded in 635 pages of handwritten notes.'' 
The foreman stated that ``[t]here were lessons to be learned, but 
(Shell) didn't (learn them) because it saw money to be made in selling 
the product.'' After the jury verdict establishing liability, but 
before the jury could assess monetary damages, the companies settled 
the case for $60 million.
Oil Companies Knew MTBE Was a Threat to Water Supplies
    Even though MTBE was not classified as a potential cause of cancer 
in humans until 1995, refiners knew much earlier that its powerfully 
foul taste and smell meant that small concentrations could render water 
undrinkable, and that once it got into water supplies it was all but 
impossible to clean up. A Shell hydrogeologist testified in the South 
Lake Tahoe case that he first dealt with an MTBE spill in 1980 in 
Rockaway, N.J., where seven MTBE plumes were leaking from underground 
storage tanks. By 1981, when the Shell scientist wrote an internal 
report on the Rockaway plumes, the joke inside Shell was that MTBE 
really stood for ``Most Things Biodegrade Easier.'' Later, other 
versions of the joke circulated, including ``Menace Threatening Our 
Bountiful Environment,'' or apropos to the present attempt to limit 
liability, ``Major Threat to Better Earnings.'' (Attachment 5) and
    In 1983, Shell was one of at least nine companies surveyed by a 
task force of the American Petroleum Institute on ``the environmental 
fate and health effects'' of MTBE and other oxygenates. Shell's 
Environmental Affairs department replied to the trade association: ``In 
our spill situation the MTBE was detectable (by drinking) in 7 to 15 
parts per billion so even if it were not a factor to health, it still 
had to be removed to below the detectable amount in order to use the 
water.'' (emphasis added). The survey, the results of which were later 
distributed to all API members, asked for information about the number 
and extent of spills, chemical analysis of the spill and the 
contaminated water, and health effects to people in the community.
    Clearly, Shell was not the only company that knew about MTBE 
problems. An environmental engineer for ExxonMobil (the companies 
merged in 1999) testified that he learned of MTBE contamination from 
Exxon gasoline in 1980, when a tank leak in Jacksonville, Maryland, 
fouled wells for a planned subdivision. The ExxonMobil engineer said it 
was learned MTBE had also leaked into the subdivision's wells from a 
Gulf and an Amoco station.
Storage Tanks Were Known to be Leaking in the 1970's and 1980's
    Refiners also knew that underground gasoline storage tanks were 
susceptible to leaks, a fact that would amplify the problem with MTBE. 
In 1973, an Exxon report on the problem said: ``The subject of 
underground leaks at service stations is one of growing concern to 
gasoline marketers. Large sums of money, time, and effort are exhausted 
on a continuing basis in the location and detection of leaking tanks 
and lines.''
    In 1981, an ARCO memo said leaking tanks were ``a major problem. . 
. . The issue is essentially a health/safety and environmental one. 
Escaping vapors can seep into basements, sewers and conduits, creating 
not only a nuisance but the danger of explosion and/or fire. Escaping 
gasoline also enters and pollutes the water table. (Groundwater is a 
major source of the U.S. water supply.) Certain chemicals in gasoline 
(namely the aromatics like benzene) may be carcinogenic or toxic in 
certain quantities.''
    By 1980, Exxon had an annual testing program for tanks and found 
that 27 percent were leaking; 2 years later the failure rate was up to 
38 percent. In 1981, Shell and ARCO, the first refiners to add MTBE, 
estimated that 20 percent of all U.S. underground storage tanks were 
leaking. Five years later, in 1986, the EPA concurred. Prior knowledge 
of the extent of leaking gasoline storage tanks was a major part of 
South Lake Tahoe's case: Fully aware that tanks were leaking, the 
petrochemical industry nonetheless introduced an additive known to 
rapidly percolate down to groundwater from gasoline distribution 
systems with known leaks. Efforts were ongoing to upgrade storage tank 
systems, but when industry learned quickly that the new tanks were 
still leaking, it continued to expand the use of MTBE anyway.
The Industry, not the EPA, Promoted MTBE as an Oxygenate
    Recently disclosed court documents clearly show that the oil 
companies, not State or Federal regulators, were the boosters of MTBE. 
The industry developed and promoted the concept of using reformulated 
gasoline to reduce air emissions, assuring the EPA that reformulated 
gasoline would be better than other options being considered. ARCO 
Chemical Co.'s Manager of Business Development from 1987 to 1998 
testified: ``What I recall is the EPA actually promoting using methanol 
blends . . . and the refining industry said here's another option . . . 
we can reformulate gasoline to reduce the emissions . . . that would be 
equal to or better than you would get by substituting or mandating the 
use of methanol vehicles . . . [T]he oil industry . . . brought this 
forward as an alternative to what the EPA had initially proposed.'' He 
continued, ``The EPA did not initiate reformulated gasoline.'' 
(Attachment 3)
    Well before EPA mandated reformulated gasoline in 1992, the oil 
industry was aggressively promoting MTBE. According to the American 
Petroleum Institute, refiners were adding an average of 74,000 barrels 
of MTBE to gasoline per day from 1986 through 1991, roughly one third 
of the peak amount added to gasoline in 1998.
    In 1987, a representative of ARCO Chemical (later absorbed by 
Lyondell), which was rapidly expanding its MTBE production, testified 
before the Colorado Air Quality Control Commission that the additive 
would reduce emissions and improve gas mileage, that supply and price 
were no barrier, and that consumers didn't need to be warned about the 
presence of MTBE in gasoline. Nothing was said about the leak and 
contamination problems that ARCO and the rest of the industry had known 
about for at least 7 years. ARCO's representative testified that in the 
1980's he played a similar role in ``assisting'' the States of Arizona 
and Nevada in the development of oxygenate programs--programs that 
resulted in those States adopting MTBE.
The Industry Attacked Safety Studies and Withheld Information From 
        Regulators
    In 1986, the Maine Department of Environmental Protection published 
a report documenting extensive MTBE groundwater contamination in the 
State. The authors identified MTBE as a ``rapidly spreading groundwater 
contaminant'' and discussed the option that ``MTBE could be abandoned 
as an additive in gasoline stored underground'' or that gas with MTBE 
``be stored only in double-contained facilities.'' The Maine Paper was 
perhaps the earliest warning from government health officials about the 
dangers of MTBE. To the oil companies, it was a call to arms. Documents 
show that even as they were internally disseminating this study and 
treating its findings seriously, the oil companies joined forces to 
attack the study's authors and the article's ``damage'' in an effort to 
discredit their findings and downplay the risks of MTBE.
    The industry disinformation effort began even before publication of 
the paper. A 1987 ARCO memo details the continued attack on the authors 
and their research:
    ``We initially became involved with the Maine DEP prior to the 
presentation of their first version of this paper at the National Well 
Water Conference on November 13, 1986 . . . Since the paper was 
presented last November, we have been working with API, the newly 
formed MTBE Committee [of the Oxygenated Fuels Association], and on our 
view to assess the potential impact of this paper on State policymakers 
[and] to contain the potential `damage' from this paper. . . .''
    The memo goes on to explain how the Maine Petroleum Council, the 
State affiliate of the API, was preparing a paper claiming that MTBE 
didn't speed up the spread of benzene in water, that MTBE ``only 
spreads slightly further'' than benzene and other contaminants, and 
that MTBE could be easily removed from water with existing technology--
none of which is true. Internally, however, the industry admitted the 
Maine paper was a scientifically credible threat. A 1987 letter from an 
ARCO refining executive to his Unocal counterpart admits the MTBE task 
force didn't ``have any data to refute comments made in the paper that 
MTBE may spread further in a plume or may be more difficult to remove/ 
cleanup than other gasoline constituents.''
    In 1987, at the same time that ARCO and API were leading the attack 
on the Maine Paper, EPA issued a request to the industry for ``more 
information on the presence and persistence of MTBE in groundwater.'' 
As reported in 2001 by the San Francisco Chronicle and The Sacramento 
Bee, ARCO responded: ``Where gasoline containing MTBE is stored at 
refineries, terminals or service stations, there is little information 
on MTBE in groundwater. We feel that there are no unique handling 
problems when gasoline containing MTBE is compared to hydrocarbon-only 
gasoline.''
Internal Memos Warning Against MTBE Were Ignored
    There were voices within the industry that warned against the use 
of MTBE, on grounds both of public health and cleanup costs from the 
inevitable leaks. A document dated April 3, 1984 from an Exxon employee 
said:

    ``[W]e have ethical and environmental concerns that are not too 
    well defined at this point; e.g., (1) possible leakage of [storage] 
    tanks into undergroundwater systems of a gasoline component that is 
    soluble in water to a much greater extent [than other chemicals], 
    (2) potential necessity of treating water bottoms as a 'hazardous 
    waste,' [and] (3) delivery of a fuel to our customers that 
    potentially provides poorer fuel economy. . . . `` (Emphasis 
    added.)

    That same year, an Exxon engineer wrote the first in a series of 
memos outlining ``reasons MTBE could add to groundwater incident costs 
and adverse public exposure:''

    ``Based on higher mobility and taste/odor characteristics of MTBE, 
    Exxon's experiences with contaminations in Maryland and our 
    knowledge of Shell's experience with MTBE contamination incidents, 
    the number of well contamination incidents is estimated to increase 
    three times following the widespread introduction of MTBE into 
    Exxon gasoline. . . .'' Later, the document notes: ``Any increase 
    in potential groundwater contamination will also increase risk 
    exposure to major incidents.''

    An Exxon memo from 1985 discusses MTBE's ``much higher aqueous 
solubility'' than benzene and other gasoline components:

    ``This can be a factor in instances where underground storage tanks 
    develop a leak which ultimately may find its way to the underground 
    aquifer. When these compounds dissolve in groundwater and migrate 
    through the soil matrix they separate into distinct plumes. MTBE 
    creates the most mobile of the common gasoline plumes. MTBE is not 
    a known carcinogen like Benzene however we can be required by 
    public health agencies to remove it based on its taste and odor 
    characteristics.''

    Thus, it is clear that the oil industry was not only well aware of 
the fact the MTBE is extremely soluble, mobile, and persistent, but 
that leaks could and had seriously contaminated water sources, well 
before the Clean Air Act Amendments of 1990.
                               __________
  Statement of Joe Jobe, Executive Director, National Biodiesel Board
    Thank you, Chairman Inhofe and the members of the Environment and 
Public Works Committee for the opportunity to submit comments regarding 
the environmental and energy benefits of biodiesel.
    As Executive Director of the National Biodiesel Board (NBB), it is 
my pleasure to inform the committee of the benefits of biodiesel and to 
encourage its inclusion in major legislation before this committee. NBB 
is the nonprofit entity which serves as the central coordinating body 
for biodiesel research and development in the United States.
    Biodiesel is a cleaner burning alternative fuel made from renewable 
fats and oils such as soybean oil. It has become the fastest growing 
alternative fuel in the United States, with more than 300 major fleets 
using biodiesel today to address air quality concerns and meet Federal 
alternative fuel requirements. A compelling reason for this growth is 
that virtually everyone benefits from biodiesel use. It significantly 
reduces harmful emissions, making it better for the environment and 
better for human health. It comes from domestically produced, renewable 
resources, thus contributing to domestic energy security. A thriving 
biodiesel industry also contributes to our own economy rather than that 
of the Middle East. Biodiesel is one of the most thoroughly tested 
fuels on the market today with more than 50 million successful road 
miles, thousands of off-road and marine hours, and data on virtually 
every diesel engine type and application.
    The EPA recently released a new comprehensive technical report of 
biodiesel emissions that validates the substantial body of existing 
biodiesel technical data. The EPA report shows biodiesel use can reduce 
emissions of particulate matter by 47 percent when compared to 
petroleum diesel in unmodified diesel engines. The report also verified 
a 67 percent reduction in unburned hydrocarbons, a contributing factor 
in the localized formation of smog and ozone; and a 48 percent 
reduction in the poisonous gas carbon monoxide. Nitrogen Oxides (NOx) 
is the only category of diesel engine emissions for which biodiesel 
does not provide significant benefits. However, as a boiler fuel, 
biodiesel has shown great promise in dramatically reducing NOx.
    Biodiesel is the only alternative fuel to have fully completed the 
health effects testing requirements of the Clean Air Act. The results 
show biodiesel reduces EPA-targeted air toxics and their corresponding 
risks of cancer, asthma and other ailments when compared to petroleum 
diesel. Polycyclic Aromatic Hydrocarbons (PAH) and Nitrated Polycyclic 
Aromatic Hydrocarbons (nPAH) are compounds believed to cause cancer 
from diesel engine exhaust. Pure biodiesel reduces most PAH compounds 
by 80 percent and nPAH compounds by 90 percent.
    Biodiesel can help cities across the Nation meet clean air 
requirements and can be used immediately to help improve the air our 
children breathe every day when they ride diesel powered buses to 
school. Biodiesel reduces harmful black smoke and other toxic compounds 
from diesel exhaust by simply changing the fuel in existing buses, 
rather than by making tremendous expenditures for new buses and fueling 
stations.
    The ``energy balance'' of a fuel is an important indicator of its 
effectiveness in displacing fossil fuel with renewable fuel. According 
to a DOE/USDA lifecycle analysis, biodiesel has the highest energy 
balance of any fuel. For every one unit of fossil fuel it takes to 
produce biodiesel, 3.2 units of energy are gained. That same study 
concluded that biodiesel also results in a 78 percent lifecycle 
reduction in carbon dioxide. This means that biodiesel is the single 
most effective greenhouse gas mitigation technology currently available 
for heavy duty vehicles and equipment.
    Biodiesel can be used in its pure form or blended with petroleum 
diesel at any level. The most common blend is 20 percent biodiesel 
mixed with 80 percent diesel, or B20. The comprehensive EPA report 
shows more incremental emissions benefits are achieved at the B20 level 
than with B100. While it remains true that maximum emissions reduction 
per vehicle can be obtained with B100, the EPA analysis shows that 
using B20 in 100 vehicles will actually reduce more pollution overall 
than using B100 in 20 vehicles.
    Biodiesel is included as an eligible fuel in the Renewable Fuel 
Standard (RFS) as would be established by S. 385 legislation introduced 
by Senators Tom Daschle (D-SD) and Dick Lugar (R-IN). While ethanol is 
poised to displace significant volumes of gasoline under this 
initiative, biodiesel is well-positioned to play a valuable role in 
current and future diesel technology.
    The EPA's 2006 sulfur standards for diesel fuel will require a 97 
percent reduction in sulfur, and create significant changes for heavy-
duty diesel technology. The removal of sulfur will allow aftertreatment 
technology that is otherwise fouled by sulfur, and will dramatically 
reduce diesel exhaust emissions. The EPA's rule will also create a fuel 
performance problem, because the refinery process used to remove sulfur 
also removes lubricity. Lubricity is the lubricating characteristic in 
diesel fuel necessary to keep diesel fuel injection systems functioning 
properly. Biodiesel is well-positioned to address this issue, because 
it has essentially no sulfur, it already meets the EPA's 2006 sulfur 
standard, and it is highly effective as a renewable lubricity additive. 
For example, the addition of less than 2 percent biodiesel, can improve 
lubricity by as much as 65 percent. This rule will cause a shift in the 
driving forces for the continued development of heavy-duty diesel 
fuels. The shift will be away from such a strong focus on nitrogen 
oxides and particulate matter, to place more of an emphasis on energy 
security, renewability, and the reduction of air toxics and greenhouse 
gases. These are all issues that biodiesel addresses better than any 
other heavy duty fuel currently available.
    Policy initiatives aimed at providing incentives for increased 
renewable fuel use have shown great promise in the United States and 
Europe. The United States desperately needs a more diversified energy 
portfolio, and we encourage the committee to consider biodiesel as an 
important part of its comprehensive energy strategy.
                               __________
     Statement of Bob Dinneen, President and CEO, Renewable Fuels 
                              Association
    Mr. Chairman and members of the committee, today's hearing on 
proposals to increase renewable fuel consumption is extremely timely. 
Crude oil prices are rising, driven by concerns over the conflict in 
Iraq and continued political unrest in Venezuela. At the same time, 
gasoline output is down, in part, because refiners have responded to 
increased demand for heating oil. Consequently, the need for an energy 
policy that reduces our nation's dependence on foreign sources of 
energy by increasing the production and use of domestic fuels such as 
ethanol and biodiesel has never been greater. I commend the chairman 
for convening today's hearing, and for his leadership on promoting 
opportunities for increased production and use of domestic ethanol.
    The Renewable Fuels Association is the national trade association 
for the domestic ethanol industry. Our membership includes ethanol 
producers and suppliers, gasoline marketers, agricultural organizations 
and State agencies dedicated to the expanded production and use of fuel 
ethanol. The U.S. ethanol industry consists of 69 production facilities 
located in 20 States with an annual production capacity of 2.75 billion 
gallons. Production capacity continues to expand, particularly among 
farmer owned cooperatives, the fastest growing segment of our industry. 
Thus, the U.S. ethanol industry and farmers across the country stand 
ready to contribute more meaningfully to our growing energy needs.
The Need for a Comprehensive Energy Policy
    The war in Iraq, coupled with political upheaval in Venezuela, has 
focused renewed attention on the need for a comprehensive national 
energy policy that ensures a reliable fuel supply. As you know, the 
U.S. currently imports more than 57 percent of our oil, and our imports 
are predicted to grow to 68 percent by 2025. At the same time, we rely 
increasingly on our energy supplies from unstable regions of the world, 
including Iraq. In fact, last year we imported 450,000 barrels of oil 
per day from Iraq! In addition, the war on terrorism has renewed 
interest in reducing energy imports and diversifying the energy sector.
    In testimony before Congress, R. James Woolsey, former Director, 
Central Intelligence, said, ``We have to realize that our fuel 
distribution . . . systems are almost certainly going to come under 
attack in some way. Their high degree of centralization and their 
fragility to terrorist attack is a serious matter. One thing we have to 
be looking at is how to decentralize and how to make more flexible and 
less fragile our energy distribution networks. It means local 
production of renewable fuels . . . rather than relying on imports and 
central fuel stations.''
    President George Bush has recognized the contribution American 
agriculture can make to provide a more reliable fuel supply through the 
production of domestic liquid fuels such as ethanol and biodiesel. In 
calling for the Congress to pass an energy bill last fall, President 
Bush said, ``We need an energy bill in America. An energy bill that 
enhances renewables like ethanol. An energy bill that makes us less 
dependent on foreign sources of crude oil.''
    Deputy Secretary of Energy Kyle McSlarrow echoed the 
Administration's support for expanded use of ethanol in the U.S. fuel 
supply in recent testimony before the House Energy and Commerce 
Subcommittee on Energy and Air Quality. Among the eight goals the 
Administration feels should guide the energy debate, McSlarrow stated, 
``the Administration strongly supports a renewable fuels standard that 
will increase the use of clean, domestically produced renewable fuels, 
especially ethanol, which will improve the Nation's energy security, 
farm economy, and environment.''
    The increased use of renewable fuels will expand U.S. fuel 
supplies. Ethanol and biodiesel are blended with gasoline and diesel 
after the refining process. Thus, the increased use of these fuels adds 
directly to domestic fuel supplies. Blending 10 percent ethanol in a 
gallon of gasoline provides an additional 10 percent volume to the 
transportation fuel market.
2002 Record Year for U.S. Ethanol Industry
    The U.S. ethanol industry has been a responsible partner in the 
fuels marketplace, increasing production capacity to meet the growing 
demand for ethanol created by State and Federal law. In 2002, the U.S. 
ethanol industry set records in production, production capacity, and 
number of new facilities. Twelve new state-of-the-art production 
facilities were completed in 2002; and with expansions at existing 
plants completed, the industry produced more ethanol in 2002 than at 
any time in its history--2.13 billion gallons.
    Last year's record production represents a 20-percent increase over 
2001 and a 45-percent increase since 1999. This record-breaking 
production is continuing this year. In January, the industry set an 
all-time monthly production record of 177,000 barrels per day, 
representing a 31-percent increase over last January's production.
    But the industry is not done yet. There are another 11 ethanol 
production facilities totaling more than 500 million gallons of 
capacity currently under construction, which will increase ethanol 
production capacity to more than 3 billion gallons by the end of this 
year. At current production rates, the industry will produce a record 
2.8 billion gallons of ethanol in 2003.
    Ethanol is the third largest and fastest growing market for U.S. 
corn. In 2002, over 800 million bushels of corn were processed into 
ethanol and valuable feed co-products, boosting corn prices by 30-40 
cents per bushel nationally. The U.S. Department of Agriculture 
estimates that the ethanol industry will process as much as one billion 
bushels of corn this year, approximately 10 percent of the national 
crop. Additionally, ethanol is the second-largest user of grain 
sorghum. More than 45 million bushels of grain sorghum were used in 
ethanol production in 2002.
    The recent growth in ethanol plant construction has been led by 
farmers seeking to capture new value-added markets for the commodities 
they grow. Since 1999, farmer-owned ethanol facilities have increased 
their percentage of total production capacity to more than 30 percent. 
Today, farmers own 29 of the 69 plants in operation. Eight of the 11 
plants under construction are farmer-owned. With this new production, 
taken together farmer-owned ethanol plants will be the single largest 
ethanol producer in the country.
    Ethanol production facilities represent local economic engines 
throughout rural America, creating jobs, investment opportunities, 
value-added markets for farmers, and increased local tax revenue. A 
recent study found that an average 40 million gallon facility would 
have the following positive economic impact on the local community in 
which it is located:

      Provide a one-time boost of $142 million to the local 
economy during construction;
      Expand the local economic base of the community by $110.2 
million each year through the direct spending of $56 million;
      Create 41 full-time jobs at the plant and a total of 694 
jobs throughout the entire economy;
      Increase the local price of corn by an average of 5-10 
cents per bushel, adding significantly to farm income in the general 
area surrounding the plant;
      Increase household income for the community by $19.6 
million annually; and,
      Boost State and local sales tax receipts by an average of 
$1.2 million (varies depending on local rates).
Rising Ethanol Demand
    The tremendous growth in ethanol demand over the last several years 
is a direct response to State efforts to reduce the use of MTBE. To 
date, 16 States have acted to phase-out the use of MTBE, and the 
ethanol industry has acted responsibly to build additional capacity so 
that refiners could continue to supply consumers with competitive fuels 
that meet Federal Clean Air Act requirements. Without commenting on 
whether such State actions are justified, between 3.5 and 4.5 billion 
gallons of ethanol would be needed to replace MTBE, depending on how 
new EPA regulations implementing the 8-hour ozone standard impact State 
decisions to opt into the RFG program.
    The U.S. ethanol industry has proven it can supply such demand, if 
necessary.
    In California, most major refiners have voluntarily switched to 
ethanol 1 year ahead of schedule. With the transition two-thirds 
complete, the results can only be described as seamless. There have 
been no ethanol shortages, transportation delays or logistical problems 
associated with the increased use of ethanol in the State. Today, 
approximately 65 percent of all California gasoline is blended with 
ethanol, and it is estimated that 80 percent of the fuel will contain 
ethanol by this summer. As a result, while there was only about 100 
million gallons of ethanol being used in the State last year, 
California refiners will use between 600-700 million gallons of ethanol 
in 2003.
    Concerns about ethanol supply, transportation and logistics have 
been successfully answered. Pat Perez, manager of the California Energy 
Commission's (CEC) Transportation Fuel Supply and Demand Office, said 
recently the transition to ethanol is ``progressing without significant 
problems.'' Furthermore, CEC spokesman Rob Schlichting told the San 
Jose Mercury News in a February 27 article that the substitution of 
ethanol for MTBE in California has not added to recent retail price 
increases ``because ethanol is more plentiful than previously expected 
and cheaper than gas.''
    With the transition to ethanol in California nearly complete, the 
focus turns to the Northeast. Connecticut is currently scheduled to 
phase-out MTBE use by October 1, 2003, followed by the State of New 
York beginning January 1, 2004. As in California, the U.S. ethanol 
industry is committed to supplying customers there, if necessary, also.
    The use of ethanol is not new to Connecticut or New York and 
ethanol is indeed currently being blended in both States. At our 
National Ethanol Conference in Scottsdale, Arizona, February 19, Paul 
Stendardi of Getty Petroleum Marketing spoke of the ethanol blending 
that is currently occurring in the Northeast. Specifically, Stendardi 
said, ``We've been blending with ethanol longer than 12 years. Right 
now we blend in Providence, Rhode Island, New Haven, Connecticut, 
Albany, New York, Newark, New Jersey and Paulsboro, New Jersey. We take 
the ethanol into Providence by rail. We truck it down to New Haven. And 
we take the ethanol into Paulsboro and Newark by water. And it's railed 
into Albany, New York.'' Blending ethanol is common practice throughout 
the country and logistics for converting terminals is very 
straightforward.
    In addition to the ethanol blending currently occurring in the 
Northeast, California's successful transition to ethanol should give 
East Coast policymakers confidence that ethanol can be used to satisfy 
the Clean Air Act oxygenate requirement in a smooth and orderly 
fashion. In fact, the Northeast is even better equipped for the 
transition to ethanol than California as the Northeast draws from a 
wider variety of fuel supply sources including the Gulf, Mid Atlantic 
and off-shore refineries. This diversity of fuel supply options will 
help keep a competitive and steady supply of fuel components coming 
into the region.
Fuels Security Act of 2003
    The U.S. ethanol industry has clearly demonstrated it can continue 
to provide refiners with adequate supplies to meet current Clean Air 
Act requirements, even as States take action limiting the use of MTBE. 
But we have heard the requests of our customers for greater flexibility 
in meeting those standards, i.e., eliminating the Federal RFG oxygen 
content requirement. Consequently, we have worked for more than a year 
to develop a consensus proposal that addresses the concerns of a number 
of stakeholders, including environmental and water quality officials 
apprehensive about MTBE, petroleum companies appealing for greater 
flexibility, and ethanol producers expanding to meet the increased 
demand created by current Federal and State laws.
    The result of this collaborative effort was legislation 
overwhelmingly approved by the U.S. Senate during consideration of the 
energy bill last year, and recently reintroduced as the Fuels Security 
Act of 2003 in the Senate, S. 385, and H.R. 837 in the House of 
Representatives. We continue to support this important legislation, and 
appreciate the chairman's support as an original co-sponsor of S. 385.
    The Fuels Security Act of 2003 provides a Federal resolution to 
persistent concerns related to MTBE, avoiding a patchwork of State 
actions that complicate the fuel distribution system. It maintains the 
existing clean air benefits of Federal RFG with strong anti-backsliding 
provisions. It provides refiners with the flexibility they have sought 
in meeting Clean Air Act requirements by eliminating the Federal RFG 
oxygen standard. And it provides some marketplace certainty to farmers 
and ethanol producers that have acted responsibly to meet the demand 
created by current law.
    Renewable, domestically produced fuels can and should play a larger 
role in meeting our nation's energy needs. Creating a Renewable Fuels 
Standard (RFS) in which a small percentage of our nation's fuel supply 
is provided by renewable, domestic fuels such as ethanol and biodiesel 
provides a positive roadmap for reducing consumer fuel prices, 
increasing energy security, and stimulating rural economies by 
harnessing America's renewable energy potential.
    The RFS included in the Fuels Security Act of 2003 boosts the 
demand for renewable fuels such as ethanol and biodiesel to 5 billion 
gallons by 2012. A recent analysis by the U.S. Department of Energy, 
``Infrastructure Requirements for an Expanded Fuel Ethanol Industry,'' 
concludes, ``no major infrastructure barriers exist'' to expanding the 
U.S. ethanol industry to 5 billion gallons per year. This is because 
credit banking and trading provisions included in the bill maximize 
refiner flexibility. The bill does not require that any renewable fuels 
be used in any particular area, allowing refiners to use these fuels in 
those areas where it is most cost-effective. Moreover, there are 
several provisions allowing the requirement to be adjusted or 
eliminated if price or supply problems occur. Small refiners are 
exempted from the RFS for several years, allowing those companies an 
easier transition to the program. Finally, recognizing that MTBE 
producers made investments in reliance upon a Federal mandate, the bill 
provides significant transition assistance to MTBE producers.
    The Fuels Security Act of 2003 is a comprehensive approach to a 
myriad of fuels issues that has generated broad support from several 
previously competing interests. It protects the environment while 
providing refiner flexibility and marketplace certainty to farmers. 
Given the tremendous growth the U.S. ethanol has been required to 
commence in order to be prepared in case the Fuels Security Act of 2003 
is not passed, however, a more accelerated RFS schedule is warranted. 
In fact, as domestic ethanol production capacity has outpaced RFS 
demand in the first several years of the program, new ethanol 
production would not be needed until 2007 under S. 385. In the 
meantime, ethanol plants built in anticipation of current law would 
likely shut down. To avoid penalizing farmers that have built ethanol 
production capacity to meet the requirements of current law, 
legislation implementing the fuels agreement in the 108th Congress must 
include a more accelerated RFS schedule than was included in the Senate 
energy bill last year.
Conclusion
    Mr. Chairman, I thank you again for your tremendous leadership in 
advancing an energy policy that recognizes the important contribution 
that can be made to our nation's energy demands by renewable fuels such 
as ethanol and biodiesel. The need for a comprehensive energy policy 
that ensures a reliable fuel supply for our Nation has never been 
greater. America's economic prosperity and national security depend on 
the availability of reliable, affordable energy. Therefore, increasing 
the production of domestic fuels and diversifying our energy 
infrastructure are critical components of energy policy legislation. 
Providing for an expanded role for domestic, renewable fuels such as 
ethanol in the U.S. fuels marketplace is vital if we are to reduce our 
dangerous dependence on imported energy.
    Thank you.
    ``Ethanol and the Local Community,'' John Urbanchuk, AUS 
Consultants and Jeff Kapell, SJH & Company, June 2002.
                               __________
  Statement of the National Association of Convenience Stores and the 
          Society of Independent Gasoline Marketers of America
I. Introduction
    The National Association of Convenience Stores (``NACS'') and the 
Society of Independent Gasoline Marketers of America (``SIGMA'') 
respectfully submit this statement to the Senate Committee on 
Environment and Public Works on the occasion of the subcommittee's 
hearing on a possible fuels title to the national energy policy 
legislation. NACS and SIGMA request that this statement be made an 
official part of the record of this hearing.
II. The Associations
    NACS is an international trade association comprised of more than 
1,700 retail member companies operating more than 100,000 stores. The 
convenience store industry as a whole sold 124.4 billion gallons of 
motor fuel in 2001 and employs 1.4 million workers across the Nation.
    SIGMA is an association of more than 270 independent gasoline 
marketers operating in all 50 States. Last year, SIGMA members sold 
more than 48 billion gallons of motor fuel, representing more than 30 
percent of all motor fuels sold in the United States in 2002. SIGMA 
members supply more than 28,000 retail outlets across the Nation and 
employ more than 270,000 workers nationwide.
III. Focus on Motorists
    This statement will focus on one simple message. As this 
subcommittee, and this Congress, debates national motor fuel policy, 
NACS and SIGMA urge you to consider the impact this legislation will 
have on NACS and SIGMA members' customers--your constituents.
    The average motorist does not know or care whether gasoline 
contains MTBE or ethanol; they simply want competitively priced 
gasoline and diesel fuel to power their automobiles and trucks. In 
general, motorists favor environmentally friendly fuels, and favor 
strong environmental protections to assure that the use of motor fuels 
does not harm air quality and does not pollute our nation's water 
supplies.
    These motorists' interests are closely matched by the interest of 
independent motor fuel marketers. NACS and SIGMA member companies sell 
motor fuels, but for the most part, we do not make either the gasoline 
or the diesel fuel we sell. Consequently, from a business perspective, 
an independent marketer has little interest in what its refiner-
supplier puts into these products, be it ethanol or MTBE. Independent 
marketers' primary concern is supply. Our customers, and therefore our 
companies, benefit from plentiful supplies of gasoline and diesel fuel 
from diverse sources, thereby assuring a competitive marketplace for 
motor fuel. Furthermore, like our customers, we also support the 
production of motor fuels that do not harm air quality and the strong 
and effective enforcement of regulations to prevent petroleum releases 
from underground storage tanks. We support these issues for the benefit 
of our communities as well as for the benefit of our business.
    Therefore, as you consider a fuels title to national energy policy 
legislation this year, we strongly urge you to keep in mind the 
interests of your constituents, and our customers, the motoring public. 
NACS and SIGMA believe that this subcommittee will have served its 
constituents well if it puts aside special interest pressures and 
instead develops energy policy legislation that focuses on expanding 
overall motor fuel supplies, easing the pressures on the motor fuel 
distribution system, and reducing motor fuel price volatility.
IV. Key Components of Fuels Legislation
    For these reasons, NACS and SIGMA strongly support efforts in 
Congress to adopt national energy policy legislation in 2003. To 
accomplish these objectives, we urge this subcommittee to include, at a 
minimum, the following core provisions in the motor fuels title of a 
2003 energy bill.
    First, we support the repeal of the reformulated gasoline (``RFG'') 
program's oxygenate mandate contained in Section 211(k) of the Clean 
Air Act. Numerous studies have concluded that oxygenates, including 
MTBE and ethanol, are not necessary for the production of clean-burning 
gasoline. The oxygenate mandate is not environmental protection; 
rather, it is political protection for the MTBE and ethanol industries 
and should be repealed. Doing so will enhance the ability of America's 
refiners to efficiently produce gasoline for America's consumers.
    Second, we support an orderly phase-out of MTBE as a gasoline 
additive in a manner that does not impact overall gasoline supplies 
negatively. The contamination of groundwater supplies by MTBE has been 
documented widely. To address this problem, NACS and SIGMA support a 
nation-wide phase-out of MTBE over a period of years Doing this at the 
Federal level will avoid the further segmentation of the market as 
individual States proceed with their own bans. A phase-out over several 
years will permit the orderly transition from MTBE to other fuel 
components and mitigate the impact on overall gasoline supplies. In 
addition, we also strongly support increased enforcement of Federal 
petroleum underground storage tank laws to help prevent any future 
petroleum releases. We will return to this subject later.
    Third, we support the adoption of legislative provisions to slow, 
and ultimately reverse, the ``balkanization'' of the gasoline and 
diesel fuel markets into islands of ``boutique'' motor fuels. Twenty 
years ago, our Nation had the most efficient fuel distribution system 
in the world. Today, with the proliferation of boutique fuels, the 
distribution system is under constant stress which has led to spot 
supply shortages, wholesale and retail price volatility, and consumer 
complaints. Congress must tackle this important issue in order to 
improve gasoline and diesel fuel supply and reduce price volatility. 
Any Federal initiative that does not substantially restore fungibility 
to the motor fuel supply and distribution system will only contribute 
to the continued supply dislocation and price volatility witnessed over 
the past several years.
V. Consideration of an Ethanol Mandate
    During the consideration of energy policy legislation last year, 
there was spirited debate over the proposed adoption of a mandate to 
include ethanol in much of the nation's gasoline. NACS and SIGMA 
strongly opposed, and continue to oppose, an ethanol mandate. We simply 
cannot support a provision to replace one mandate--the oxygenate 
mandate--with another--an ethanol mandate.
    The details of this issue have been debated for several years as 
representatives of the ethanol industry and the MTBE industry have 
competed for Federal market support. NACS and SIGMA are not concerned 
with the rivalry between these two industries, but we are very 
concerned about the impact the proposed resolution could have on 
consumers.
    The ethanol mandate proposed last Congress places the motor fuels 
market in serious jeopardy. Our central concern is the delivery of 
product to all markets throughout the country in a cost-efficient 
manner. Because ethanol is predominantly a regionally produced product, 
it must be shipped from its Midwest-production facilities to all 
markets. The problem is that our pipeline system cannot transport the 
product. This forces the market to rely on rail and truck deliveries, a 
much more expensive method of liquid product transport. In addition, it 
adds yet another level of potential disruption to the system. These 
factors alone could lead to increased regional supply shortages and 
even greater price volatility.
    NACS and SIGMA do not oppose increased market opportunities for 
ethanol; in fact, our members are the leading retailers of ethanol-
blended gasoline. However, we believe it would be a mistake for the 
Federal Government to mandate its use on a national basis.
    NACS and SIGMA recognize, however, that there is substantial 
political support in the House and Senate for the adoption of an 
ethanol mandate. Therefore, if Congress is intent on adopting a 
renewable fuels standard (``RFS'') as part of an energy bill, we urge 
that the following modifications be made to the fuels title offered by 
the House to the Senate last fall. These suggested modifications will 
benefit overall gasoline supplies and environmental protection, reduce 
the number of boutique fuels, maintain the competitive position of 
independent marketers, and ease the introduction of the RFS.
VI. Commingling of Divergent Compliant Fuels
    First, Congress should adopt a legislative provision to permit the 
commingling of divergent compliant fuels. Currently, EPA regulations 
specifically prohibit the blending of ethanol-additized RFG with MTBE-
additized RFG during much of the year. In addition, the regulations 
generally prohibit the blending of any two compliant fuels if the 
resulting mixture would have a higher RVP (generated by the presence of 
ethanol) than allowed in a specific market. These prohibitions 
balkanize the gasoline markets and increase supply shortages during 
market disruptions, while having little or no environmental benefit. 
Furthermore, the requirements make it considerably more difficult for a 
marketer to proactively sell ethanol-blended gasoline. There are a 
couple of scenarios that last year's proposed fuels title would create 
that could be improved by allowing the commingling of compliant fuels.
    If the oxygenate requirement is repealed, MTBE is banned, and an 
ethanol mandate is created, there will be at least two primary 
varieties of reformulated gasoline sold across the nation-oxygenated 
gasoline with ethanol and non-oxygenated gasoline. Existing regulations 
would permit the blending of these fuels in the tanks of motorists' 
cars, but not in the underground storage tanks (``USTs'') of gasoline 
marketers. This limitation will impair the ability of marketers to 
efficiently sell RFG and will make it more difficult for marketers to 
offer ethanol-blended RFG to their customers.
    Another complication raised by the implementation of the ethanol 
mandate is the loss of fungibility for conventional fuel. Currently, 
many States and localities impose volatility controls on gasoline to 
control for pollution. Ethanol-blended conventional gasoline is 
afforded a one-pound volatility waiver to accommodate for the increased 
volatility contributed by the ethanol. However, if marketers begin 
selling ethanol-blended conventional and non-ethanol blended 
conventional, the mixture of the two products will result in non-
compliant product.
    In both conventional and RFG markets, therefore, a marketer must 
drain his storage tank in order to sell ethanol-blended product. If 
that same mixture is not available at a later date, the marketer would 
again be forced to drain his tank in order to refill it with non-
ethanol product. This places an undue burden on the marketer by 
hindering his ability to provide uninterrupted service to his customers 
and will cause temporary supply shortages at certain retail outlets. 
Permitting the blending, or commingling, of these fuels in marketers' 
USTs will increase marketer flexibility to respond to shortages of one 
fuel or another, will reduce price volatility caused by such shortages, 
and will reduce stresses on the gasoline distribution system.
    Some may argue that allowing a marketer to commingle products will 
increase the environmental impact. NACS and SIGMA submit that any 
impact on the environment is likely to be minimal and will be far 
outweighed by the benefits to supply and price stability. Even today, 
divergent compliant fuels are being commingled in consumer's gasoline 
tanks throughout the country. It will be rare that a marketer will be 
forced to commingle product in his tank, certainly less frequently than 
a consumer will fill his or her vehicle with divergent product. In 
fact, most of America's gasoline retailers are branded marketers, 
locked into supply contracts, who will not be faced with this situation 
except in extreme supply situations. Unbranded marketers, which 
comprise approximately 30 percent of the market, are also unlikely to 
switch terminal suppliers except in tight market conditions. The 
provision NACS and SIGMA are advocating will simply provide extra 
flexibility to avoid unnecessary market disruptions and price spikes 
when these market conditions develop.
VII. Underground Storage Tank Reform
    Second, Congress should adopt comprehensive Federal leaking 
underground storage tank (``LUST'') program reforms. Last year's House 
and Senate energy bills both contained modest provisions on UST reform. 
NACS and SIGMA urge that these provisions be expanded to accomplish 
comprehensive UST reform. The full Environment and Public Works 
Committee recently approved unanimously S. 195, Senator Chafee's UST 
reform bill. In addition, this House Subcommittee on Environment and 
Hazardous Materials Subcommittee is considering similar legislation.
    This year's energy bill should not contain half-measures on UST 
reform. Whether the issue is full enforcement of existing UST rules, 
preventing future MTBE leaks, or providing States with more funding for 
their UST enforcement and remediation programs, comprehensive UST 
reform legislation should be an integral part of a 2003 energy bill 
and, at the very least, must not be compromised by the enactment of 
half-measures.
VIII. Seasonal Variation Protection for RFS
    Third, the Senate's 2002 RFS proposal required the use of ethanol 
throughout the year. This provision should be deleted. Use of ethanol 
during the summer months will require refiners to produce sub-RVP 
blendstocks, further reducing the overall supply of gasoline, create 
spot shortages, and promote retail and wholesale gasoline price 
volatility. If Congress is intent on mandating the use of ethanol in 
gasoline, then Congress should permit industry to meet that goal in the 
most cost-effective manner that causes the least disruption to gasoline 
supplies. Mandating that a certain portion of the RFS be satisfied 
during the summer months runs counter to this goal.
IX. Credit and Trading System
    Fourth, NACS and SIGMA are concerned deeply about the proposed RFS 
credit and trading system contained in the 2002 Senate energy bill 
fuels title. Given the concentration of market power in the gasoline 
refining and ethanol production industries, there is cause for concern 
that some parties may attempt to ``hoard'' RFS credits in order to 
disadvantage their competitors. For example, if a Mid-West refiner with 
national marketing interests uses more ethanol than it needs for 
compliance and generates RFS credits, what incentive would that refiner 
have to sell these credits at a reasonable, competitive rate to an East 
or West Coast refiner that is a competitor? If that East or West Coast 
refiner cannot physically obtain ethanol or locate affordable RFS 
credits, it will be in violation of the RFS program.
    NACS and SIGMA urge this subcommittee to consider the adoption of a 
provision to incentivize refiners who are ``long'' on RFS credits to 
tender these credits to other refiners at a reasonable price. One 
solution might be to penalize refiners that are ``long'' on RFS credits 
in the same way refiners that are ``short'' on credits are to be 
penalized if there is unmet demand for RFS credits in the marketplace. 
Whatever solution Congress arrives at, assuring a competitive and open 
market for RFS credits must be examined.
X. Other Issues
    Many other issues are under consideration with respect to a fuels 
title in an 2003 energy bill. NACS and SIGMA have adopted the following 
positions on several of these additional issues.
    First, independent marketers support the adoption of a provision to 
shield MTBE users, manufacturers, and refiners from product liability 
claims that MTBE is a defective product. The 2002 Senate energy bill 
contained such protection for ethanol producers. Such protection should 
be afforded to MTBE, as provided in the House counter-offer. It must be 
noted that such liability protection will not shield marketers from 
potential liability for MTBE releases--which generally is governed by 
negligence law. Instead, this provision would simply move MTBE release 
claims out of the product liability area of law.
    Second, NACS and SIGMA support strongly a Federal solution to 
address the problems associated with the proliferation of boutique 
fuels. To date, virtually all stakeholders have criticized the 
balkanization of the motor fuels markets, but there have been no 
studies completed to provide policy recommendations to halt, or 
reserve, the introduction of boutique fuels. Last year, both the Senate 
and the House included a provision in the energy bill requiring a 
Federal study into this issue. We continue to support a Federal 
assessment of the problem. However, the timing of such a study will not 
serve to assist this subcommittee in developing a national energy 
policy.
    The National Association of Convenience Stores has commissioned a 
study into this very subject that will be completed next month, in 
April 2003. This study is taking an in-depth look into the current 
market conditions generated by today's overlapping Federal, State and 
local fuel regulations and is assessing the impact of potential changes 
to these regulations on overall fuel supplies, product fungibility, 
cost and environmental impact. NACS looks forward to sharing the 
results of this study with this subcommittee as soon as it is available 
and we hope that it will prove a useful tool as you work to complete an 
energy bill this Congress.
XI. Conclusion
    Mr. Chairman, members of the subcommittee, thank you for this 
opportunity to comment on America's national energy policy. NACS and 
SIGMA appreciate the chance to share our concerns and recommendations 
with you as you prepare a new energy bill. We hope to have provided 
some insight into the impact certain policies will have on the 
petroleum marketplace and some provisions that could help mitigate 
those impacts. We look forward to working with the members of this 
subcommittee to craft energy policy legislation that meets the goals 
outlined in this testimony.
                               __________
Statement of the National Association of Convenience Stores, Society of 
               Independent Gasoline Marketers of America
I. The Issue
    Over the past 25 years, the gasoline and diesel fuel distribution 
markets have become increasingly ``balkanized'' through the 
introduction of myriad ``boutique'' fuels designed to address air 
quality concerns. In 1980, the Nation sold basically two different 
types of gasoline and one type of diesel fuel. In 2003, there are 
dozens of ``boutique'' gasolines mandated across the Nation and the 
markets for diesel fuel will become even more fragmented with the 
mandates for ultra low sulfur formulations that take effect in 2006.
    Most of the time, the motor fuels refining and distribution systems 
do an excellent job making sure that sufficient quantities of these 
boutique fuels are available in the right locations at the right time 
of year. Despite the significant strains these boutique fuels place on 
the motor fuel distribution system on a daily basis, the system, as 
EPA's Staff White Paper on Boutique Fuels States, ``is able to provide 
adequate quantities of boutique fuels, as long as there are no 
disruptions in the supply chain.''
    However, as the EPA report notes, any disruption in the system--
from a refinery accident to a pipeline spill to a natural disaster--can 
cause significant supply disruptions and increased price volatility. 
Different parts of the Nation have experienced these shortages and 
price volatility repeatedly over the past decade.
II. A First Step Toward A Solution
    NACS and SIGMA have repeatedly urged Congress to address the issue 
of the proliferation of boutique fuels during the debate over national 
energy policy legislation. While a comprehensive solution to the 
boutique fuels problem has thus far eluded policymakers, there is an 
intermediate step that Congress can take to reduce balkanization, 
improve fungibility, increase overall supplies, and reduce price 
volatility.
    This intermediate step would permit the commingling of different 
compliant gasolines, including ethanol-and non-ethanol blended 
gasolines, in the underground storage tanks of retailers.
III. Current Regulation of Commingling
    The Clean Air Act does not address the issue of gasoline 
commingling directly. Instead, EPA, as part of its regulations 
implementing Section 211(k) of the Act, prohibits the commingling of 
reformulated gasoline (RFG) blended with MTBE with RFG blended with 
ethanol by anyone other than the consumer when that gasoline is going 
to be consumed during the summer months of the year. EPA adopted this 
restriction because the blending of ethanol-RFG with MTBE-RFG results 
in increased gasoline volatility, which can lead to increased 
emissions.
    In addition to this prohibition, it is also true that the blending 
of ethanol-blended conventional fuel with non-ethanol blended 
conventional fuel can lead to increased emissions due to the increased 
volatility contributed by the presence of ethanol. Volatility 
controlled conventional markets, therefore, pose a similar challenge to 
supply fungibility as do RFG markets.
    EPA's restriction, however, does not apply to a consumer, who is 
free to shop at any retail gasoline station he or she chooses. This 
consumer often commingles different compliant products in the tank of 
his or her motor vehicle due to his or her selection of different 
retailers. Thus, the widespread commingling of gasolines is occurring 
already--EPA has simply chosen arbitrarily to ignore the commingling by 
consumers and to prohibit it for retailers. With the implementation of 
a renewable fuels standard, and the introduction in markets throughout 
the Nation of ethanol-and non-ethanol-blended gasolines, the frequency 
with which this consumer commingle occurs will increase significantly.
IV. Issues Associated with Commingling
A. Enforcement
    Currently, gasoline quality is regulated at the retail dispenser 
nozzle. To permit commingling of gasolines by retailers, enforcement of 
quality regulations would be moved above the retail tank, to the trucks 
delivering gasoline to the retail stations. As long as all of the 
gasoline delivered into a retailer's tank complies with EPA standards, 
then the gasoline in the tank shall be deemed to comply with the EPA 
standards.
B. Air Quality
    While the commingling of ethanol-and non-ethanol-blended gasolines 
results in a slight increase in fuel volatility, this commingling 
proposal will have little or no adverse impact on air quality. 
Approximately 70 percent of the nation's retail gasoline outlets are 
branded under the name of a major refiner, and are unlikely the take 
advantage of this commingling flexibility because of the steady source 
of supply that major refiners can provide. Other than during times of 
severe supply dislocations, when branded marketers might be forced to 
take advantage of the commingling flexibility, commingling will be used 
primarily by unbranded, or privately branded, independent gasoline 
marketers that purchase gasoline from multiple suppliers. These 
marketers are not significant players in most large urban areas, where 
air pollution can be a problem. Therefore, the air quality impact of 
this commingling proposal will be minimal.
    Further, it is much more likely that a motorist will commingle 
gasolines in his or her vehicle tank than it is that a retailer will 
commingle gasolines in his or her retail tanks. Most retailers have a 
relatively stable source of supply and will commingle only during 
periods of supply shortages or disruptions. Motorists, on the other 
hand, frequently purchase gasoline from different retailers--resulting 
in the frequent commingling of ethanol-and non-ethanol-blended 
gasolines.
C. Surveys
    Commingling flexibility should not be permitted to disrupt the 
gasoline quality surveys undertaken by EPA. If the gasoline in a 
retailer's tank is found out of compliance during a survey test, that 
non-compliant sample would be discarded if the retailer can prove 
through delivery documentation that all gasoline delivered to that 
retail outlet was tested and found in compliance. By discarding these 
commingling samples, survey results will not be skewed and will not 
impact negatively an area's compliance efforts.
D. SIPs
    EPA's current model ignores the commingling that takes place in a 
motorist's vehicle when determining the amount of ``credit'' for 
emissions reductions a State will receive in its SIP if it adopts RFG 
as a control program. A legislative proposal to authorize commingling 
in a retailer's tank must provide States with the same SIP credit for 
adopting RFG. Otherwise, a State would be disadvantaged in its 
attainment efforts.
E. Supply and Fungibility
    This commingling proposal will significantly increase gasoline 
fungibility and will in effect increase overall gasoline supplies. This 
is true because it will ease some of the restrictions on segregating 
different fuels and permit retailers to seek supplies for their 
customers at the lowest price. This flexibility will reduce 
balkanization, reduce gasoline supply disruptions, reduce wholesale and 
retail price volatility, and expand the sources of supply many 
retailers can access.
    NACS and SIGMA strongly urge Congress to adopt a legislative 
provision to permit commingling as part of its national energy policy 
legislation in 2003.

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