    [Senate Hearing 109-1001]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 109-1001

         S. 1772, THE GAS PETROLEUM REFINER IMPROVEMENT AND COMMUNITY
                            EMPOWERMENT ACT OF 2005

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

                                    HEARING

                                   before the

                   COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
                              UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                   __________

                                OCTOBER 18, 2005

                                   __________

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

                   COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

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                           ONE HUNDRED NINTH 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            JOSEPH I. LIEBERMAN, Connecticut
    LINCOLN CHAFEE, Rhode Island         BARBARA BOXER, California
    LISA MURKOWSKI, Alaska               THOMAS R. CARPER, Delaware
    JOHN THUNE, South Dakota             HILLARY RODHAM CLINTON, New York
    JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
    JOHNNY ISAKSON, Georgia              BARACK OBAMA, Illinois
    DAVID VITTER, Louisiana
                    Andrew Wheeler, Majority Staff Director
                     Ken Connolly, Minority Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page

                                OCTOBER 18, 2005
                               OPENING STATEMENTS

    Bond, Hon. Christopher S., U.S. Senator from the State of
      Missouri, prepared statement...................................    43
    Boxer, Hon. Barbara, U.S. Senator from the State of California...    14
    Chafee, Hon. Lincoln, U.S. Senator from the State of Rhode Island    10
    Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...     1
    Jeffords, Hon. James M., U.S. Senator from the State of Vermont..     4
    Murkowski, Hon. Lisa, U.S. Senator from the State of Alaska......    10
    Obama, Hon. Barack, U.S. Senator from the State of Illinois......     8
    Thune, Hon. John, U.S. Senator from the State of South Dakota....    11
    Voinovich, Hon. George V., U.S. Senator from the State of Ohio...    12
    Warner, Hon. John W., U.S. Senator from the Commonwealth of
      Virginia.......................................................     7

                                   WITNESSES

    Adler, Jonathan, associate director, Center for Business Law and
      Regulation, Case Western Reserve University....................    35
        Prepared statement...........................................    68
        Responses to questions from:
            Senator Jeffords.........................................    73
            Senator Warner...........................................    71
    Mannix, Brian, Associate Administrator, Policy, Economics and
      Innovation, Environmental Protection Agency....................    21
        Prepared statement...........................................    44
        Responses to questions from:
            Senator Jeffords.........................................    49
            Senator Voinovich........................................    53
            Senator Warner...........................................    53
    Mitchell, Hon. Shawn, Colorado State Senator.....................    32
        Prepared statement...........................................    54
        Responses to questions from Senator Warner...................    56
    Schaeffer, Eric, director, Environmental Integrity Project.......    34
        Prepared statement...........................................    57
        Supporting document, Environmental Integrity Project,
          ``Refining Capacity and Gasoline Price: Separating Fact
          from Fiction''.............................................    62
        Responses to questions from Senator Warner...................    65

                              ADDITIONAL MATERIAL

        Statements:
            National Association of Convenience Stores and the
              Society of Independent Gasoline Marketers of America...    23
            National Mining Association..............................    16

         S. 1772, THE GAS PETROLEUM REFINER IMPROVEMENT AND COMMUNITY
                            EMPOWERMENT ACT OF 2005

                                  ----------

                           TUESDAY, OCTOBER 18, 2005

                                           U.S. Senate,
                     Committee on Environment and Public Works,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 2:35 p.m. in room
    406, Senate Dirksen Building, Hon. James Inhofe (chairman of
    the committee) presiding.
        Present: Senators Inhofe, Warner, Voinovich, Chafee,
    Murkowski, Thune, Jeffords, Boxer, Carper, and Obama.

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

        Senator Inhofe. As usual, we are starting on time.
        We have asked the first panel to go ahead and be seated.
        The purpose of today's hearing is to consider S. 1772,
    ``The Gas Petroleum Refiner Improvement and Community
    Empowerment'' or the ``Gas PRICE Act.''
        The Gas PRICE Act is not some knee-jerk reaction to recent
    hurricanes. Rather, S. 1772 builds on the committee's
    consideration of issues facing the refinery sector since our
    hearing in May 2004. The fact that the hurricanes shut down
    one-third of the U.S. refining capacity did, however, highlight
    what many objective, non-partisan experts have concluded some
    time ago and that is, the United States lacks sufficient
    refining capacity to make clean transportation fuels and meet
    the public demand and tight capacity translates to
    significantly higher prices at the pump.
        The issue is not solely a U.S. challenge but insufficient
    refinery capacity is a global problem. Even the Federal Reserve
    Chairman, Alan Greenspan, stated as much May 20 of this year.
    The chart we have up here is from ICF Consulting depicting the
    global refining trends. The relatively stable blue and red
    lines depict how the global demand and global refining capacity
    are nearly equal. The sharp downward curve shows global surplus
    capacity.
        The erosion of the domestic refining industry is an erosion
    of national security as well as economic security. Failing to
    promote increased domestic refining capacity means that the
    United States is relying on other countries for its gasoline
    and home heating oil. Today, 25 percent of the East Coast
    supply is imported. With the Chairman of the Senate Armed
    Services Committee sitting to my right, we have had many
    discussions about the National Security ramifications of our
    dependence upon foreign countries for our ability to fight a
    war.
        What are we going to do about it? Congress cannot make new
    refineries spring up overnight. States have the primary role in
    permitting the facilities and we shouldn't mandate the use of
    certain fuels where residents don't want them.
        The Gas PRICE Act responds to the facts. It supports and
    assists States in meeting their own objectives that will
    benefit us all. I am extremely troubled that a critic chose to
    make sensational baseless assertions rather than read the text
    in the legislation before this committee. The Gas PRICE Act
    first directs the Economic Development Administration within
    the jurisdiction of this committee to provide additional
    resources to communities.
        It is very important that we understand these are resources
    to communities, not to some industry. Communities are faced
    with BRAC-related job loss to consider, noting refineries. We
    encourage them and we have gone through a very onerous BRAC
    process, our fifth such process and there are a lot of jobs
    lost in areas where there are ideal sites to build refineries.
    Refineries are not just a good source of local high paying
    jobs, but are in the Nation's best interest.
        Second, States have a significant role in permitting
    existing or new refineries, yet they face particular technical
    and financial constraints when faced with these extremely
    complex facilities. Therefore, the bill establishes a Governor
    Opt-In Program that requires the Administrator to coordinate
    and concurrently review all permits with the relevant State
    agencies. This voluntary program does not waive or modify any
    environmental law but assists the States and consumers by
    providing greater certainty in the permitting process.
        Third, natural gas prices this winter are projected to go
    up 75 percent. The Gas PRICE Act increases efficiency by
    providing grants to identify and use methane emission reduction
    through EPA's Natural Gas STAR Program. It requires the EPA to
    conduct methane emission reduction workshops for State
    officials.
        Fourth, recent hurricanes forced EPA to invoke new
    authority under the EPACT 2005 to ensure that consumers get the
    fuel they need. S. 1772 simply clarifies that States acting
    pursuant to a Federal emergency waiver will be held harmless.
    Additionally, bipartisan Senators have sought to reduce the
    number of boutique fuels to promote greater supply stability.
    Yet, boutique fuels address environmental needs to each
    program. Therefore, I propose a cautious approach that will
    reduce fuel blends pursuant to the environmental and consumer
    preferences in each State.
        Fifth, policymakers, businesses and the public have
    struggled to balance the increased demand for transportation
    fuels with improved environmental quality while keeping prices
    low at the pump. Most solutions have focused on technologies
    that may not be realized for decades or other measures that
    would hurt U.S. manufacturers.
        As Montana's Governor Schweitzer wrote in the New York
    Times op-ed entitled, ``The Other Black Gold,'' Syn-fuels are a
    part of the answer. These fuels use petroleum coke, a refining
    waste or byproduct or domestic coal to produce ultra-clean,
    virtually sulfur-free diesel or jet fuel. They are price
    competitive at $35 a barrel.
        The Gas PRICE Act requires the EPA to establish a
    demonstration project evaluating the use of these fuels as an
    emission control strategy and authorizes the EPA to issue up to
    two loan guarantees designed to promote private sector
    response. Promoting domestic ways to reduce oil dependence is
    an important goal that 85 Senators including nearly every
    member of this committee, voted for in passing the historic
    Renewable Fuels Standard in the recent Energy bill.
        The choice is clear. Increased refining capacity and
    developing new domestic resources to meet U.S. needs or to
    maintain the status quo which as ICF Consulting concluded in
    its 2005 report means a world of higher prices, supply
    shortages and slower global economic growth. The Gas PRICE Act
    is a very reasonable step toward breaking the status quo by
    empowering participating States and local communities
    increasing efficiency of natural gas and establishing new
    programs to develop ultra-clean domestic fuels to benefit U.S.
    motorists and businesses.
        I look forward to hearing from our witnesses today. I think
    a lot of work has gone into this, a lot of bipartisan effort.
    We are going to have to do something to correct the problem of
    refining deficiencies we have in this Nation.
        [The prepared statement of Senator Inhofe follows:]
            Statement of Hon. James M. Inhofe, U.S. Senator from the
                               State of Oklahoma
        The purpose of today's hearing is to consider S. 1772, the Gas
    Petroleum Refiner Improvement and Community Empowerment or Gas PRICE
    Act.
        The Gas PRICE Act is not some knee-jerk reaction to the recent
    hurricanes. Rather, S. 1772 builds on the committee's consideration of
    issues facing the refining sector since its hearing in May 2004. The
    fact that the hurricanes shut down one-third of U.S. refining capacity
    did however, highlight what many objective, non-partisan experts have
    concluded some time ago the United States lacks sufficient refining
    capacity to make the clean transportation fuels the public demands, and
    tight capacity translates to significantly higher prices at the pump.
        The issue is not solely a U.S. challenge; rather insufficient
    refining capacity is a global problem. Even Federal Reserve Chairman,
    Alan Greenspan stated as much in a May 20, 2005 speech.
        This chart from the energy experts at ICF Consulting depicts global
    refinery trends. The relatively stable blue and pink lines depict how
    global demand and global refining capacity are nearly equal. The sharp
    downward curve shows globally surplus capacity.
        The erosion of domestic refining capacity is an erosion of national
    and economic security. Failing to promote increased domestic refining
    capacity means that the United States is relying on other countries for
    its gasoline and home heating oil. Today, 25 percent of the East
    Coast's supply is imported.
        So what are we going to do about it? Congress cannot make new
    refineries spring up over night, States have a primary role in
    permitting the facilities, and we shouldn't mandate the use of certain
    fuels where residents don't want them.
        The Gas PRICE Act responds to the facts; it supports and assists
    States in meeting their own objectives that will benefit us all. I am
    extremely troubled that a critic chose to make sensational, baseless
    assertions rather than read the text of the legislation before this
    Committee. As Sir Winston Churchill said, ``Truth is incontrovertible,
    ignorance can deride it, panic may resent it, malice may destroy it,
    but there it is.''
        The Gas PRICE Act first directs the Economic Development
    Administration to provide additional resources to communities (not to
    industry as some claim) facing BRAC-related job loss to consider
    building refineries on those sites. Refineries are not just a good
    source of local high paying jobs, but are in the Nation's interest.
        Second, States have a significant role in permitting existing or
    new refineries yet they face particular technical and financial
    constraints when faced with these extremely complex facilities.
    Therefore, the bill establishes a Governor opt-in program that requires
    the Administrator to coordinate and concurrently review all permits
    with the relevant State agencies. This voluntary program does not waive
    or modify any environmental law, but assists States and consumers by
    providing greater certainty in the permitting process.
        Third, natural gas prices this winter are projected to increase 75
    percent. The Gas PRICE Act increases efficiency by providing grants to
    identify and use methane emission reduction through EPA's Natural Gas
    Star Program; and it requires the EPA to conduct methane emission
    reduction workshops for State officials.
        Fourth, the recent hurricanes forced EPA to invoke new authority
    under EPACT 2005 to ensure that consumers get the fuel they desperately
    need. S. 1772 simply clarifies that States acting pursuant to a Federal
    emergency waiver will be held harmless. Additionally, bi-partisan
    Senators have sought to reduce the number of boutique fuels to promote
    greater supply stability. Yet, boutique fuels address environmental
    needs of each region. Therefore, I have proposed a cautious approach
    that will reduce fuel blends pursuant to the environmental and consumer
    preferences in each State.
        Fifth, policymakers, businesses, and the public have struggled to
    balance increased demand for transportation fuels with improved
    environmental quality while keeping prices low at the pump. Most
    ``solutions'' have focused on technologies that may not be realized for
    decades or other measures that would hurt U.S. manufacturers.
        As Montana's Governor Schweitzer wrote in a New York Times op-ed
    titled, ``The Other Black Gold,'' syn-fuels are a part of the answer.
    These fuels use petroleum coke, a refining waste or byproduct, or
    domestic coal to produce ultra-clean, virtually sulfur free diesel or
    jet fuel, and are price competitive at $35/ barrel of oil.
        The Gas PRICE Act requires EPA to establish a demonstration project
    evaluating the use of these fuels as an emission control strategy, and
    authorizes EPA to issue up to two loan guarantees designed to promote
    private sector response. Promoting domestic ways to reduce U.S. oil
    dependence is an important goal; a goal that 85 Senators, including
    nearly every member of this committee voted for in passing the historic
    Renewable Fuels Standard in the recent Energy bill.
        The choice is clear: increase refining capacity and develop new
    domestic sources to meet U.S. needs or maintain the status quo, which
    as ICF Consulting concluded in its summer 2005 report means ``a world
    of higher prices, supply shortages, and slower global economic
    growth.''
        The Gas PRICE Act is a very reasonable step toward breaking the
    status quo by empowering participating States and local communities,
    increasing efficiency of natural gas, and establishing new programs to
    develop ultra-clean domestic fuels to benefit U.S. motorists and
    businesses. I look forward to hearing from our witnesses.

        Senator Inhofe. I would advise the committee that when we
    have a quorum of 10, we will have to recess this hearing and
    have a very brief, not more than probably a 2- or 3-minute
    business session but we must have a quorum to do that.
        Senator Jeffords.

    OPENING STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM
                          THE STATE OF VERMONT

        Senator Jeffords. Mr. Chairman, thank you for holding this
    hearing. Thanks to all the witnesses for providing testimony to
    the committee.
        I am certain every member of this committee has heard from
    our constituents about gas prices. The nationwide pump price
    for gasoline has set a new record this year. Mr. Chairman, when
    our constituents are hurting financially, we have to make sure
    that we are correctly responding to high gasoline prices and
    that we formulate legislation.
        I do not believe this bill is the correct response. Instead
    of punishing the refineries for price gouging at a time our
    Nation can least afford it, I believe this bill rewards them
    for bad behavior with the promise of new subsidies and lax
    regulation. My constituents in Vermont should not be asked to
    further boost the record profits of oil companies at the same
    time they struggle to pay their winter heating bills.
        I also have grave concerns about the environmental impacts
    of this legislation. I have seen no evidence that environmental
    permitting is the reason for lack of refinery capacity, nor am
    I convinced that relaxing our environmental laws will do
    anything to lower gas prices either in the short term or the
    long term but it is clear that change in our environmental law
    is likely to lead to increased pollution at the expense of
    public health. This is unacceptable.
        The correct response, I believe, would be to promote sound
    policies and encourage conservation, boost the supply of clean
    fuels and protect the environment. This bill repeals or
    modifies several sections of the new energy law just recently
    enacted, including sections on refinery revitalization and a
    new loan guarantee for refineries making gasoline and ultra
    clean diesel. How are we to know that these provisions have not
    worked when they are a little more than 2 months old?
        We also gave refiners a 50 cents per gallon fuel blenders
    credit in the new highway law to make the very fuels we would
    subsidize in this bill. Instead of giving an additional $1.5
    billion in loan guarantees, we should be urging the Federal
    agencies to implement the program that Congress just passed.
        I am also concerned that this bill makes additional changes
    to the Clean Air Act in the name of addressing boutique fuels.
    These changes go beyond those in our new energy law. This bill
    exempts States that have received fuel waivers from accounting
    for any resulting air pollution under the Clean Air Act. It
    also attempts to reduce the number of boutique fuels without
    taking into account what we have done in the new energy law as
    well.
        The bill would also make far reaching changes in the
    delicate Federal-State structure of judicial review set forth
    in environmental laws. I am concerned these could actually
    result in additional litigation delay.
        It is my hope that we can get to the heart of some of the
    issues today. If we don't, I am afraid that our constituents
    will pay higher prices at the pumps and breathe dirtier air.
    The Washington Post recently reported that the average price of
    a gallon of regular gas peaked at $3.07. Of that, the Nation's
    refiners were getting an estimated 99 cents on each gallon
    sold. That is more than three times the amount refiners earned
    a year ago. These profits have been made with the environmental
    regulations in place and when waivers were granted after
    Hurricanes Katrina and Rita.
        I will be listening closely for any documented evidence
    that witnesses may have to show that environmental regulations
    are actually contributing to increases in gasoline prices in
    any significant way.
        Thank you, Mr. Chairman, for holding this hearing. I look
    forward to hearing from the witnesses.
        [The prepared statement of Senator Jeffords follows:]

          Statement of Hon. James M. Jeffords, U.S. Senator from the
                                State of Vermont
        Mr. Chairman, thank you for holding this hearing, and thanks to all
    the witnesses for providing testimony to the Committee.
        Since late 2002, gasoline prices have been extremely volatile.
    Record gasoline prices continue to prompt calls for quick Federal
    action. I am certain that every member of this Committee has heard from
    their constituents about gas prices. The nationwide pump price for
    regular gasoline has set a new record this year. Inflated gasoline
    prices harm our constituents in several ways: it takes dollars from
    their pocketbooks; and it raises the prices of the other goods and
    services needed by families in Vermont and across the county due to
    increased transportation costs.
        Mr. Chairman, when our constituents are hurting financially, we
    have to make sure that we are correctly responding to high gasoline
    prices when we formulate legislation. We need to be sure we are
    promoting sound policies that promote conservation, expand fuel supply
    and protect the environment. And we need to be sure that we are not
    asking constituents to make unwise program investments and pay for
    those programs in the form of higher taxes when their budgets are
    already strained.
        I look forward to hearing the testimony of the witnesses, Mr.
    Chairman, but I have grave fiscal and environmental concerns about this
    legislation. I am not yet convinced that the record shows that
    environmental permitting is the reason for a lack of refinery capacity,
    not am I convinced that relaxing our environmental laws will do
    anything to lower gasoline prices, in either the short term or the long
    term. I am, however, convinced that changing our environmental laws is
    likely to lead to increased pollution at the expense of public health,
    a result I cannot support.
        I would first ask whether there a need for this legislation and
    will it solve the problem it seeks to address, which is high gas
    prices. I would submit that the answer to both these questions is no.
    As an initial matter, S. 1772 repeals or modifies several sections of
    the new energy law that were just enacted earlier this year, including
    sections on refinery revitalization, and loan guarantees for refineries
    making gasoline and diesel, including Fischer-Tropsch fuels. How are we
    to know that these provisions have not worked, when they are a little
    more than 2 months old?
        For instance, we gave these same Fisher-Tropsch fuels a 50 cent per
    gallon fuel blenders credit in the new highway bill. Now we are
    proposing to give an additional $1.5 billion dollars in loan guarantees
    to these technologies and additional Economic Development
    Administration grant funds to cover assessment and infrastructure costs
    of developing refineries on former military installations. We currently
    have a clear process for re-use of military bases, and for providing
    assistance to communities that seek to economically reuse those sites.
    Instead of reinventing the wheel, we should be urging Federal agencies
    to implement these laws and provide the assistance and incentives we
    have just put into the law, rather than rushing to change programs
    again midstream.
        I also am concerned, Mr. Chairman, that this bill makes additional
    changes to the Clean Air Act in the name of addressing boutique fuels.
    These changes go beyond those in our new energy law. This bill exempts
    States that have received fuel waivers from accounting for any
    resulting air pollution under the Clean Air Act. It also provides a
    mechanism for further reducing the number of boutique fuels, without
    taking into account what we have done in the new energy law as well.
    These new changes could result in reducing the options for States to
    meet air quality goals, at a time when the number of new fuel blends is
    decreasing anyway. In June 2005, the Government Accountability Office
    issued a report examining the country's boutique fuels situation,
    before the energy bill became law. Of the 11 specialty gasoline blends
    they examined, four blends were eliminated by the energy bill and the
    Tier II sulfur cap. We've already eliminated a third of the fuels that
    were being sold in the summer of 2004, and the Energy bill provisions
    may result in more reductions. This hardly seems the time for change,
    Mr. Chairman.
        The bill also revises the consensus refinery revitalization
    provisions in the new energy law and puts new permitting deadlines for
    participating States in its place: 270 days for new refineries and 90
    days for refinery expansion. It would make far reaching and unexamined
    changes in the delicate Federal-State structure of judicial review set
    forth in our environmental laws, by requiring all permits, whether
    issued pursuant to Federal or State law, to be reviewed in Federal
    District Court. In some cases, it would actually create an additional
    step for judicial review, while in others, it would override provisions
    of environmental law that require State court review. These sweeping
    changes could actually provide a predicate for additional litigation
    and delay with regard to refinery permits and make it harder for States
    and localities to participate in the permitting process.
        It is my hope that we can get to the heart of some of these issues
    today. If we don't Mr. Chairman, I fear that the harm to our
    constituents of these high prices may include unjustified repeal or
    revision of our federal environmental laws on top of the highest gas
    prices in history. Our nation's environmental laws are not to blame for
    the current price of gasoline. These are important laws, important for
    the health of our citizens and our environment. Waiving and altering
    them wholesale for uncertain benefits is adding insult to injury,
    especially at a time when the oil industry is making record profits.
        These laws and their regulations have dramatically reduced harmful
    emissions from motor vehicles by removing lead and sulfur, adding
    catalytic converters, and specifying specific performance requirements
    for both vehicles and fuels. They also require refining facilities to
    modernize their pollution control equipment at certain times so they do
    not worsen local air quality.
        While compliance with these laws has imposed some financial costs,
    it has also achieved real benefits well in excess of the costs to
    refiners or at the pump. In fact, according to EPA, the public health
    benefits of the new rule to reduce sulfur in diesel for non-road,
    heavy-duty engines will be 40 times the cost of implementing the rule.
    This same pattern exists for many of the fuel and pollution controls
    that the Nation has adopted so far.
        Whatever contribution the costs of environmental compliance and the
    manufacturing of fuels that meet the requirements of the Clean Air Act
    have made to the overall price of gasoline, I am very skeptical that
    these costs are a primary driver behind the recent price fluctuations
    we have seen. Most experts believe the high price of crude oil and the
    high refining margins are the principal components of increased
    gasoline prices. We routinely implement our environmental laws in a
    deliberate and measured way. In the case of Clean Air Act compliant
    motor fuels, all of them have been phased-in over long time frames in
    consultation with industry. We have done this specifically to try to
    avoid market shocks and price spikes. These are not new requirements,
    they are not a surprise, and the costs associated with meeting them are
    known.
        Mr. Chairman, it also appears that the financial resources to meet
    these requirements are available. Major newspapers across the country
    continue to report record high profits for the oil industry. For
    example, the Washington Post reported on September 25, 2005 that when
    the average price of a gallon of regular gasoline peaked at $3.07
    recently, it was partly because the Nation's refineries were getting an
    estimated 99 cents on each gallon sold. That was more than three times
    the amount they earned a year ago when regular unleaded was selling for
    $1.87.
        These are very high profits, much higher than those in other
    sectors of our economy. And those profits have been made both with the
    current environmental regulations in place, and when environmental
    waivers were granted after Hurricanes Katrina and Rita. During this
    hearing, I will be listening closely for any documented, real-world
    evidence that witnesses may have to show that environmental regulations
    are actually contributing to increases in gasoline prices in any
    significant way.
        But, there is one thing that we do know with certainty; our
    country's voracious appetite for petroleum is continuing to cause
    environmental and national security problems. We cannot ignore the
    health and environmental consequences of our growing oil consumption.
    We owe it to our children to reduce our appetite now and find new,
    cleaner and, if possible, renewable fuels to keep our transportation
    sector strong.
        Thank you again, Mr. Chairman for holding this hearing. I look
    forward to hearing from the witnesses.

        Senator Inhofe. Thank you, Senator Jeffords.
        Following the early bird rule, I will recognize Senator
    Warner.

    OPENING STATEMENT OF HON. JOHN W. WARNER, U.S. SENATOR FROM THE
                        COMMONWEALTH OF VIRGINIA

        Senator Warner. Thank you, Mr. Chairman.
        I strongly endorse the initiatives you have taken. I say to
    my good friend, we have been here many years and we have seen a
    lot of things together, but I want to go to your phrase, I
    wrote it down, price gouging.
        Would it not be a simple way to get rid of price gouging to
    expand the base of production and introduce greater
    competition? Those are the basic pillars of economics on which
    this Nation has been formed. If I understand, we are here today
    to explore the options of increasing that base so that we can
    introduce competition and hopefully bring down the prices at
    the tank.
        It is my understanding and I suspect our witnesses and
    others will speak of this, that we haven't build a refinery in
    29 years. Is that about right? If you go back to a baseline of
    1981, better than half of the existing refineries since 1981
    have been closed for one reason or another, I imagine a number
    not being able to meet environmental considerations and the
    restraints of the law. Would that be basically correct? Anyway,
    we will get a chance to question the witnesses in a moment.
        Fine, if you have a better idea, I say to my good friend, I
    would be interested in seeing your bill on this, but we had
    better do something to try and increase the base of production
    because we will certainly be hearing from our constituents.
        Several of us here were here in 1979 when the gas lines
    were very long and I remember, that was the most difficult
    period of my 27 years in this institution. Our offices were
    shut down, the phones absolutely blocked, everything, irate
    people all across the country turned to the Congress because
    they were sitting in gasoline lines as far as the eye could see
    to fill up their tank. We do not want to revisit that chapter
    in American history.
        I commend you again, Mr. Chairman, for stepping out.
        Senator Inhofe. Thank you, Senator Warner.
        Senator Obama.

     OPENING STATEMENT OF HON. BARACK OBAMA, U.S. SENATOR FROM THE
                           STATE OF ILLINOIS

        Senator Obama. Thank you, Mr. Chairman. I will be very
    brief.
        I want to congratulate you on holding this hearing because
    as Senator Warner just stated, I think the issue of expanding
    refinery capacity is absolutely critical.
        Shortly before Hurricane Katrina hit, the Gulf Coast
    refineries made up one eighth of our country's total capacity
    were evacuated and shut down; 95 percent of all production was
    immediately suspended in a region where we refine over a
    quarter of America's oil; gas prices already at record highs
    shot up even further all over the country.
        Today, the price of gas is down a bit to an average of
    $2.69 a gallon which is still 70 percent more than it was last
    year. Very shortly we are going to see the price of home
    heating oil and natural gas reaching new heights. So most
    Americans already know that our Nation's economy relies
    significantly on imports of foreign crude oil but they have
    also come to realize that the capability to refine crude oil is
    just as important.
        Some experts argue that tight domestic refinery capacity is
    due to excessive regulations. I know those are some of the
    issues you have mentioned, Mr. Chairman. Others say the return
    on capital investment is a deterrent, others believe that the
    refining capacity in the United States is just right.
        I don't claim to have all the answers to this. In the short
    term, I do know that we need to expand our refinery capacity
    but I strongly believe we can do it without weakening important
    environmental protections.
        Another issue that will be discussed is greater fuel
    interchangeability and whether narrowing the range of boutique
    fuels can help accomplish this goal. In Illinois, we have four
    petroleum refineries, four ethanol refineries and one biodiesel
    plant with flexible fuel vehicles and conventional diesel
    vehicles.
        Fuel interchangeability is already here. That is why I
    believe that any debate on our refining capacity should also
    include a discussion of how we can encourage greater domestic
    refining of alternative fuels, especially if petroleum
    production capacity remains constrained.
        I welcome the opportunity to hear more from your experts.
    This is something to which I look forward to working on with
    you and the committee. I would simply suggest that as we think
    about how we reverse some of the trends on the chart before us
    that we make sure we are basing whatever policy decisions we
    make on the information and that we don't simply take
    industry's word for it, that we have a well rounded discussion
    to make a determination as to how best we can get the kind of
    refinery capacity that we need.
        Thank you.
        [The prepared statement of Senator Obama follows:]
    Statement of Hon. Barack Obama, U.S. Senator from the State of Illinois
        I want to thank the Chairman for holding this hearing today.
        Shortly before Hurricane Katrina hit, Gulf Coast refineries that
    made up one-eighth of our country's total capacity were evacuated and
    shut down. Ninety-five percent of oil production was immediately
    suspended in a region where we find over a quarter of America's oil.
    And gas prices that were already at record highs shot up even further
    all over the country--reaching $6 a gallon in some places. Today, the
    price of gas has come down a bit--to an average of $2.69 a gallon,
    which is still 70 cents more than this time last year. And very
    shortly, we will see the price of home heating oil and natural gas
    reaching new heights as well.
        Most Americans already know that our nation's economy relies
    significantly on imports of foreign crude oil. What they have also come
    to realize is that the capability to refine crude oil is just as
    important.
        Some experts argue that tight domestic refining capacity is due to
    excessive regulations; others say that the return on the capital
    investment is a deterrent. Still others believe that the refining
    capacity in the United States is just right.
        I don't claim to have all the answers, but in the short-term, I do
    know that we need to increase our country's refining capacity. And I
    believe we can do this without weakening important environmental
    protections.
        Another issue that we will be discussing today is greater fuel
    interchangeability and whether narrowing the range of boutique fuels
    can help accomplish this goal. In Illinois, we have four petroleum
    refineries, four ethanol refineries, and one biodiesel plant. With
    flexible fuel vehicles and conventional diesel vehicles, fuel
    interchangeability is already here. That's why I believe that any
    debate on our refining capacity should also include a discussion of how
    we can encourage greater domestic refining of alternative fuels,
    especially if petroleum production capacity remains constrained.
        But even as we take steps towards increasing refining capacity, we
    need to remember that these are only short-term measures that will not
    fundamentally reduce our dependence on foreign oil. It is my hope that
    this Committee will concentrate its energies on more long-term
    solutions to our energy problems.
        Thank you.

        Senator Inhofe. Thank you, Senator Obama. That is the very
    reason we are having this hearing.
        Senator Murkowski.

    OPENING STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR FROM THE
                            STATE OF ALASKA

        Senator Murkowski. Thank you.
        Today is really an all out energy day for me. I think I am
    the only one in this committee that also serves on the Energy
    Committee. This morning we had a hearing on the winter fuels
    outlook and the effect of the high prices this coming winter.
    This afternoon at 3 p.m., we have another Energy Committee
    hearing to consider our national capacity for producing
    innovation in energy technology.
        So what you are doing with your legislation fits right in
    the middle of all this discussion. How do we make a difference
    in this country in enhancing our capacity and ultimately in
    furthering our supply to meet that demand.
        You mentioned, Senator Warner, the lines back in the 1970s.
    I was not back here at this point in time. We didn't have those
    lines in the State of Alaska, fortunately, but I will tell you,
    a couple of weeks ago to be driving through certain parts of
    your State here in Virginia and to go to gas stations and have
    a little sign pasted on the pump saying ``We are out of gas''
    gets peoples' attention as it certainly should and I think
    highlights the need for not only having these hearings and
    discussing it but actively moving.
        I have to tell you the real focus has been on the refinery
    issue but I want to point out title 5 of this bill which you
    have entitled ``Future Fuels.'' There are two provisions to
    require EPA to establish a demonstration project to use the
    Fischer-Tropsch for diesel and jet fuel as an emissions control
    strategy and then requiring the EPA to issue the loan
    guarantees to demonstrate the commercial scale fuels using the
    Fischer-Tropsch production facility.
        We need to recognize that in this country we have an
    incredible supply of coal. We have been described as the Saudi
    Arabia of coal, so it only makes sense for us to try to find a
    way to turn that fuel into the clean fuels that will also
    permit carbon dioxide that is generated to be sequestered, keep
    it from the environment. The Fischer-Tropsch process allows us
    to do that. Again, it is how do we move forward with the
    technology so that we can bring down the cost so that
    ultimately the cost to us all as consumers is ameliorated.
        I am pleased that we are moving forward with this
    particular legislation and let us get the ideas out there and
    get the ideas moving. Thank you for the time this afternoon. I
    apologize in advance that I won't be here for all of it, but we
    want to hear what our witnesses have to say.
        Thank you.
        Senator Inhofe. Thank you, Senator Murkowski.
        Senator Chafee.

    OPENING STATEMENT OF HON. LINCOLN CHAFEE, U.S. SENATOR FROM THE
                         STATE OF RHODE ISLAND

        Senator Chafee. Thank you, Mr. Chairman.
        Much has been said about the energy crisis of the late
    1970s and Mr. Mannix is going to testify that he was at the
    Energy Department back then so intimately involved in the long
    lines and odd-even rationing and the like. Then the cost of oil
    fell below $10 a barrel and we kind of fell off the wagon,
    started driving high consumption vehicles. No more Vegas and
    Pintos and the Gremlins that were the rage back in the 1970s.
        I think it is incumbent upon government to make the
    decisions to foresee the inevitable swing back to high price of
    oil and we have failed to do that. I think it is a balance
    between production and consumption. Over and over again we have
    tried to address CAFE standards and the SUV loophole, an SUV
    loophole left over from American Motors and trying to help them
    with their Wagoneer which is the only vehicle they were
    selling. We forged that loophole and never addressed it since.
        Thus our consumption is very high and now we have to look
    at production. I think if we are not going to look at the two
    of them, that is a mistake in direction. We should look at the
    two of them.
        I look forward to the hearing.
        Senator Inhofe. Thank you, Senator Chafee.
        Senator Thune.

      OPENING STATEMENT OF HON. JOHN THUNE, U.S. SENATOR FROM THE
                         STATE OF SOUTH DAKOTA

        Senator Thune. Thank you. I too want to congratulate you on
    holding this hearing and the action you are taking to address
    this very important issue.
        Coming from a cold weather climate, we are very concerned
    in my State about the economic impact of high energy prices. Of
    course that applies to natural gas and a number of other fuels
    that we use for heating. More specifically, your legislation
    deals with another issue which I think is long overdue in terms
    of being addressed and that is additional capacity, refinery
    capacity.
        It seems to me at least that some of these steps should
    have been taken about a decade ago but it is never too late to
    do the right thing. I think we have an opportunity now to take
    some of these steps to eliminate some of the redundancy and
    duplication that exists with State regulations all in
    accordance with environmental law.
        In my view, we do have a crisis which needs to be addressed
    not only by renewable fuels, which is something of which I am
    very supportable and alternative sources of energy but also
    additional supplies here in this country, not only refinery
    capacity but also the fuels themselves. That is why I think it
    is important that we be looking at Alaska and other places we
    have resources that are abundant and can be used to help
    address the energy crisis in this country.
        I look forward to working with you on this legislation as
    it moves forward. Again, I appreciate your good work in taking
    the necessary steps to make sure that Congress is moving
    forward to address what is going to be a very, very important
    economic issue to the American people, both in the short term
    and in the long term.
        Senator Inhofe. Thank you, Senator Thune.
        Senator Voinovich.

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

        Senator Voinovich. Thank you for holding this hearing today
    and I appreciate your leadership in addressing our Nation's
    limited refining capacity.
        I would also like to welcome Jonathan Adler, associate
    director of the Center for Business Law and Regulation at Case
    Western Reserve University in my State of Ohio.
        Unfortunately, over the past several weeks we have been
    painfully reminded that our Nation is far from being energy
    independent. As I have said before, we need a second
    Declaration of Independence, a Declaration of Independence to
    become more self sufficient in terms of our energy involving
    oil and gas.
        Our economy today is being held hostage by too much
    reliance on foreign sources of energy. Today we import 60
    percent of our oil. Senator Warner, you mentioned it was 1979,
    but it was 1973 when we had the big lines.
        Senator Warner. Senator, I was here in 1970. I will escort
    you on some of the pictures.
        Senator Voinovich. We must have had another one in 1979.
        Senator Warner. We really had a whopper in 1979.
        Senator Voinovich. In 1973 it was pretty bad.
        Senator Warner. I wasn't here in 1973.
        Senator Voinovich. You weren't here?
        Senator Warner. No.
        Senator Voinovich. Maybe there was another one in 1979. All
    I know is back in 1973 we were about 70 percent reliant on
    foreign oil and today it is over 60 percent.
        Americans are concerned about prices at the pump. The
    Energy Information Agency said the average price of gas in Ohio
    on September 5 was $3.02 a gallon. This is an increase of 42
    cents a gallon after the Katrina disaster, an increase of $1.23
    from 1 year ago.
        While gas prices have skyrocketed, recently this problem is
    the result of years of inaction. As my colleagues know, I have
    been fighting for years for a comprehensive energy plan to
    address this dilemma. This legislation today folks is just one
    piece of it. We have to look at the whole deal. We had the
    energy bill that passed and thank God it got passed, but it
    should have passed back in 2003 when we first started to debate
    it on the floor and now the chickens have come home to roost
    and we are paying for it with high gas prices, high natural
    gas.
        If we don't harmonize our energy, if we don't harmonize our
    economy and environment, we are in bad, bad shape in this
    country. I would like to thank the chairman and the co-sponsors
    of the legislation for at least doing something about
    refineries. Everybody understands we haven't built a refinery
    in how many years?
        Senator Warner. Twenty-nine.
        Senator Voinovich. Twenty-nine years. Part of it is NIMBY,
    not in my back yard. Part of it is environmental rules and
    regulations that have made it almost impossible for people to
    go forward and build a new refinery. We have to get real.
        I want to clarify today in case some people haven't got it
    that this legislation should not be confused with Congressman
    Barton's bill in the House. This is not the same piece of
    legislation. It is different.
        I am pleased with this legislation. First, it addresses not
    only building of new refineries but the expansion of existing
    refineries. We have four of them in the State of Ohio. It is
    done without eroding the State and local rights on
    environmental laws and it would establish a demonstration
    project for converting coal, our most abundant domestic energy
    resource to near zero sulfur content, diesel and jet fuel. It
    is a good piece of legislation.
        I don't think anybody here is holding out that it is going
    to bring down the price of gasoline overnight. It is going to
    help get the situation taken care of in the next couple of
    years. We had better understand part of our problem is China
    has increased their use of gasoline by 30 percent. The demand
    is way up around the world.
        We have to do this and a bunch of other things including
    Senator Jeffords' conservation and alternative fuels and the
    rest of it. It has to be a comprehensive plan. This is just a
    piece of it. Hopefully we can get this thing done and move on
    and we will get to some of the other things we need to do.
        Thank you.
        [The prepared statement of Senator Voinovich follows:]

         Statement of Hon. George V. Voinovich, U.S. Senator from the
                                 State of Ohio
        Mr. Chairman, thank you for holding this hearing today. I
    appreciate your leadership as we address our nation's limited refining
    capacity. I would also like to welcome Jonathan Adler, Associate
    Director of the Center for Business Law & Regulation at Case Western
    Reserve University in my State of Ohio.
        Unfortunately, over the past several weeks, we have been painfully
    reminded that our Nation is far from being energy independent. As I
    have said before, we need a second Declaration of Independence, so this
    country will become substantially more energy independent, and our
    economy and national security will no longer be held hostage.
    Currently, for instance, we import close to 60 percent of our oil.
        Specifically, Ohioans and all Americans are very concerned about
    high prices at the pump. According to the Energy Information
    Administration, the average price of gas in Ohio on September 5 was
    $3.02 per gallon of regular gasoline. This was an increase of $0.42
    after the Katrina disaster and an increase of $1.23 from one year ago.
        While gas prices have skyrocketed recently, this problem is a
    result of years of inaction. As my colleagues know, I have been
    fighting for years for a comprehensive energy plan to address this
    dilemma.
        The good news is that we finally passed an Energy bill this summer.
    The bad news is that it took us a long time to get done--and our
    families and businesses across the Nation are now literally paying for
    it. While we made progress with the recent Energy bill, there are a
    number of issues that must be further addressed. In particular, the Gas
    PRICE Act focuses on our limited refining capacity. As many of you
    know, no new refineries have been built in the United States since
    1976, and today, our refineries are already operating at near peak. For
    example, even with surplus crude oil, we would lack the refining
    capacity to make enough transportation fuels to meet demand.
        As Chairman Inhofe helped bring to light in a May 2004 hearing,
    historic economic factors mixed with regulatory uncertainty have
    impeded new refinery construction.
        One major problem is NIMBY--Not In My Back Yard. I remember the
    case of the Marathon Ashland pipeline that now provides a direct
    connection from one of the Nation's largest refineries to central Ohio.
    After the project was announced in 1998, there was intense opposition
    with many environmental lawsuits filed to stop this project.
        Notably, in 2004, as this project was being completed, Tom Stewart,
    executive vice president of the Ohio Oil and Gas Association in
    Granville, which represents 1,250 independent oil and gas producers,
    stated that ``This is just one example of how hard it is to upgrade
    that infrastructure. We were perplexed why people would fight that and
    then complain about the price of gasoline or fuel.''
        This remains the reality that we must fix, and this legislation
    brings people to the table early and makes the construction or
    expansion of refineries a community-driven process. I also want to
    clarify that this legislation should be distinguished from Congressman
    Barton's bill in the House. This is NOT the same piece of legislation.
        I am pleased with this legislation for a number of reasons. First,
    this bill addresses not only the building of new refineries but the
    expansion of existing refineries, such as the four in Ohio. Moreover,
    this is all done without eroding State and local rights or
    environmental laws.
        As well, the Gas PRICE Act would require EPA to establish a
    demonstration project for converting coal--our most abundant domestic
    energy resource into near zero sulfur content diesel and jet fuel. I am
    very supportive of this particular provision because it moves us toward
    energy independence and could create jobs in Ohio. Finally, in regard
    to this issue, I would like to submit a statement for the record from
    the National Mining Association.
        Again, Mr. Chairman, thank you for holding this hearing and putting
    together a balanced piece of legislation. I am pleased to be a
    cosponsor and hope that we can join together to address this important
    problem.

        Senator Inhofe. Thank you, Senator Voinovich.
        Senator Boxer and others who came in a little later, as
    soon as we get our tenth person, we will recess and go into our
    business meeting.
        Senator Boxer.

    OPENING STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM THE
                          STATE OF CALIFORNIA

        Senator Boxer. Thank you very much, Mr. Chairman.
        I certainly agree we need to do something about extremely
    high gas prices. What is going on now across the country, gas
    at over $3 a gallon in many places, isn't new for those of us
    from California. We have been fighting these outrageous prices
    for years now.
        S. 1772, in my opinion, and I could be in a minority, I
    feel it is not the answer. First, the oil industry does not
    need government help. Let us face it, there are a lot of people
    out there that need government help. We saw their faces when we
    saw what happened after Katrina. We see the wounded veterans
    come back from Iraq. Yes, they need government help. The oil
    industry does not need government help.
        Let us look at some of the profits of the oil companies.
    Compared to the same period as last year, second quarter, 2005
    profits, BP up 31 percent, Conoco Phillips up 56 percent,
    Exxon-Mobil up 32 percent, Royal Dutch Shell up 118 percent.
    Right after Katrina, Exxon announced profits of $110 million
    per day, 60 percent higher than last year.
        According to the Denver Post, the gross profit margins of
    refineries more than tripled between September 2004 and 2005.
    That is the profits of refineries. By the way, this is a
    change. In the old days refineries didn't make money; today
    refineries make money. Their profits currently equal $23 a
    barrel. Here we are talking about money to the refineries, to
    the oil companies to build refineries.
        Second and interestingly, oil companies are the reasons
    there aren't more refineries. They don't want to increase
    supply. Let me tell you a story from California. Shell wanted
    to close the Bakersfield refinery in 2004. First, they said it
    wasn't profitable. Then when the Attorney General asked them
    for their information, they said, ``Oh, well, yeah, it is in
    fact profitable.'' When further pushed, they admitted it was
    the most profitable of their refineries.
        Let me tell you, Senators, why Shell finally agreed to sell
    off the refinery rather than just shut it down. We went public,
    all of us from California, elected officials across the board,
    and we said, if you shut down this refinery, California will
    get a 2 percent shortfall, it is going to really impact us on
    our gasoline. We pressed and pressed and essentially forced
    them to sell the refinery. They got a good price for it and it
    is profitable.
        During periods of high gasoline prices in California,
    refineries have actually shut down under the guise of ``routine
    maintenance.'' We saw Enron do this and then we saw this. This
    decreases the supply and keeps prices up. So let us not reward
    oil companies for this type of behavior.
        We can blame environmentalists and environmental groups all
    we want but we had better not blame the people of this country
    who vote for us who expect to have clean air, who want to have
    their children be healthy. In 2003, refineries emitted over 67
    million pounds of toxic chemicals. I will get specific, 3.6
    million pounds of known cancer causing substances, 2.4 million
    pounds of toxins that damage the reproductive system, 6.9
    million pounds of toxins that harm the development of children.
        In California, communities that border refineries and
    chemical plants have high concentrations of childhood asthma.
    We should be working to make the air cleaner, not allowing oil
    companies who are making record profits to make it worse. We
    already see the pullback on new source review. Is it too much
    to ask a company that is making billions and billions of
    dollars to clean up their act when they want to expand their
    capacity?
        Mr. Chairman, I know that we are good friends but we are so
    different on this point. I think it is a fallacy that there is
    an either/or option here, either we have refineries or we have
    strong environmental laws. I believe that two published studies
    by a professor at U.C. San Diego concluded that strong
    regulations and procedures governing refineries increased
    productivity at refineries and may actually increase job
    growth.
        Mr. Chairman, we do have a problem with high gas prices. We
    should close the SUV loophole, we should set CAFE standards at
    35 miles per gallon by 2013, we should promote more hybrids. I
    drive a hybrid, I know Senator Chafee has a couple of them.
    They work. Our latest hybrid is getting 52 miles per gallon and
    yes, gentlemen, because you always ask me, it has good pick-up.
    My male friends always say, does it have good pick-up. Yes, it
    has great pick-up.
        We should make sure we have better tires on our cars since
    that adds to fuel efficiency. We should require the FTC to
    investigate the gas market for manipulation. There are a few of
    us working to impose a windfall profits tax on oil companies
    that are taking advantage of consumers and rebate the tax
    collected back to the American consumer.
        The point is there are so many things we could do that
    don't involve giving government benefits to big oil companies
    who are making record profits and make it easier for them to
    pollute our air with deadly chemicals.
        I thank you, Mr. Chairman.
        Senator Inhofe. Thank you, Senator Boxer.
        I do have 10 here now, so we are going to recess our
    hearing for a moment while we take up the request that we have.
        [Recess.]
        Senator Jeffords. Mr. Chairman, I ask consent that I put in
    a longer version of my statement on this bill into the hearing
    record. I have to go to the Health Committee but I will try to
    return for questions.
        Senator Inhofe. Yes. Without objection, that will be the
    order.
        Senator Jeffords. For the record, I have a hybrid.
        Senator Voinovich. Mr. Chairman, as part of my statement, I
    would like to insert in the record a letter from the National
    Mining Association in regard to the issue of refining coal.
        Senator Inhofe. Certainly. Without objection that will be
    the order.
        [The referenced document follows:]
                  Statement of the National Mining Association
        The National Mining Association (NMA) appreciates the opportunity
    to provide its views on S. 1772, the ``Gas Petroleum Refiner
    Improvement and Community Empowerment Act.'' NMA is a national trade
    association representing the companies that mine most of the coal,
    metals, industrial and agricultural minerals produced in the United
    States; manufacturers of mining and mineral processing machinery and
    supplies; transporters; financial and engineering firms; and other
    businesses related to mining.
        As the committee debates how America should rebuild and reform its
    energy infrastructure in the wake of natural disasters, persistently
    high energy prices and shortages of some domestic energy resources, it
    should not limit discussion to expansion of the number of refineries
    only. The committee also should look at expanding the kinds of
    refineries built. Coal liquefaction or coal-to-liquids (CTL) refineries
    can be located anywhere that coal is produced. This proven technology
    can produce clean transportation fuel using domestic coal thus
    expanding our supply of transportation fuels while decreasing
    dependence on overseas sources of energy.
        NMA strongly supports S. 1772, but urges the committee to amend the
    definition of ``refinery'' to include refineries that can use coal as a
    feedstock. This amendment is necessary to ensure that facilities that
    process and refine coal by any chemical or physical process, including
    liquefaction, to produce gasoline, diesel or other liquid fuels are
    afforded the same treatment under the Act as crude oil refineries.
    Equal treatment with petroleum refineries will encourage the widespread
    deployment of CTL facilities and promote the economic and national
    security benefits that modern and existing CTL technology can offer.
        According to the Energy Information Agency (EIA), the U.S. now
    depends on foreign sources of petroleum for 56 percent of its needs.
    EIA forecasts that share will increase to nearly 70 percent by 2025 if
    nothing changes. Our dependence on foreign sources extends to both
    crude oil and refined products, the later due to the lack of new
    refinery capacity in the U.S. Our existing refining capacity is
    stretched to its limits and beyond. America's energy security is
    challenged by both a dependence on foreign supplies and a geographic
    concentration of refining capacity.
        One solution to these, and other, problems related to the Nation's
    critical need for a reliable and affordable domestic supply of liquid
    transportation fuels is CTL. CTL fuel technologies are well-established
    and have been improved by 30 years of U.S. government research and
    development efforts. These efforts, undertaken directly and through
    industry partnerships, have produced innovative processes ready for
    widespread commercialization in the 21st century.
        CTL is not a new technology. By 1944, Germany had 25 liquefaction
    plants that produced up to 124,000 barrels daily and met 90 percent of
    the Nation's needs. In the 1950s, South Africa developed a commercial
    liquid fuels industry using synthesis gas to produce transportation
    fuels such as gasoline and diesel. Since the early 1980s, the
    technology has been developed further and has produced more than 700
    million barrels of synthetic fuels. CTL is not new, but advancements
    over the years mean that the CTL plant of today is modern, efficient
    and environmentally sound.
        Our Nation, with its abundant and readily available supplies of
    domestic coal combined with the nation's critical need for reliable and
    affordable supply of liquid fuel, should be promoting the commercial
    development of CTL refineries. There are more than 250 billion tons of
    recoverable U.S. coal reserves, the equivalent of an estimated 800
    billion barrels of oil. This is compared to Saudi Arabia's proven
    reserves of 260 billion barrels. United States coal can be converted
    into clean, zero sulfur synthetic oil and oil products at a cost of $35
    to $40 dollars per barrel compared to current prices that are averaging
    over $62 per barrel for oil.
        China, which is the world's second biggest consumer and importer of
    oil after the U.S., is planning a $6 billion investment in new
    liquefaction plants that would produce 440 million barrels of liquid
    fuel annually. While the stage is set for rapid commercialization and
    deployment in the U.S., China with its vast coal reserves and rapidly
    growing economy currently is ahead of the United States in developing
    the capability to use coal as a transportation fuel.
        A number of factors have discouraged the development of CTL plants
    in the U.S. First, if oil prices stay above $35 to $40 per barrel, a
    coal refinery makes economic sense. If the price drops below that range
    (as it has been for most of recent history), there are no assurances
    that a coal refinery can remain competitive. The historic volatility of
    oil prices combined with the relatively steady supply of affordable
    transportation fuel until now has made the risks unacceptable to
    investors.
        Second, coal refineries are expensive to construct with capital
    costs in the $600 million to $700 million range for a 10,000 barrel per
    day plant. The technical and financial risks of a ``first-of-a kind''
    plant in the United States have discouraged consideration of this type
    of investment in the past.
        Finally, the lead time for a coal refinery, as with all refineries,
    is a minimum of five to seven years under optimal circumstances.
        But, the many advantages of CTL fuels mean that this committee
    should take steps to encourage its rapid use. The deployment of CTL
    facilities can improve national and economic security by lessening
    dependence on foreign oil and substituting plentiful, more affordable
    U.S. coal. By using this domestic resource, CTL deployment can produce
    more jobs for Americans and provide a positive influence on the U.S.
    balance of trade and the economy in general.
        From an environmental perspective, CTL is capable of carbon
    capture. CTL technology also can serve as a bridge to a hydrogen fuel
    future by linking multiple types of plants into one, such as co-
    production of liquid fuels, electricity, hydrogen and other products.
        Coal reserves are located in 38 States and coal is mined in 26
    States representing every region of the country. This means that CTL
    facilities can be constructed across the country providing a geographic
    diversity which will reduce threats to energy security which may result
    from natural or other disasters.
        Although existing impediments to wide scale deployment of CTL
    technologies are challenging, they can be eliminated or mitigated
    through concerted and focused efforts by government, industry and
    public support. Many of these challenges also confront those who are
    attempting to refurbish or construct new oil refineries.
        Among the hurdles to deployment are those that are addressed in S.
    1772, including economic development assistance to encourage refinery
    activity on BRAC property and the streamlining of the refinery
    permitting process. Coal state economies as well as the energy
    consuming public will benefit from the provisions of the bill
    encouraging coal based refineries on BRAC properties. Needless permit
    delays will affect the construction of CTL refineries just as they do
    petroleum refineries.
        The mining industry is all too familiar with multiple permit
    challenges and repeated appeals. The delays caused by repetitive
    challenges and appeals can make projects unattractive to lenders who
    require a return on their investment within a reasonable period of
    time. This is particularly true with a first of a kind facility such as
    a CTL plant where the potential risks set out above are a considerable
    hurdle to obtaining project financing.
        Failure to afford the same incentives and protections for coal
    liquefaction refineries made available to petroleum refineries under S.
    1772, would deny the Nation the opportunity to use its domestic
    resources to address a significant energy and national security
    challenge.
        NMA appreciates the opportunity to provide the committee its views
    on S. 1772 and urges it to take advantage of this opportunity to
    provide a level playing field for coal-to-liquids technology, which
    could have a significant positive effect on our nation's energy and
    economic future.
    [GRAPHIC] [TIFF OMITTED] T9520.004

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    [GRAPHIC] [TIFF OMITTED] T9520.006

        Senator Inhofe. Mr. Mannix, we are delighted to have you
    here today. We appreciate your patience during the opening
    portion of our hearing.
        Mr. Mannix is the Associate Administrator for Policy,
    Economics and Innovation at the Environmental Protection
    Agency. We appreciate your being here today.
        Try to stay within a reasonable timeframe since there is
    only one on the first panel, maybe at the most 6 or 7 minutes.
    Your entire statement will be made a part of the record and we
    will be able to ask you questions.
        Mr. Mannix.

      STATEMENT OF BRIAN MANNIX, ASSOCIATE ADMINISTRATOR, POLICY,
       ECONOMICS AND INNOVATION, ENVIRONMENTAL PROTECTION AGENCY

        Mr. Mannix. Thank you.
        For the record, let me state at the outset that I have been
    driving a hybrid for 5 years and I just got a brand new hybrid
    SUV Highlander, and it has really good pick-up.
        Thank you for inviting me to appear today to provide
    testimony on S. 1772, the Gas Petroleum Refiner Improvement and
    Community Empowerment Act.
        I am Brian Mannix, Associate Administrator for Policy,
    Economics and Innovation at the Environmental Protection
    Agency.
        First, I want to commend the committee for proposing steps
    to address the Nation's critical need for additional refining
    capacity and a sustained fuel supply. The issue of refinery
    permitting has a deja vu feeling for me because I was at the
    Energy Department in 1978-1979 during the oil crisis and,
    Senators, you are both right; there were gas lines in 1973-1974
    and again in 1978-1979. We tried to address the permitting
    issue then.
        Bills were introduced to accelerate the permitting process
    for critical energy facilities and received broad support on
    both sides of the aisle and both Houses of Congress.
    Ultimately, however, no such bill was passed. That was almost
    25 years ago and not one refinery has been built since then.
        I know that you have also heard that more than 100
    refineries have been closed during the past 25 years, but I
    have to say that that number is a little misleading. Many of
    the refineries that closed were not economical but existed to
    collect a variety of government subsidies, mostly associated
    with the oil price and allocation regulations which disappeared
    in 1981. In the few years after 1981, several refineries closed
    that probably should not have been in the business in the first
    place.
        Since that time, other refineries have closed while overall
    capacity has increased through the expansion of existing
    facilities. Between 1987 and 2004, the number of refineries in
    the United States declined from 195 to 146. All totaled, U.S.
    refining capacity increased by 8 percent. As the events of the
    last 2 months have helped to demonstrate, the Nation remains
    critically dependent on refining capacity and the margin of
    safety has become alarmingly thin. The entire country has felt
    the impact of the hurricanes on retail gasoline prices, and the
    possibility of a difficult winter looms ahead.
        As we sit here today, major refineries remain shut down or
    at reduced capacity in Louisiana and Texas. I believe a
    streamlined permitting process can be part of the solution for
    this country and that we can also make other improvements in
    the operation of our Nation's fuel production and supply
    system. This Administration is committed to ensuring that the
    United States is able to produce and distribute gasoline,
    diesel fuel, jet fuel, and home heating oil at a fair price to
    consumers while protecting the environment and public health.
        Since most permits are issued by State and local
    authorities, EPA does not routinely track permitting activities
    for refineries and cannot provide precise numbers concerning
    such activity. However, based on information we currently have,
    we estimate that approximately 100 permits have been issued to
    refineries since the year 2000, generally for capacity
    expansions and other modifications.
        Siting a new facility or making major modifications to an
    existing facility raises a broad range of environmental issues
    that may require multiple permits and reviews pursuant to the
    Clean Air Act, the Clean Water Act, the Resource Conservation
    Recovery Act, the National Environmental Policy Act and other
    Federal, State, and local laws.
        The Environmental Protection Agency has taken a variety of
    administrative steps to simplify and streamline each of these
    programs. In addition, the Office of Enforcement and Compliance
    Assurance has undertaken a refinery initiative that, to date,
    has brought 77 percent of U.S. refinery capacity under consent
    agreements. These settlements generally make provision for
    capacity expansion even as they reduce air emissions. Through
    these and other efforts, the Agency seeks to ensure that our
    fuel infrastructure continues to operate as our environmental
    goals are met. We welcome the opportunity to work with the
    committee on legislative improvements as well.
        Apart from permitting, S. 1772 has various provisions which
    either confer new authority on EPA or affect the Agency's
    implementation of existing statutory authority. Title III would
    modify EPA's natural gas STAR Program to provide for Federal
    grants. Title IV would affect the Agency's implementation of
    fuel waivers granted under the Energy Policy Act of 2005 and
    its approval of boutique fuels found in the State
    implementation plans. Title V requires EPA to conduct a
    research and demonstration program to evaluate the air quality
    benefits of Fischer-Tropsch transportation fuel and authorizes
    loan guarantees for domestic coal and petroleum coke-based
    Fischer-Tropsch commercial demonstration projects. The EPA is
    currently evaluating these provisions and their impact on the
    Agency's program and its resources.
        In conclusion, the Administration believes S. 1772 takes
    several important steps in the right direction by including
    provisions to streamline refinery permitting requirements and
    expanding refinery capacity in the United States. It provides a
    mechanism to reduce the proliferation of State fuel
    requirements where such fuels are no longer utilized or are
    duplicative of Federal standards and it addresses potential
    consequences of fuel waivers on State SIP compliance among
    other provisions.
        We welcome the opportunity to work with the committee and
    its members as it continues to consider this legislation and we
    will provide the committee with any needed technical
    assistance.
        Thank you and I am happy to take any questions.
        Senator Inhofe. Thank you. We appreciate your fine opening
    statement.
        I will begin a series of rounds and try to stay within 5
    minutes because we do have a panel of three following Mr.
    Mannix.
        The first thing I want to ask you is, it certainly was not
    the intent of this bill but several people have indicated that
    perhaps this was something to weaken environmental standards.
    It certainly was not intended to do that. This is not the same
    bill, as pointed out by Senator Voinovich, the Barton bill,
    over in the House. I don't want people to get confused with
    that.
        In title II of the bill, it says, ``Nothing in this section
    affects the operation or implementation of otherwise applicable
    law regarding permits necessary for the construction and
    operation of a refinery.'' Do you agree with that?
        Mr. Mannix. As I read it, Mr. Chairman, it does not change
    any substantive requirement of environmental law.
        Senator Inhofe. Does it undermine any environmental law you
    can think of?
        Mr. Mannix. No, it does not.
        Senator Inhofe. The National Association of Convenience
    Stores and the Society of Independent Gasoline Marketers of
    America submitted testimony and I am going to submit this for
    the record.
        [The referenced document follows:]
      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 in support of S. 1772, the ``Gas
    Petroleum Refiner Improvement and Community Empowerment Act'' (Gas
    PRICE Act). NACS and SIGMA request that this statement be made a part
    of the official record of the October 18, 2005 hearing before the
    Senate Environment and Public Works Committee on S. 1772.

                              II. The Associations

        NACS is an international trade association comprised of more than
    2,200 retail member companies operating more than 100,000 stores. The
    convenience store industry as a whole sold 142.1 billion gallons of
    motor fuel in 2004 and employs 1.4 million workers across the Nation.
        SIGMA is an association of more than 240 independent motor fuel
    marketers operating in all 50 States. Last year, SIGMA members sold
    more than 58 billion gallons of motor fuel, representing more than 30
    percent of all motor fuels sold in the United States in 2004. SIGMA
    members supply more than 35,000 retail outlets across the Nation and
    employ more than 350,000 workers nationwide.
        Together, NACS and SIGMA members sell approximately 80 percent of
    the motor fuel retailed in the United States each year.

                            III. Support for S. 1772

        NACS and SIGMA support S. 1772 and urge the committee to approve
    this important legislation at the earliest possible date. In
    particular, NACS and SIGMA offer strong support for titles I, II, and
    IV of the bill--provisions designed to expand domestic petroleum
    refining capacity, to make Federal emergency fuel supply waivers more
    effective, and to reduce the number of boutique fuels used across the
    Nation. All of these provisions in S. 1772 are common sense, modest,
    and sensible changes to existing Federal law.
        In the wake of Hurricanes Katrina and Rita, the fragile nature of
    our Nation's domestic refining base was apparent for all to see. These
    storms shuttered and damaged domestic crude oil production facilities
    and petroleum refining and transportation operations in the southern
    half of the United States and put these facilities out of action for
    days, weeks, and perhaps months. However, the fragile state of the
    Nation's domestic refining and transportation industries exposed by
    these storms should not be surprising to Federal legislators. Four
    years ago, NACS and SIGMA testified before this Committee and delivered
    the following straightforward message regarding the demise of domestic
    refining capacity and the proliferation of boutique fuels:

            [I]f we, collectively, do not address aggressively the motor
            fuels supply crisis that is facing this Nation in the near
            future, then the price spikes we have witnessed, for the past
            decade in California and for the past 2 years in other portions
            of the Nation, in gasoline, diesel fuel, and other petroleum
            products will become the norm rather than the exception.
            Ultimately, if we fail to act, it will be consumers who will
            pay for this inaction--through higher retail motor fuels prices
            at the pump.
            [T]he debate over the future of our Nation's energy policy need
            not be confrontational. Our Nation can have both a clean
            environment and affordable, plentiful supplies of gasoline and
            diesel fuel. However, in order to achieve these twin goals, all
            sides to the current debate--industry, government, consumers,
            and environmentalists--must approach this debate in a spirit of
            cooperation, not confrontation.\1\
    ---------------------------------------------------------------------------
        \1\ Statement of Thomas L. Robinson before the Senate Environment
    and Public Works Committee, April 5, 2001, page 2.

        S. 1772 represents a bold legislative effort to achieve both of
    these goals: expand domestic supplies of gasoline and diesel fuel while
    at the same time safeguarding environmental protections and setting up
    cooperative, instead of confrontational, interaction between industry,
    public interest groups, and State and local governmental officials.
    ---------------------------------------------------------------------------
    Specifically, S. 1772:

         Would use existing funds from the Economic Development
    Administration to expand domestic refining capacity by locating new
    refineries on closed military bases;
         Would, if requested by a State's Governor, streamline the
    permitting processes for a petroleum refinery and speed up approval of
    such permits while assuring that all environmental protection statutes
    remain in place and effective;
         Would enhance the effectiveness of Federal temporary emergency
    motor fuel waivers under Section 1541(a) of the Energy Policy Act of
    2005 (EPAct 2005) by encouraging States to follow Federal waivers in
    times of severe motor fuel supply emergencies, such as much of the
    Nation experienced after Katrina and Rita; and,
         Would reduce the number of boutique fuels nationwide by reducing
    the Federal cap on the number of boutique fuels under Section 1541(b)
    of EPAct 2005 when a State voluntarily drops a boutique fuel from its
    State Implementation Plan or when a State boutique fuel becomes
    identical to a Federal clean gasoline or diesel fuel formulation.

        For these reasons, NACS and SIGMA support the ``Gas PRICE Act'' as
    a balanced and modest approach to responding to the challenges faced by
    our Nation's motor fuel refining and distribution industries in the
    wake of Katrina and Rita. On behalf of motor fuel marketers nationwide
    and gasoline and diesel fuel consumers in every State, NACS and SIGMA
    urge this Committee to vote to approve S. 1772 at the earliest possible
    date.
        Thank you for the opportunity to submit this statement for the
    record.

        Senator Inhofe. In the testimony, they state the bill
    represents ``a bold legislative effort to achieve both of these
    goals, expand domestic supplies of gasoline and diesel fuel
    while at the same time safeguarding environmental protections
    and setting up cooperative incentive, confrontational
    interaction between industry and public interest groups and the
    State and local government officials.'' Do you agree with their
    statement?
        Mr. Mannix. Mr. Chairman, at this point in the legislative
    process, the Administration generally does not take a position
    on legislation until it is reported out of committee. However,
    we do believe that this bill takes several steps in the right
    direction.
        Senator Inhofe. That is the reason I was quoting their
    testimony so you wouldn't have to take a position on this. Do
    you agree with their testimony?
        Mr. Mannix. I will have to reserve judgment until the
    Administration takes a position.
        Senator Inhofe. That is fine.
        Senator Obama.
        Senator Obama. Thank you.
        Rather than go through each provision of the bill, I want
    to broaden the scope of our discussion a bit.
        I think there is uniform agreement on this committee that
    we need to figure out how to expand refinery capacity. The
    first question I have for you is what do you think has
    inhibited the expansion of refinery capacity? There has been
    mention made of a cumbersome permitting process, undue
    regulation, low margins. There are a lot of potential culprits
    out there and I am wondering from where you are sitting, what
    do you think are the largest contributors to the reduction in
    refinery capacity?
        Mr. Mannix. I think there is some truth in all the factors
    you mentioned. It is certainly true that since the hurricanes,
    the margins that refiners earn are higher; and that is what you
    would expect when something is scarce and it is in demand: the
    price goes up. But, historically, refineries have had low
    margins and I think that has been a factor.
        I think it has also been a factor that permits can be
    cumbersome, they can have uncertain outcome, they can take a
    lot of time; and all those things factor into financial
    calculations. I think they are all a factor.
        Senator Obama. Just the permitting process, the information
    I have is, and this may be mistaken, that we don't have a lot
    of instances where permits have actually been rejected. Is it a
    matter of time, is it a matter it takes too long to get the
    permit and therefore, it raises increased uncertainty? What is
    it exactly because the information I have at least indicates
    that permits are pretty readily obtained.
        Mr. Mannix. As I said, I think it is a combination of
    factors, including time and uncertainty. I think the companies
    do get pretty good at figuring when they can make it all the
    way to the end and when they can't, so it may be the case that
    you don't see a lot of permits being abandoned halfway through
    their process or three-quarters of the way through the process.
    Nonetheless, when they look at the obstacles to siting a new
    refinery, I do believe the permit process looms pretty large in
    their calculations.
        Senator Obama. Do you think that is largely Federal or
    State and local? Senator Voinovich I think properly noted the
    nimby problem, people don't necessarily want a big refinery in
    their back yard. To what degree is it environmental
    restrictions placed through EPA or the Clean Air Act resulting
    in the difficulties and whatever difficulties there may be. As
    I said, it is not clear to me the evidence is that the
    permitting seems to be the main problem.
        Mr. Mannix. I think it is a combination of Federal, State,
    and local. Many of the Federal programs are delegated to States
    and implemented at that level. I think it is a combination.
        Senator Obama. Just one other question on the nature of the
    problem. If the problem is low margins and you have oil
    companies that may have a financial incentive in keeping
    refinery production low, how do we encourage oil companies, as
    Senator Boxer indicated, that are making absolutely
    breathtaking profits to invest in refinery capacity?
        Essentially you don't really have a situation of vertical
    integration here where it is to their advantage to expand
    refinery capacity, right? The less the refinery capacity, the
    more restrictive the supply, the higher the gas prices which
    results in great profits for them.
        Mr. Mannix. I think I am going to have to defer to the
    Federal Trade Commission which generally looks into industry
    concentration in the oil industry and how it is affecting
    investment decisions.
        Senator Obama. I am not saying that anything they are doing
    is illegal. I am saying if they are making rational decisions
    and say to themselves, we make a lot of money with tight
    refinery capacity. How are we going to encourage them to build
    more refinery capacity? Are we going to give them subsidies and
    more money to encourage them when they are making billions of
    dollars in profits?
        Mr. Mannix. Speaking as an economist, I think the degree to
    which they make that calculation depends on the concentration
    of the industry. Again, I will defer to the Federal Trade
    Commission on the structure of the industry; but I think the
    current high margins can be attributed to the fact that
    refinery capacity is in high demand and low supply. I don't
    think you need to look further than that for an explanation.
        Senator Obama. I understand. I guess what I am asking is
    does that mean then that the market should take care of this
    and we should see people entering the refinery market because
    now the margins are higher?
        Mr. Mannix. Yes to the extent that low margins were
    deterring investment in refinery capacity, high margins should
    be a cure for that. We do, however, have to worry about the
    other factors that may have been deterring investment such as
    permitting.
        Senator Obama. I don't want to take up too much time. I
    would suggest as I look through your legislation, I don't see
    anything usually objectionable to what is in here. I would love
    to see some hard evidence that the permitting process itself is
    what is inhibiting refinery capacity.
        This is one of those things that can be easily asserted but
    sounds difficult to document. When I asked about it, you said,
    well, it may be that people aren't even bothering to file
    because they know it is going to be difficult. The evidence
    indicates that when they bother to file for a permit, they get
    one.
        I think it is important for us to be very clear if in fact
    there is a permitting process, and I have no doubt it could be
    cumbersome, I would like to know the degree to which this is
    actually the reason we are not seeing more refineries out
    there.
        Senator Inhofe. Senator Voinovich.
        Senator Voinovich. I would like to point out that the Gas
    PRICE Act provides no money for oil companies. It provides
    economic development and administration grants to communities
    if they decide to put a refinery on a BRAC site. This money can
    be used for roads, infrastructure to plants and so forth. It is
    only an incentive and it is a community-driven process.
        Senator Inhofe. I am glad you mentioned that. I mentioned
    it in my opening statement and I think there is some confusion
    between this legislation and perhaps the House legislation.
    Sometimes we need to reclarify that.
        Senator Voinovich. Mr. Mannix, some have expressed concerns
    that this bill could increase environmental risks. As Associate
    Administrator of EPA, do you believe that to be the case with
    this legislation? Is this going to increase environmental
    risks?
        Mr. Mannix. As we read it, no. It does not affect any
    substantive standards in existing environmental laws. It should
    not increase environmental risks.
        Senator Voinovich. Many of us have been very supportive of
    a bill that would deal with the diesel engines we have and we
    are very concerned that EPA does not extend the deadline to put
    in place the high sulfur diesel program. Are you familiar with
    that program?
        Mr. Mannix. I am familiar with it, yes.
        Senator Voinovich. Is there any thought at all at the EPA
    to extend the deadline beyond October 15, 2006?
        Mr. Mannix. We are working hard to meet the deadlines in
    the bill.
        Senator Voinovich. What does that mean?
        Mr. Mannix. As you know, in response to the hurricanes, we
    have taken several actions including fuel waivers on sulfur in
    diesel fuel; but none of those actions we believe will lead us
    to miss that deadline.
        Senator Voinovich. It is very important because there are a
    tremendous number of people banking on it that are
    manufacturing new diesel engines and expect that it is going to
    go into place. If it doesn't, then it is going to impact them
    dramatically.
        Mr. Mannix. We are closely monitoring that and are very
    conscious of the fact that those new engines are susceptible to
    damage from the sulfur content in diesel fuel. We want to
    ensure that doesn't happen.
        Senator Voinovich. Do you have any other ideas on what we
    could do to facilitate expansion and diversification of our
    refining capacity? This bill is pretty modest. Do you have any
    other ideas that we could use to make it more attractive?
        Mr. Mannix. As an Administration witness, I am going to
    have to defer that question and say we may be able to get back
    to you with ideas. I don't have any ready for presentation at
    the moment.
        Senator Voinovich. I don't know if EPA or the Energy
    Department, but has anyone ever sat down in the Administration,
    to your knowledge, and looked at this whole issue of gas and
    oil and natural gas and said, here is what we really need to do
    in order to have a comprehensive plan that is going to make a
    difference? By that, I mean this piece of legislation,
    alternative sources of energy, for example, fuel cells. We say
    they are 10 or 15 years away. If we made a real commitment,
    could we increase that to say 5 years? In other words, to your
    knowledge, has anyone really sat down and looked at the big
    picture?
        Mr. Mannix. I can tell you that meetings are taking place,
    not just at EPA but throughout the Administration, at high
    levels, paying close attention to both the short- and the long-
    term energy situation in this country. In the short term, we
    are dealing with the damage from the hurricanes and the gas
    supply situation, diesel supply, and the upcoming winter. So
    there is a lot of attention to that; but we are also trying to
    look beyond that to longer term solutions. Refinery permitting
    is not going to have a big impact in the next 6 months but it
    can have a longer term impact.
        Senator Voinovich. I like to refer to the second
    Declaration of Independence that we become as self reliant on
    energy resources as we can possibly can. It seems to me that
    the Administration could go a long way to give comfort to a lot
    of anxious people in this Nation that we have some short-term,
    medium- and long-term plans in place so that we are not going
    to be held hostage to some folks out there that may not like
    us.
        Mr. Mannix. I appreciate that, Senator.
        Senator Inhofe. Senator Boxer.
        Senator Boxer. Thank you very much.
        I want to make a bit of a counter to Senator Voinovich's
    comments in a couple of areas. I would ask unanimous consent to
    place into the record the definition section of title I which
    deals with what I consider to be giveaways to the oil companies
    so that they will get the land for nothing.
        [The referenced document was not available at press time.]
        Senator Boxer. Section 501 I want to put in the record
    which shows that in fact funds will be made available to them
    as I understand in excess of $1 billion of loan guarantees. I
    don't know any thought that this isn't a giveaway, I don't
    square it with the legislation but I am happy to work with my
    colleagues if I am wrong on that.
        I really do want to take on the issue of NIMBY, Not In My
    Back Yard. I want to show you a back yard of an area in
    California. This is a photo of the Phillips Rodeo Refinery in
    Contra Costa. The building to the lower right is part of the
    Bayo Vista housing complex. It is not an expensive suburban
    area by any stretch. People who live in the shadow of this
    refinery complain a lot to us about nausea and burning eyes.
        This refinery is flaring or burning off excess gas which
    causes tons of extra pollution in the air. Our Bay Area Air
    Quality Management Board passed the first rule in the Nation to
    control flaring on July 20, 2005. I am very proud of them. I
    served on that board. This gives you a better picture of what
    is going on. I cannot criticize communities that say can you do
    something to control this pollution.
        I believe we need to ensure--and I hope as you evaluate
    this, you will look at this--we need to ensure that local,
    State and Federal entities have the time they need if this bill
    passes to correctly apply such protections, not set arbitrary
    deadlines. I am asking you, Mr. Mannix, this: Do you have a
    list of statutes and permitting requirements that apply to
    refineries that could be affected by this legislation? We are
    going to deal not only with Federal law but State law, local
    law, air quality management law, tribal laws. Do you have a
    list of statutes and permitting requirements that apply to
    refineries that could be affected by this legislation?
        Mr. Mannix. No, at this point we don't have such a list.
        Senator Boxer. I would urge you, as you look at the
    legislation, to see how it would impact these laws because one
    thing I don't like is an unfunded mandate, maybe because I
    served on a local board of supervisors and I saw things coming
    down in the 1970s and in 1980, it was still there until I went
    to Congress in 1982. We had to do these things and we didn't
    have the funding. So I am concerned because I will tell you,
    those folks with the burning eyes are not going to want to give
    up their rights and local government isn't going to tell them
    to take a walk.
        The fact is, if this was the only way to increase energy
    production, it would be one thing but there are so many other
    ways to conserve. These big oil companies could do so much
    more. I hope you will look at all this.
        I wonder if you are familiar with EPA's report that
    examined the cost and benefits of the Clean Air Act from 1970
    to 1990?
        Mr. Mannix. The ``Cost of Clean'' report?
        Senator Boxer. Yes. Have you looked at that?
        Mr. Mannix. Yes, I have.
        Senator Boxer. The report found that the benefit of
    reducing six pollutants--I am going to reiterate: sulfur
    dioxide; nitrogen oxides; ozone; particulate matter; carbon
    monoxide; and lead--from 1970 to 1990, the benefits were
    between $5.6 and $49.4 trillion with costs totaling $.05
    trillion. It was a $10 to $100 return on every dollar spent.
        Because EPA issued this report, I assume you agree with it.
    Am I correct on that?
        Mr. Mannix. I wasn't at EPA at the time, but I don't
    disagree with it. Those benefit and cost numbers I think are
    part of the reason that the Administration adopted the Clean
    Air Interstate Rule to reduce sulfur dioxide and nitrogen oxide
    and the associated particular matter, the Clean Air Visibility
    Rule in the west and the Clean Air Mercury Rule. We have taken
    great strides in reducing those pollutants.
        Senator Boxer. I so appreciate it but also when you come
    out and say New Source Review is not working and if you give
    support to this legislation, which you haven't made up your
    mind on this legislation at this stage?
        Mr. Mannix. That is correct.
        Senator Boxer. I think we need to look at EPA's stance in
    relation to what we know EPA has said before.
        I guess my time is up so I will submit the rest of my
    questions for the record.
        Senator Inhofe. Thank you, Senator Boxer.
        Senator Carper, I don't think you had an opening statement,
    did you?
        Senator Carper. I have something I would like to say if I
    can use an extra minute or two?
        Senator Inhofe. An extra 2 minutes.
        Senator Carper. That would be great. Thanks.
        I share with Senator Voinovich a passion for this notion of
    energy independence. We can do a lot better than we are doing
    in terms of reducing the trend that we see, an ever growing
    dependence on foreign oil.
        Sometimes when I think about our approach as a Nation to
    this challenge, some folks think the way to get out of this
    dependence on foreign oil is just to drill, some thing people
    think we can use energy conservation, and a variety of other
    approaches. I think in the end what we need is a balanced
    approach.
        We are sitting here today talking about legislation that is
    designed to make it easy to build new refineries. I know some
    have concerns about that. On the positive side, we have big oil
    refinery in Delaware near the town of Delaware City right on
    the Delaware River and it is probably one of the greatest
    emitters of sulfur dioxide on the East Coast and is a source of
    constant sorrow in terms of its pollution for a lot of folks
    who live in that part of the State.
        As much as those folks are dismayed by the pollution from
    that refinery, my guess is if we tried to build a brand new
    refinery in the same place, could somehow wave a magic wand and
    eliminate the one that is there and build a brand new, state-
    of-the-art refinery, my guess is it would emit only a fraction
    of sulfur dioxide and other emissions that we currently suffer
    from.
        Ironically about 40 miles south of Delaware City is a
    little town called Clayton, Delaware, a bit north of Dover. A
    refinery is being built there without a lot of hoopla, a
    biodiesel refinery. We raise a lot of chickens in our State, a
    lot of corn and soy beans to feed the chickens and have a lot
    of soy bean oil left over, we don't always feed that to the
    chickens. We take the kernel of the soy bean and we feed that
    mixed in with the corn.
        I am encouraged that not the whole solution to reducing our
    reliance on foreign oil but a part of it is figuring out how we
    can better utilize the crops we grow to go into our tanks of
    our cars, trucks and vans.
        A member of my staff was good enough to provide an article
    I think appeared in the Washington Post this summer about
    Brazil and some discussion about what they are doing in Brazil
    to reduce their reliance on petroleum to fuel their cars,
    trucks and vans. Mr. Mannix, you are probably familiar with
    some of what is going on down there.
        Mr. Mannix. They are using ethanol.
        Senator Carper. Take a moment and share with us what they
    are doing, aside from building refineries. What are some of the
    things they are doing and what kind of success are they
    enjoying in Brazil in reducing their reliance on gasoline for
    transportation.
        Mr. Mannix. I have to say, as in many such stories, there
    are a couple of sides to it. They have made more progress I
    think than any other nation in replacing gasoline with
    biologically based ethanol production. I am not up to date on
    where they are, something like 20 percent.
        Senator Carper. I have heard as high as one-third of the
    fuel they use to power their cars, trucks and vans comes from
    sugar cane.
        Mr. Mannix. They had to cut down a lot of rain forest to
    grow that, so there are some concerns about it as well.
        Senator Carper. Are there any lessons we could learn from
    what they are doing there? Apparently, they not only use sugar
    cane and soy beans but they have grown a variety of different
    grasses and some of those are far better in terms of producing
    ethanol than is corn.
        Mr. Mannix. As we implement the new Energy Policy Act, we
    are going to be looking at a lot of those options because there
    are fuel provisions in that Act. I think we will be doing
    comparative assessments of different types of fuel as we
    implement that.
        Senator Carper. One of the provisions in the Energy bill is
    a tax credit for small producers like our plant in Clayton,
    Delaware, our diesel refinery, there will be tax credits
    favorable to small producers of biodiesel as we will be. The
    same energy bill has some tax credits that encourage people to
    buy more energy efficient cars, trucks and vans. There are two
    tax credits that I am aware of. Starting January 1, one is for
    those who buy hybrid powered vehicles and a tax credit I think
    worth up to about $3,400. I think there is a similar tax credit
    for those who buy what is called lean burn clean burn diesel
    engines that are able to meet the Tier II requirements for low
    emission. That is another tax credit worth about $3,400. Would
    you comment on those?
        Mr. Mannix. I am painfully aware of that because the
    Highlander I just bought became available about a month ago,
    but the tax credit isn't available until January 1. But I
    couldn't wait, so I bought it and I will forego that tax
    credit.
        Senator Carper. Did you enjoy any tax credit at all, did
    you get $1,000?
        Mr. Mannix. I can't remember. There is a HOV incentive. I
    just like the hybrid technology.
        Senator Carper. I know some people say they are just buying
    those vehicles to support the technology and hope it will get
    better. That is admirable.
        The other thing I would like to ask in addition to
    increasing refinery capacity and finding ways to better harvest
    the crops in our fields and tell them into fuels for our
    vehicles, providing tax credits to support hybrid powered
    vehicles and lean burn, clean burn diesel.
        I might just say to my friend Dieter Satcha, the current
    head of Daimler Chrysler of North America is going to be taking
    over Daimler Chrysler Worldwide and he was a few months ago.
    Senator Voinovich I don't know if you had a chance to go to the
    reception but he had all kinds of vehicles he brought with him,
    some large ones and some great small ones.
        One of the small vehicles he brought was a diesel powered
    vehicle, very unique in style, gets about 70 miles per gallon
    and meets the Tier II diesel requirements, 60 miles in the
    city, 80 miles on the highway. That is pretty attractive.
        The idea of marrying a diesel engine with an electric
    motor, so you have a diesel hybrid is something that is very
    attractive in my view and would give us the benefit of the
    extra power, extra torque that diesel provides, lower
    CO2 emissions so by marrying it with the electric
    engine, you have something around the city that provides good
    mileage as well. Maybe not much pick-up but maybe pretty good
    mileage.
        Mr. Mannix. I disagree with you on the pick-up. I got great
    pick-up.
        Senator Carper. Thank you very much.
        Senator Inhofe. Thank you, Mr. Mannix, for your time and
    patience. We will now dismiss you and ask for the next panel to
    please take the table.
        The next panel consists of: Shawn Mitchell, a Colorado
    State Senator on behalf of the State of Colorado; Eric
    Schaeffer, director, Environmental Integrity Project; and
    Jonathan Adler, associate director, Center for Business Law and
    Regulation, Case Western Reserve University. We welcome all
    three of you to this panel. We will start with you, Senator
    Mitchell, and move down the table.
        Senator Mitchell.

              STATEMENT OF HON. SHAWN MITCHELL, COLORADO
                             STATE SENATOR

        Mr. Mitchell. Thank you for allowing the State of Colorado
    to testify on the Gas PRICE Act today.
        My State strongly supports this legislation. We hope the
    committee and the full Senate pass the bill. It will provide
    incentives to site and expand refinery capacity and to do it in
    a way that protects the environment and simplifies the
    permitting process to cut delays for needed projects.
        This issue is one we have grappled with for some time. As
    you noted in your hearing back in 2004, it is even more
    important now given our vulnerabilities that were exposed by
    Hurricane Katrina, specifically the shortsightedness of placing
    most of our Nation's refinery capacity in the Gulf Coast
    region.
        I understand that about half of our refining capacity and a
    quarter of our oil production is concentrated in the Gulf. When
    Katrina hit, we experienced sharp price spikes because of
    reduced supply and because of uncertainty about future supply.
    Those events took days but the effects linger. Further, prices
    were already rising before the storm. Obviously, any incentive
    to increase refinery capacity will benefit the country.
        Colorado's support for your legislation, Mr. Chairman, is
    based on those incentives that would be provided to States to
    expand capacity. The Gas PRICE Act provides incentives through
    the Economic Development Administration to those parts of the
    country that are impacted by the Base Closure and Realignment
    Commission's designations. Thankfully, my State was not hit by
    the most recent BRAC process, but we have had military
    facilities closed in Colorado in the past and we know how
    difficult it can be to overcome those losses.
        Although Colorado has been lucky and we have been able to
    address some of those losses as an opportunity for economic
    development, for example, we have had military facilities
    closes to the Denver area that we have transformed into vibrant
    residential, commercial and hospital centers. Those projects
    made sense and enriched our State, but I am certain there are
    circumstances around the country where those kinds of options
    aren't available.
        Helping the Economic Development Administration to address
    these circumstances while also addressing the Nation's need for
    additional refining capacity makes absolute sense. This bill
    seizes that opportunity by providing incentives for American
    communities to consider constructing new refineries to expand
    our nationwide capacity. The bill helps communities take
    advantage of existing infrastructure to preserve and create
    jobs.
        The legislation does not mandate any action on States, it
    provides them valuable incentives if they determine vitally
    needed energy production is an appropriate opportunity for
    their communities. This bill provides authority to the EDA for
    additional cost sharing authority. It also provides flexibility
    that States can choose to exercise in environmental permitting
    by entering into a refinery permitting agreement.
        It is important to remember that this provision only
    applies to those States or tribes that choose to participate.
    No State or tribe will be forced to participate. There is no
    usurpation of the concepts behind any of the Federal
    environmental laws that are delegated to the States or tribes
    for enforcement. There is no credible argument that this
    proposal would infringe the rights of State or tribal
    authorities.
        As we heard the EPA representative testify, nor is there is
    any argument that this proposal lowers substantive protections
    for environmental standards. It provides a streamlined process.
    In fact, we have experience with this kind of collaboration
    among State and local governments and Federal Government in
    Colorado. We have an excellent working relationship that has
    led to ground breaking cooperation.
        In southwest Colorado, there are three governmental
    entities that have developed an air permitting program that
    places the Southern Ute Tribe in charge of permitting on fee
    land within tribal boundaries. This ended a dispute over who
    had the authority. Similarly this bill would provide Governors
    and tribal leaders the authority to combine permitting
    requirements for all of the different media into one permit.
        In Colorado, this is not a new concept but an opportunity
    we are already pursuing. In 2003, the Colorado Legislature
    passed legislation that I sponsored authorizing the Governor
    and local governments to streamline and consolidate different
    environmental permits and processes into a single permit
    through one coordinated process. The idea is twofold. First, to
    create a single timeline; second, to allow all responsible
    agencies and authorities to work together.
        The purpose of a multimedia permit is to identify where the
    net gains for the environment are and to work to achieve those
    gains. One hypothetical example comes from the refining
    process. To capture sulfur dioxide, wet scrubbers are the
    effective method. To achieve SO2 reductions you
    might think of installing wet scrubbers but as the name
    implies, that takes a lot of water.
        In Colorado with both the Health Department and the Natural
    Resources Department at the same table, we might balance the
    gain of marginal SO2 reductions with the
    environmental cost of using a lot more water. In consultation
    with the EPA, we can make the best choice to protect Colorado's
    environment.
        My time is up. I applaud you for bringing this measure
    forward to provide States an opportunity to create economic
    opportunity where bases are closed and also to streamline the
    process of creating new refinery capacity.
        Senator Inhofe. Thank you, Senator Mitchell, for that fine
    opening statement.
        Mr. Schaeffer.

    STATEMENT OF ERIC SCHAEFFER, DIRECTOR, ENVIRONMENTAL INTEGRITY
                                PROJECT

        Mr. Schaeffer. Thank you for the chance to testify.
        Congress understandably is concerned about the recent run
    up in gasoline prices, especially after the devastating
    hurricanes in the Gulf. I would like to respectfully suggest
    that while the intent of this legislation may not be to weaken
    environmental rules, short cutting permitting and some of the
    other provisions in this bill would have that practical effect.
        In particular, I think it is a mistake to think you can
    change permit procedures to condense and collapse the time it
    takes to review these projects and not effect how these permits
    are actually written. Speaking in part from experience at EPA
    where I worked for 12 years, I don't think it is practical to
    permit every major refinery project in 90-120 days no matter
    what the facts. I would like to offer several examples.
        In the Gulf Coast where much of our capacity is located,
    where many of the major expansions are underway, Motiva is
    reportedly considering adding more than 300,000 barrels a day
    of capacity to its Port Arthur refinery. That is a huge
    project. That would make that facility I believe the largest in
    the world. To try to get through the application in 90 days for
    an operation that big is not practical.
        Second, Texas City, BP had a terrible accident in March of
    this year, an explosion that killed 15 people. The next time
    that plant comes in for a permit application, should they be
    entitled to a 90 day review? I would suggest not. We ought to
    make sure they can manage safely before they are given that
    kind of fast track approval.
        It has been mentioned that nearly half of our capacity is
    in the Gulf, nearly a quarter of that capacity was shut down by
    the recent hurricanes. Oil tanks in Louisiana were ripped off
    their moorings, spread oil all over neighborhoods surrounding
    these refineries. Some of these communities will likely never
    recover.
        I would suggest if we are concerned about not losing
    capacity and not hurting people, that especially in those
    hurricane prone areas, this is not the time to fast track
    permits. Rather, we ought out ask what is being done to make
    sure that capacity isn't lost the next time we have a storm,
    and they are going to happen again.
        Part of my concern is that the refinery industry itself has
    repeatedly said that the environmental rules don't explain high
    gasoline prices and don't seem to have much affect on decisions
    to invest. To try to adjust environmental rules in the hope
    this will increase the supply of gasoline or significantly
    affect the price, I think is a classic case of the tail wagging
    the dog. I would go directly to the industry for those
    comments.
        Last year, the president of the American Petroleum
    Institute testifying before a House subcommittee said, somewhat
    indignantly, ``We have not said that environmental costs are
    responsible for higher gasoline prices.'' Valero's senior vice
    president, Valero being the largest refinery in the country
    today, has said, ``It is profit not environmental rules that
    drive investment decisions.'' Bob Slaughter of the National
    Petroleum Refiners Association has asked Congress not to make
    any further changes in the clean fuels requirements until
    additional studies are done about the impact of capacity on the
    industry.
        We keep hearing no refineries in 29 years. The only company
    to apply for a permit for a new refinery in recent memory has
    the permits. What they don't have are investors with the
    confidence in the company to put their money behind a big new
    refinery in a place like Arizona. I am not sure this is a
    problem that this legislation will solve.
        What does drive investment in refining capacity? Profits.
    Margins are at record levels. Those of us foolish enough not to
    have oil company stock at this point can only look on with envy
    as companies like Valero and Sunoco offer two for one stock
    splits and Citgo pays $400 million in dividends to its
    shareholders. It just doesn't get any better than this for oil
    companies. They have the money; money is not the problem.
        They are investing some of that money to expand supply.
    They are doing it mostly by building out at existing
    facilities. There are nearly 600,000 barrels a day of capacity
    additions that have been announced or reported at refineries
    throughout the country. So we are making some progress in
    addressing the capacity problem.
        I would close by suggesting refiners are always going to be
    very sensitive to price. If the price of gasoline starts to
    decline, they may well back off some of these investments and
    may shut down refineries to improve their margins. If we are
    really serious about legislating a floor on a refinery capacity
    in this country, maybe we ought to prohibit a refiner from ever
    closing its facility until we have had a congressional review
    or some agency has given its approval.
        Thank you for your time.
        Senator Inhofe. Thank you, Mr. Schaeffer.
        Mr. Adler, thank you very much for being here today. You
    are recognized for your opening statement.

      STATEMENT OF JONATHAN ADLER, ASSOCIATE DIRECTOR, CENTER FOR
      BUSINESS LAW AND REGULATION, CASE WESTERN RESERVE UNIVERSITY

        Mr. Adler. Thank you for the invitation to testify today.
    Thank you, Senator Voinovich, for your hospitality while I am
    away from the great State of Ohio. It is a pleasure to be here
    on this important issue.
        No one likes to pay high gas prices. Consumers
    understandably wish gasoline was less expensive and prices less
    volatile. The question is how to accomplish that goal without
    compromising environmental protection, trampling upon State
    prerogatives or disrupting the efficient operation of energy
    markets.
        History clearly demonstrates that well intentioned
    interventions can have perverse consequences and cause more
    harm than good. There have already been discussions today of
    some of this Nation's experiences in the 1970s when ill
    considered energy policies had quite disastrous effects.
        From this perspective, I commend this committee for taking
    a cautious and prudent approach in S. 1772 that should help
    ease pressures on gasoline supply without sacrificing other
    policy goals. I want to make a few brief comments about titles
    II and IV of the bill and submit my full written statement for
    the record.
        With regard to refinery permitting, as Senator Obama noted
    earlier, just about everyone agrees that there is a clear need
    for increased refining capacity in the country. While existing
    domestic refining capacity may be adequate to meet current
    needs, demand is rising and current capacity is unable to
    respond to surges in demand or disruptions in supply. This
    creates both upward pressure on prices as well as increased
    volatility of prices.
        I believe it is indisputable that cumulative regulatory
    burdens play some role in discouraging investment in the
    refining sector. This is also a conclusion reached by the
    Federal Trade Commission in its June 2005 report on gas prices.
    Insofar as regulations increase the cost of constructing,
    expanding and/or operating refinery facilities, they decrease
    the attractiveness of such investment as compared to available
    alternatives.
        While I would agree that regulatory burdens cannot explain
    the entirety of refinery investment trends, there should be
    little doubt that regulatory costs have an effect on the margin
    and the greater the costs and uncertainty involved with
    existing regulations, the greater that effect will be.
        Streamlining the permitting process is an effective way to
    reduce the cost of uncertainty involved with environmental
    compliance without sacrificing environmental protection. As the
    experiences of many State environmental agencies have shown,
    Colorado is certainly among them, it is possible to streamline
    the permitting process without sacrificing environmental goals
    through the adoption of coordinated, simultaneous reviews of
    various permitting requirements across environmental media,
    establishing deadlines for permitting decisions and other
    innovations. Some States even offer money back guarantees on
    permit fees for failure to meet deadlines. Such measures are
    fully compatible with high levels of environmental performance.
        Even if skeptics are correct, the regulations play a minor,
    insignificant role in investment decisions in this area. This
    provision proposes minimal risk. As Senator Mitchell already
    noted, if streamlining the permitting process for new
    refineries does not increase the attractiveness of such
    investments, permitting provisions will not be invoked as no
    Governor will seek a refinery permitting agreement if there is
    no interest in expanding or constructing a refinery. Nothing is
    lost.
        While reasonable people may disagree on the extent to which
    title II of this bill will spur additional investment in
    refining capacity, I do not see how adoption of this measure
    will cause any harm. It leaves in place the substantive
    requirements of State and Federal law that merely seeks to
    facilitate streamlining and the expeditious processing of the
    permitting process.
        As for the boutique fuel provisions, let me say the ability
    of gasoline markets to respond to supply disruptions and price
    changes have been severely hampered by the proliferation of
    boutique fuel requirements. While such regulations play an
    important role in reducing air pollution, they have balkanized
    gasoline markets making some regions more vulnerable to supply
    disruptions and volatile gasoline prices. Again, I refer this
    committee to the June 2005 FTC report which talks about how the
    proliferation of boutique fuel requirements have left certain
    regions of the country particularly vulnerable to price
    volatility and price increases.
        Insofar as this bill provides for a gradual reduction in
    fuel types, it is a welcome step. Under these provisions,
    States will continue to benefit from the pollution reduction
    benefits of such fuels with the aggregate number of fuel
    formulas a refiner is required to produce and therefore the
    extent to which national gasoline markets are further
    fragmented will decline over time.
        In closing, let me reiterate that Federal interventions in
    energy markets have always had the potential to do harm as well
    as good. Given some of the troubling proposals recently
    advanced to address concerns about increased gasoline prices
    including some of the provisions of the recently enacted House
    bill, I appreciate this committee's prudent approach to this
    important issue. It is far wiser to adopt modest measures
    designed to facilitate the market's natural response to supply
    disruptions and price increases than to adopt additional layers
    of regulatory mandates or to trample upon State and local
    prerogatives.
        I recognize the importance of these issues to you and your
    constituents. I commend our efforts to develop a sound policy
    response to these concerns and to increase refinery capacity. I
    hope my perspective has been helpful. I am happy to answer any
    questions.
        Senator Inhofe. Thank you, Professor Adler.
        Mr. Schaeffer, you are the director of the Environmental
    Integrity Project. Tell me what that is?
        Mr. Schaeffer. We are a public interest group that tries to
    promote enforcement of environmental laws.
        Senator Inhofe. Are you involved in any challenges of any
    laws?
        Mr. Schaeffer. We have challenged successfully a law that
    would have rethought pared back emission monitoring
    requirements.
        Senator Inhofe. In your statement you said S. 1772 is
    ``likely to face court challenges.'' Would that be from you?
        Mr. Schaeffer. That is possible.
        Senator Inhofe. Senator Mitchell, it is interesting that
    all the members here, all five were in State or local
    government so we all know what unfunded mandates are, we know
    what local concerns are. I think we probably share the concept
    that the closer to the people, the better the decisions.
        I think we have all felt the insufficient refining capacity
    for quite a while and we are concerned about the Federal
    Government and what we should do to act to address this problem
    but the Federal role has to be considered with the States. The
    Gas PRICE Act was carefully drafted to assist participating
    States voluntarily, not to preempt them.
        As a local elected representative and speaking on behalf of
    the State, do you think we have managed to meet this goal, this
    challenge we have?
        Mr. Mitchell. I believe you have met that goal entirely in
    several different ways. The opportunities and incentives that
    are available for BRAC placement of refinery facilities are
    entirely optional to the States and local communities that will
    be affected. If they want to pursue those opportunities, they
    have incentives and additional assistance afforded by the Act.
    There is no pressure or requirement or mandate that they pursue
    those opportunities.
        Similarly, with respect to the streamlining, the permitting
    agreement, that again is entirely optional with the State. Any
    State executive is entirely free to ignore that opportunity but
    if he or she wishes to facilitate and to streamline the process
    of approving permitting, then they are granted the opportunity
    to reach an agreement with EPA to do just that, to streamline
    the process and they have a voice throughout the entire
    process.
        Senator Inhofe. Professor Adler, I will read a statement by
    the distinguished Minority Leader of the Senate. It says, ``I
    think we need more refining capacity but you need to expand it
    according to the law.'' In reading title II, which you quoted,
    it says, ``Savings, nothing in this section affects the
    operation or implementation of otherwise applicable law
    regarding permits necessary for the construction and operation
    of a refinery.'' Do you think this statement and the law in
    general in S. 1772 complies with the desires of Senator Reid?
        Mr. Adler. Certainly. I think the bill is trying to
    facilitate and streamline the permitting process without
    changing the substantive laws that apply to refining
    facilities. I think, as I mentioned in my testimony, States
    have demonstrated there is substantial ability to make these
    processes quicker, to streamline the process without
    sacrificing the substantive requirements. We are not talking
    about exempting refineries from air pollution or water
    pollution limits; we are talking about making it easier for
    States to site facilities and expansions if those expansions
    are desired.
        Senator Inhofe. Isn't it true that as a general rule and
    perhaps Senator Mitchell would be a better one to answer this,
    the State permit requirements are more stringent in most cases
    than the Federal requirements?
        Mr. Adler. It is going to vary from State to State and it
    is going to vary on the subject matter. We see quite a bit of
    diversity. One thing we do see across the board is that States
    increasingly take environmental issues seriously and there
    certainly are many States that exceed Federal standards both in
    terms of their substantive requirements but as well as in terms
    of the amount of innovation they have demonstrated in ways of
    meeting environmental goals without sacrificing economic
    benefits.
        Senator Inhofe. Senator Mitchell.
        Mr. Mitchell. The States have to at least meet Federal
    standards but they are free to be more protective of their
    environmental quality and many are. One of the virtues of your
    proposal is that it does nothing to limit that State
    flexibility. By streamlining the process and bringing everyone
    to the same table, the States still maintain all of their
    substantive environmental protections.
        Senator Inhofe. Thank you.
        Senator Jeffords.
        Senator Jeffords. Senator Mitchell have you discussed the
    reuse of the Lowry Air Force Base in Denver in your testimony.
    At any time did Lowry consider locating a refinery on that
    property, even in the absence of the grants authorized by this
    bill?
        Mr. Mitchell. Lowry Air Force Base would not be an
    appropriate site to consider for a refinery because it is in
    the middle of a residential area. The opportunity afforded by
    this bill for communities within reasonable distance of bases
    that are not in close proximity to residential areas that I
    think is so important.
        Senator Jeffords. Thank you.
        Senator Inhofe. Senator Voinovich.
        Senator Voinovich. Mr. Adler, one of the things you
    mentioned were boutique fuels, reformulated gasoline. Could you
    tell us how they impact refining capacity and spikes in oil
    prices?
        Mr. Adler. Sure.
        Senator Voinovich. Do you think we will have more requests
    for reformulated gasoline with the advent of the new ozone and
    particulate matter standards that States are going to have to
    comply with?
        Mr. Adler. First, I certainly think States will be looking
    at pretty much everything available. Certain States will be
    looking at virtually everything available to meet the new NOx
    standards.
        Boutique fuels generally, I should note the entire
    justification for Federal regulation of gasoline was premised
    on the idea that the Nation as a whole benefits if there is a
    single standard for a fungible product so that you can make it,
    refine it in Texas, refine it in California and refine it in
    Illinois but it doesn't have to be sold there. That reduces the
    price of the product because you can take advantage of
    economies of scale. It also means there is a supply disruption.
    Several years ago if I recall correctly, there was an Illinois
    refinery that primarily made gasoline for midwestern markets.
    There was a supply disruption and they were unable to produce
    for a while.
        When you have boutique fuel requirements, different parts
    of the country are required to sell different types of
    gasoline, that means when you have a shortage like this, they
    can't go to the general market and get gasoline from anywhere,
    they have to get gasoline being produced that meets the
    specific demands of the Illinois market.
        When you have in the neighborhood of a dozen different
    boutique fuels, that means the options for communities that
    face supply disruption using some of these fuels are more
    limited and the ability of the market as a whole to respond to
    those supply disruptions and to prevent prices from spiking are
    limited. I would note the Federal Trade Commission report from
    June 2005 did note those parts of the country that have the
    most stringent boutique fuel requirements have also been most
    vulnerable to price volatility because they are least able to
    get gasoline from other parts of the country. California is a
    good example of this. California's fuel standard is the most
    stringent in the country and there aren't many places outside
    of California where they can acquire gasoline that meets the
    same standards.
        One thing about this bill in terms of meeting future air
    quality standards is that unlike the Barton bill, it doesn't
    eliminate boutique fuels tomorrow, doesn't eliminate boutique
    fuels the second it is enacted, it merely says once States are
    finished using a certain fuel requirement, once it is no longer
    in an existing State implementation plan, then the list of
    fuels will be reduced.
        I don't believe this in any significant way reduces State
    flexibility. I think it leaves on the table for the foreseeable
    future all the tools States need. I have written extensively on
    the need to get States lots of flexibility. Just over time in a
    gradual way, it is going to reduce the total number of fuels
    that refiners may have to produce. Over time that will reduce
    volatility and make it easier for the refining sector to
    respond to supply disruptions.
        Senator Voinovich. Do you think this legislation is going
    to cause anyone to build a refinery?
        Mr. Adler. It is hard to know. Certainly profit margins are
    a big deal in terms of refining investment, so are permitting
    and regulatory requirements. The FTC report I keep mentioning
    specifically notes that permitting and regulatory requirements
    influence decisions to invest in part because they influence
    profit margins. If it takes a company 3 years to get a permit,
    that investment is going to look much less attractive than if
    they know they are going to get an up or down decision in 1
    year.
        Historically, refining investments have yielded just over
    half the returns as investments in crude oil production or in
    pipelines and distribution. So for large, integrated oil
    companies, it has typically been the last place they want to
    invest their money. Currently, oil companies are experiencing
    really high margins in refining sector and one thing this bill
    does is it makes it easier both for existing companies to
    expand capacity but also makes it easier for the new firm that
    wants to come in to do that. If margins stay high, I would
    think this bill would increase the amount of investment in
    refining sector than we would have without this bill.
        Senator Voinovich. Is there anything else you think we
    could put in this that would make it more attractive to get new
    refineries built?
        Mr. Adler. I think one of the things this committee should
    consider is authorizing the sort of experiments begun in the
    Clinton administration under things like Project Excel to say
    to States if they can meet or exceed existing environment
    requirements in a less expensive way, then they should have the
    ability to do that and have the ability to petition the EPA for
    that permission.
        To give one example, there was a study about a dozen years
    ago of the Amoco Refinery in Yorktown finding that many of the
    environmental requirements placed on that refinery could be at
    much less cost and much lower cost. If I remember correctly,
    benzene emissions in particular could be reduced more cheaply
    than regulations provided for.
        Giving States that sort of opportunity and encouraging them
    to take advantage of meeting or exceeding environmental goals
    at lower cost I think could further reduce the cost of
    expanding capacity without sacrificing environmental
    performance and creating that option for State environmental
    agencies I think would be a step in the right direction.
        Senator Inhofe. Thank you.
        Senator Boxer.
        Senator Boxer. Thank you.
        Mr. Adler, do you support S. 1772?
        Mr. Adler. I certainly like title II and title IV. I don't
    know enough about Fischer-Tropsch fuel to know whether or not
    they are worthy of Federal loan guarantees.
        Senator Boxer. Do you support the bill at this stage?
        Mr. Adler. At this stage, I think the principles underlying
    titles II and IV are the right principles. Could you tweak
    language here? Probably but that is always the case with a new
    bill.
        Senator Boxer. The reason I am asking, you have made a very
    strong statement on the general issue of subsidizing energy. I
    want to read it to you. You said, ``Before new regulatory
    controls or subsidy programs are even considered, the entire
    Federal budget should be reviewed with an eye toward
    eliminating those Federal programs which inflate the use of
    energy, particularly those energy sources that are blamed for
    contributing to global warming. Instead of seeking to use
    fiscal instruments to accelerate or slow down the development
    of given energy technologies, energy policy should be shifted
    to neutral so as not to distort the energy marketplace.''
        My understanding of your work is (I am a very old economics
    major) that you have great faith in the marketplace. This type
    of bill is picking a winner clearly by what I consider to be
    subsidies, giveaways to the oil companies. How does that square
    with your very strong point that we should shift to neutral so
    as not to distort the energy marketplace?
        Mr. Adler. I don't think titles II and IV of the bill do
    pick winners. I think they are about getting out of the way so
    the market can operate.
        Senator Boxer. But I asked about the whole bill, so you are
    not taking a position on the rest of it? You either are for it
    or against it.
        Mr. Adler. As you well know, Senator, sometimes to get
    things passed, different constituencies want different things.
    I leave to this committee what sorts of compromises need to be
    made but I think titles II and IV are very important.
        Senator Boxer. You are willing to give up the heart of free
    market economics to get a couple of things in that you like
    because this is very strong.
        Mr. Adler. I would be happy to have titles II and IV pass
    by themselves.
        Senator Boxer. That helps.
        Mr. Adler. That would be fine with me.
        Senator Boxer. That would be fine with me.
        Mr. Schaeffer, welcome back. I thought you raised a very
    important point about whether oil refineries can withstand
    damage caused by powerful hurricanes; you point out this bill
    doesn't do anything about upgrading existing oil refineries to
    harden them against damage that can cause disruptions in the
    fuel supply.
        In California, we have everything in the book, not
    hurricanes but we have everything else. We have earthquakes,
    floods, fires, everything. We also have 21 oil refineries so I
    am concerned that the streamlining that Mr. Adler loves, called
    for in this bill, may interfere with applying California's
    earthquake standards to oil refineries by rushing the
    permitting process and in the long run could do more harm than
    good. Do you have a sense there is a danger here?
        Mr. Schaeffer. As I understand, the bill would pull out
    State requirements as well and consolidate it in one
    transaction and put them in front of Federal court. They would
    all be subject to that fast tracking procedure.
        Sure, I would be concerned. To use the Gulf example which I
    am a little more familiar with, you have more than half our
    capacity there. That is where the big expansion projects are,
    that is where the industry wants to go in the short run. There
    will be more hurricanes, there will be more shutdowns. It
    doesn't seem that we are planning for that in this kind of
    legislation.
        Senator Boxer. Thank you. If there is an area where we
    could agree, I would rather focus this bill on that whole issue
    because it is really key to us. We lost so much capacity and we
    are suffering all over the country because of it.
        Mr. Schaeffer. If I could have a few seconds to answer the
    Chairman's question.
        Senator Boxer. You can't because I only have 44 seconds and
    I have to ask Mr. Adler a question. Sorry.
        You said you didn't see any substantive changes in
    environmental law.
        Mr. Adler. Substantive requirements, no.
        Senator Boxer. Mr. Schaeffer, I don't think you agree with
    that?
        Mr. Schaeffer. No.
        Senator Boxer. I don't either. Let me lay out where I see
    major changes and I would like you both to comment.
        I see just the following changes to environmental laws.
    States that get fuel waivers no longer have to make up for
    emissions in their SIPs. Federal monitoring requirements can be
    replaced by potentially less comprehensive State requirements.
    It changes judicial review of environmental laws, eliminating
    State court review. It forces local permitting decisions into
    mandated rigid timeframes, rushing environmental review. I
    guess I would start with the person who agrees with me first,
    Mr. Schaeffer. Did I leave anything out or are those the main
    things?
        Mr. Schaeffer. I think that is a good summary to start
    with.
        Senator Boxer. Mr. Adler, do you agree with what I said?
        Mr. Adler. I do think it clarifies what I understood and I
    think most people understood was the intent of the waiver
    provisions in the Energy Policy Act with regard to boutique
    fuels. I think on the other provisions, I don't believe
    streamlining the permitting process or giving Governors the
    opportunity to participate in a streamlining permitting process
    changes the substantive requirements, the substantive limits on
    emissions will remain in place.
        Senator Boxer. States that get fuel waivers no longer have
    to make up for emissions in their SIP.
        Mr. Adler. My understanding is making clear what the Energy
    Policy Act intended which is an emergency waiver is granted
    that they will be held harmless for that.
        Senator Boxer. You look at this as a statement of current
    law?
        Mr. Adler. A clarification.
        Senator Boxer. Clarification and a restatement are very
    different things. I might clarify it one way and you might
    clarify it another way. It to me ends up having probably
    dirtier air at the end of the day.
        My time is up and I thank you.
        Senator Inhofe. Senator Jeffords didn't have his full time.
        Senator Jeffords. I have a question for Eric Schaeffer. In
    your view, is there a sufficient record here to legislate? Have
    we heard from all the parties that we need to? Do we know what
    the position of the refinery industry is with regard to these
    changes? What about the States and local governments?
        Mr. Schaeffer. Representatives of the refinery industry at
    other hearings made statements suggesting that these kinds of
    fixes to permits are, and I am paraphrasing and interpreting to
    be fair, not going to significantly affect capacity decisions.
    They have said flat out, we have not said environmental rules
    drive gasoline prices. That is from the head of API, the
    American Petroleum Institute.
        Bob Slaughter, National Petroleum Refiners Association, has
    said, ``I don't tinker anymore with boutique fuels
    requirements. We have eliminated the oxygenate rules that were
    giving us heartburn. Let us let it lie.'' So they are on the
    record.
        Having said that, I notice they are not here today and it
    might be useful to get their testimony and whether they feel
    this would make a significant impact.
        You do have people that are kind of hurting now in Gulf
    Coast communities. I would ask them if they think 90 days is
    enough for them to get their arms around an expansion the size
    of Motiva's at Port Arthur which was only recently under water.
        Finally, I would hope that you can find a way to talk to
    people who actually write the permits. I understand folks have
    different positions at the political level. Get to the people
    who actually write the permits and find out if they think some
    of these projects can really be reviewed seriously in the time
    this bill would allow.
        Senator Jeffords. Thank you.
        Senator Inhofe. I want to thank our witnesses and we are
    adjourned.
        [Whereupon, at 4:19 p.m., the committee was adjourned.]
        [Additional statements submitted for the record follow.]
         Statement of Hon. Christopher S. Bond, U.S. Senator from the
                               State of Missouri
        Thank you, Mr Chairman. I commend your leadership in drafting this
    important legislation and bringing it in front of this committee for a
    hearing. I believe that passing this legislation is another important
    step in helping our Nation reduce its dependence on foreign sources of
    energy. Conservation must be an important component of our energy
    policy, but it cannot be the only component. We simply cannot conserve
    our way to energy independence.
        The simple fact of the matter is that our Nation's energy supplies
    are not keeping up with demand. This situation has been further
    exacerbated by the recent hurricanes of Katrina and Rita, which shut
    down a dozen refineries and disrupted a fifth of our Nation's gasoline
    supply.
        One of the main reasons why our Nation's supply of energy is not
    keeping pace with demand and causing higher prices is due to the lack
    of refining capacity. The last oil refinery built in the United States
    was almost 30 years ago. According to the Wall Street Journal, in 1981,
    there were 125 refineries in the United States with a capacity of 18.6
    million barrels a day. Today, there are 148 refineries with a capacity
    of 16.8 million barrels per day this despite the fact that U.S. demand
    for gasoline has increased more than 20 percent.
        A big reason for the lack of refining capacity is because, over the
    years, we have created a regulatory climate that has made it
    extraordinarily difficult and costly to build new refineries. The
    permitting process for building these new refineries along with the all
    of the court challenges can take years to accomplish. One such company
    in Arizona that intends to build a new refinery has been trying for
    almost ten years. These delays, in turn, drive up costs so much that
    constructing the refinery becomes economically infeasible.
        I believe S. 1772 takes an important step forward in streamlining
    the permitting process for new refineries. Specifically, title II of
    the establishes an opt-in program for State Governors requiring the EPA
    to coordinate all necessary permits for the construction or expansion
    of refineries. It also provides participating States with technical and
    financial resources to assist in permitting and establishes deadlines
    for permit approval. The bill does this without changing or modifying
    any existing laws. I am also pleased that the bill provides economic
    development incentives for building refineries at BRAC sites. Finally,
    the bill establishes demonstration projects for future fuels (diesel
    and jet fuel) as an emission control strategy, and holds States
    harmless for acting pursuant to the emergency waivers under EPACT
    2005's Sec 1541.
        While I very much support this bill, I believe that it is
    absolutely critical that coal-based refineries be included in as part
    of the definition of ``refinery'' in this bill. The definition of
    refinery should be amended to include refineries that can use coal as
    feedstock. There are over 250 billion tons of recoverable coal reserves
    in the United States, which is equivalent to an estimated 800 billion
    barrels of oil. Saudi Arabia has reserves of roughly 260 billion
    barrels of oil. Coal already provides more than half of the Nation's
    electricity and is the largest single source of energy production at
    more than 31 percent of the total. Coal can be converted, through
    proven existing modern technology, into clean, zero sulphur synthetic
    oil and oil products at roughly $35 per barrel compared to $67 per
    barrel of oil.
        Coal liquefaction or coal to liquid refineries can be located
    anywhere that coal is produced. This proven technology can produce
    clean transportation fuels using domestic coal; thereby expanding our
    supply of transportation fuels while decreasing our dependence on
    foreign sources of energy. This includes gasoline, diesel and other
    liquid fuels. The great thing about coal refined diesel fuel is that it
    will now be low in sulphur--it will come out cleaner, enable refiners
    meet their clean-air requirements and help the public lead healthier
    lives.
        Unfortunately, much like oil refineries, there are serious
    impediments to constructing coal to liquid plants. One reason is that
    the front end cost of construction for these plants is very high.
    According to the National Mining Association, capital costs for
    constructing a 10,000 barrel per day plant can range between $600-700
    million. Furthermore, the lead time for a coal refinery, as with most
    refineries is usually a minimum of five to seven years even under the
    best circumstances.
        The existing obstacles to deploying coal to liquid technologies are
    challenging. Like the oil industry, the coal mining industry faces
    numerous permit requirements, permit challenges and repeated appeals.
    As with oil refinery permitting, the delays in this process can drive
    up costs and make constructing coal-based or coal to liquid plants
    economically infeasible.
        That is why I believe that it is imperative to give the same
    incentives and protection for coal to liquid refineries that are
    provided to petroleum refineries under S. 1772. According to the Energy
    Information Agency (EIA), the U.S. now depends on foreign sources of
    petroleum for 56 percent of its needs. The EIA estimates that this
    share will increase to 70 percent by 2025 if nothing changes. With our
    Nation's abundant supply of domestic coal, increasing dependence on
    foreign sources of energy, and our urgent need for reliable and
    affordable supplies of fuel; I believe we should be promoting the
    deployment of coal to liquid refineries. Including coal based and coal
    to liquid refineries in S. 1772 would be positive step in this
    direction.
        Thank You, Mr. Chairman, and I ask that my remarks be included in
    the record.
                                   __________
     Statement of Brian Mannix, Associate Administrator, Office of Policy,
        Economics, and Innovation, U.S. Environmental Protection Agency
                                  introduction
        Thank you, Mr. Chairman and Members of the Committee for the
    invitation to appear here today and provide testimony on S. 1772, the
    Gas Petroleum Refiner Improvement and Community Empowerment Act. I am
    Brian Mannix, the Associate Administrator of the Office of Policy,
    Economics and Innovation at the Environmental Protection Agency (EPA).
    I commend the Committee for proposing steps to address the Nation's
    critical need for additional refining capacity and a sustained fuel
    supply. The issue of refinery permitting is not new. I was at the
    Energy Department during the 1978-79 oil crisis and we tried to address
    it then. While conditions in 2005 are certainly different from those
    that occurred at the end of the 1970s, it is incumbent on us both to
    learn from the past experience as well as to plan for the future.
        I know that you have also heard that more than 100 refineries have
    been closed during the past 25 years. Most of the refineries that
    closed were not economically feasible, and existed to collect a variety
    of government subsidies, mostly associated with oil price and
    allocation regulations, which disappeared in 1981. Since that time,
    overall refining capacity has increased primarily through expansion at
    existing facilities.
        As the events of the last 2 months have helped demonstrate,
    however, the Nation needs to expand and diversify the location of its
    modern refining capacity. The entire country has felt the impact of the
    hurricanes on retail gas prices. Major refineries remain shut down or
    are operating at a reduced capacity in Louisiana and Texas due to
    Hurricanes Katrina and Rita. I believe a streamlined permitting process
    can be part of the solution. We also should make other improvements in
    the operation of our Nation's fuel production and supply system.
        This Administration is committed to ensuring that industry is able
    to produce and distribute gasoline, diesel fuel, jet fuel, and home
    heating oil to consumers while protecting the environment and public
    health. To assist the Senate in its review of these conditions and
    consideration of legislation, I would like to briefly: (1) review the
    Agency's actions with respect fuel supply and distribution issues that
    occurred in response to the recent hurricanes; (2) outline current
    environmental permitting requirements for petroleum refineries; (3)
    highlight some of our most recent regulatory reforms and initiatives
    that are reducing unnecessary burden and streamlining the regulatory
    requirements that affect the fuel sector; and (4) discuss S. 1772, the
    Gas Petroleum Refiner Improvement and Community Empowerment Act.
                    response to hurricanes katrina and rita
        Over the past 2 months, natural disasters in the Gulf region have
    resulted in increased gasoline prices. The damage caused by Hurricanes
    Katrina and Rita disrupted between 13 and 25 percent of the Nation's
    fuel capacity and the recovery of oil production, natural gas
    production and refinery throughput is continuing.
        EPA responded quickly and decisively in addressing the fuel supply
    disruption in the Gulf Region, in conjunction with the Department of
    Energy. In the days immediately following Hurricane Katrina, the
    disruption to the fuel production and distribution infrastructure made
    it necessary to minimize the potential for supply disruption and create
    the greatest flexibility possible for the fuel distribution system.
        Beginning on August 30, 2 days after Hurricane Katrina hit the Gulf
    Coast, EPA issued various temporary waivers that applied to: (1) low
    sulfur diesel fuel requirements; (2) Reid Vapor Pressure (RVP)
    standards for the control of volatility of gasoline during the summer
    months; (3) State gasoline sulfur limits; and (4) reformulated gasoline
    requirements (RFG). To address each fuel supply situation, the waivers
    were issued for various periods of time and have been applicable at the
    national, State or local level. Several waivers are still in effect for
    RFG requirements in the Houston/Dallas Ft. Worth area, for the Texas
    Low-Emission Diesel Program, for RFG requirements applicable to the
    Richmond, Virginia, and St. Louis, Missouri, and certain conventional
    fuel produced in Louisiana. In addition, waiver of low-sulfur diesel
    requirements are continuing in the Petroleum Administration for Defense
    District (PADD) III and certain other PADD I and II states. These
    waivers were granted in response to requests from Governors to address
    fuel supply and distribution issues, and to serve the public interest.
    Whenever we issue such fuel waivers, we address the risk of
    contamination of emission control systems in motor vehicles.
        In addition to our short-term actions, we are working to address
    long-term concerns. To facilitate construction of new refineries to
    meet energy needs, EPA is reviewing the new authority conferred on the
    Agency through title III, subtitle H of the Energy Policy Act of 2005.
    This law authorizes the Administrator to enter into a refinery
    permitting cooperative agreement with a State; to accept a consolidated
    application for all environmental permits required by EPA for a
    refinery; and to enter into a Memorandum of Agreement with other
    Federal Agencies and States to coordinate consideration of refinery
    permits. It also authorizes the EPA to provide financial, technical and
    other assistance to States related to refinery permits.
       s. 1772, the gasoline petroleum refiner improvement and community
                                empowerment act
        I would like to address various provisions of this bill that either
    confer new authority to EPA or involve the Agency's implementation of
    existing statutory authority.
    Title II--Refinery Permitting Process
        We can, and should, take steps to improve the efficiency of our
    permitting process and remove any unnecessary burden and delay.
        In general, domestic refining capacity has increased through steady
    expansion of operations at existing refineries, even as smaller
    refineries have closed. Because most permits are issued by State and
    local authorities, EPA does not routinely track permitting activities
    for refineries and cannot provide precise numbers concerning such
    activity. However, based on information we currently have in technology
    clearinghouses and a recent survey of refinery activities, we estimate
    that approximately 100 permits have been issued to refineries since
    2000. It should be noted that, at this juncture, EPA cannot determine
    how many of these permits were issued for expanded production.
    Approximately 60 of the permit applications in2000-2003 involved
    projects to comply with Tier 2 gasoline requirements and may not
    necessarily involve increased production capacity.
        A broad scope of environmental issues may be present in siting a
    new facility or expanding the capacity of an existing one pursuant to
    the Clean Air Act, the Clean Water Act, the Resource Conservation and
    Recovery Act, the National Environmental Policy Act and other Federal,
    State and local laws. Substantial ``up front'' work is also required
    regarding site and design factors prior to the submission of an
    application for a new refinery. Depending on the complexity of the
    refinery and the siting, the permitting process can take between one
    and 2 years after a complete application is filed. Those seeking to
    construct refineries may also revise their applications after they have
    been submitted. In addition, administrative appeals during the
    permitting process and judicial review can add substantially to the
    time required for final approval.
        As mentioned earlier, under current Federal environmental law and
    regulations, State and local authorities consider and approve most of
    the environmental permits that are required for refineries. States may
    also impose separate or additional requirements on refineries that can
    be more stringent than those required for compliance with Federal law
    and regulations. In addition, State and local decisionmaking with
    respect to refineries and other large industrial and commercial
    facilities can frequently involve land use and other local issues, such
    as conditional use permits, local fire, building and plumbing codes, as
    well as connections to sewer systems and construction approvals.
        With respect to the Committee's review of S. 1772, it may be
    helpful to briefly outline in more detail some of the specific
    requirements applicable to refineries under our Nation's major
    environmental laws.
                            clean air act permitting
        Currently, a number of permitting provisions stemming from the
    Clean Air Act apply to construction of a new refinery or expansion of
    an existing refinery. A New Source Review (NSR) permit must be obtained
    before construction starts. States typically take 12-18 months to issue
    NSR permits for large facilities, although this time period can vary
    significantly and does not include the additional time needed if an
    administrative appeal is filed.
        A Title V ``operating permit'' is also required for a refinery that
    constitutes a major source. This program was added to the Clean Air Act
    in the 1990 amendments to consolidate in a single document all Federal
    and State regulations applicable to the source. It does not create new
    substantive requirements. Once it submits a complete application, the
    facility can operate under an ``application shield'' while the title V
    permit is being processed. States must take final action on the permit
    application within 18 months. If the permit applicant or an interested
    stakeholder disagrees with the permit terms or conditions, they may
    file an administrative appeal or petition. This will add additional
    time to the process, although the facility can continue to operate
    during the appeals process.
        Applicants for a new refinery would also need to comply with other
    Clean Air Act regulations including New Source Performance Standards,
    emission standards for hazardous air pollutants and Compliance
    Assurance Monitoring requirements. Depending on the location of a
    facility, emission ``offsets'' may also be required based on the
    facility's emissions.
        The President's Clear Skies cap and trade approach will give our
    States a powerful, efficient and proven tool for meeting new, health-
    based air quality standards for fine particles and ozone. EPA has
    informed over 500 counties that they either do not meet or that they
    contribute to another county not meeting the new standards. That
    relatively straightforward action has now triggered a complex process
    for the States to develop and implement plans to meet the national
    standards.
        Clear Skies, in conjunction with the Bush administration's new
    rules cutting diesel engine pollution by more than 90 percent and other
    Clean Air Act programs, will bring most counties into attainment with
    the new standards without having to take any new local measures beyond
    the Clear Skies power plant reductions. To the extent Clear Skies can
    provide for attainment of Clean Air Act health-based standards, States
    and local governments will have a lighter burden in putting together
    their local control strategies to attain the National Ambient Air
    Quality Standards (NAAQS). This may result in an ability at the State
    and local level to accommodate new or expanded manufacturing or
    refining activities within plans to meet the NAAQS.
                           clean water act permitting
        As you know, refineries, similar to other facilities, are required
    to obtain a National Pollutant Discharge Elimination System (NPDES)
    permit if they discharge pollutants from a point source into waters of
    the U.S. Similar to our Clean Air Act programs, EPA has authorized
    States to issue permits to most States with a few exceptions. The State
    programs closely mirror the Federal program, but some have additional
    requirements such as public notice and comment periods or technical
    requirements that go beyond the Federal requirements. The Federal
    program does provide a number of permitting flexibilities.
        EPA recently finalized the pretreatment streamlining rule, which
    amends certain provisions of the General Pretreatment Regulations
    regarding oversight of industrial users that discharge to Publically
    Owned Treatment Works (POTWs). The pretreatment streamlining rule will
    reduce the regulatory burden on both indirect industrial dischargers as
    well as POTW Control Authorities without adversely affecting
    environmental protection. It will also allow Control Authorities to
    better focus oversight resources on Industrial Users with the greatest
    potential for affecting POTW operations or the environment. The
    reduction in regulatory burden is applicable to both existing
    Industrial Users and to any new Industrial Users, including any new
    refineries which choose to discharge pollutants to a POTW, rather than
    directly to surface waters via a NPDES permit. One change to the
    regulations specifically benefits refineries and organic chemical
    manufacturers. POTWs are allowed to use concentration-based standards
    rather than calculate mass limits based on a facility's wastewater
    discharge. This amendment will make it easier for POTWs to implement
    the standards and for facilities to monitor their own performance.
        The changes EPA recently adopted also provide another type of
    flexibility to POTWs by authorizing them to use general permits instead
    of an individual permit in certain circumstances. General permits cover
    multiple facilities within a specific category. This type of permit
    provides a cost-effective option for permitting agencies because of the
    large number of facilities that can be covered under a single permit.
    For example, a large number of facilities that have certain elements in
    common may be covered under a general permit without expending the time
    and money necessary to issue an individual permit to each of these
    facilities. In addition, using a general permit ensures consistency of
    permit conditions for specific facilities.
            resource conservation and recovery act (rcra) permitting
        Regulated entities that generate hazardous waste are subject to
    waste accumulation, manifesting, and record-keeping standards.
    Facilities that treat, store, or dispose of hazardous waste must obtain
    a permit either from EPA or, more likely from a State agency that EPA
    has authorized to implement the permitting program. States may have
    more stringent requirements than the Federal RCRA program.
        It has been the EPA's experience that more recent petroleum
    refineries generally are designed to only store materials in secure
    containers and tanks for less than 90 days, so that they are most often
    classified as generators only, and thus are not subject to RCRA
    permitting. However, a few petroleum refineries do have RCRA permits
    and in circumstances where a refinery expansion results in a change in
    hazardous waste management, a permit modification may be required. The
    modification process depends on the significance of the modification
    and obtaining a permit could take 1-2 years, depending on complexity. A
    temporary authorization (to start constructing the changes while
    awaiting the modification approval) may be allowable in certain
    circumstances.
        The Agency has already taken steps to streamline the RCRA
    permitting process. Specifically, in September, EPA issued the RCRA
    standardized permit rule, which allows certain waste facilities to
    submit an abbreviated permit application. These newly streamlined
    permitting requirements result in a shorter permitting time line and
    shorter time lines for any subsequent permit modifications. It is
    estimated that the standardized permitting process will save the States
    and industry more than three million dollars a year.
        Finally, the Agency continues to promote innovative ways waste can
    be used to supplement the Nation's energy supplies. EPA currently
    excludes specific industrial wastes, known as comparable fuels, from
    the hazardous waste management requirements of RCRA when they are used
    for energy production and do not contain hazardous constituent levels
    that exceed those found in a typical benchmark fuel used by facilities.
    This type of waste utilization saves energy by reducing the amount of
    hazardous waste that would otherwise be treated and disposed. EPA is
    examining the effectiveness of the current RCRA comparable fuel program
    and considering whether other industrial wastes could be safely used as
    well.
    Title III--Efficiency
        Now I would like to briefly discuss Title III, Efficiency. These
    provisions concern utilizing EPA's Natural Gas STAR program as a grant
    vehicle for entities seeking to reduce methane emissions in the oil and
    gas industries, and direct EPA to organize workshops on methane
    emission reduction techniques. The Natural Gas STAR Program is a
    voluntary partnership that encourages companies to adopt cost-effective
    technologies and practices that improve operational efficiency and
    reduce emissions of methane. EPA managers and program staff are
    currently assessing this provision of the bill, including its effect on
    current program resources.
    Title IV--Fuel Emergency Waivers and Boutique Fuel Requirements
        Section 401 of this title provides a ``hold harmless'' provision
    for States for emissions resulting from waivers granted by EPA under
    the new fuel emergency waiver provisions contained in the Energy Policy
    Act of 2005.
        To date, EPA believes that its exercise of the new waiver authority
    contained in section 1541 of the Energy Policy Act of 2005 has not
    resulted in excessive emissions. For example, on August 30, EPA issued
    waivers of Federal RVP standards effectively allowing the early sale of
    ``wintertime gasoline.'' Since the sale of ``summertime'' RVP-
    controlled gasoline ends in most parts of the country on September 15,
    as an initial matter, the Agency does not believe that any increased
    emissions resulting from the waiver for the 2-week period prior to
    September 15 were substantial. In addition, EPA would note that the
    letter informing States and other parties that the waiver had been
    granted provided that, to the extent practicable, those involved in the
    fuel distribution system take all reasonable steps to distribute and
    sell on-hand inventories of compliant fuel. The Agency, however, will
    continue to review this matter as conditions justifying the granting of
    fuel waivers continue to exist.
        Section 402 of S. 1772 amends section 211(c)(4)(C)(vii) of the
    Clean Air Act. This provision was also part of the recently enacted
    Energy Policy Act of 2005. This provision requires the EPA to remove a
    fuel from the list of fuels that are otherwise approvable as part of a
    State Implementation Plan (SIP) if such a fuel ceases to be included in
    a SIP or is identical to a Federal fuel formulation implemented by EPA.
        In general, section 211 of the Clean Air Act authorizes EPA, under
    certain conditions, to approve individual State fuels as part of a
    State Implementation Plan. While such individual State fuels, often
    known as ``boutique fuels'' normally do not strain the fuel production
    and distribution system, the variation in State and local fuel
    requirements can make it more difficult to address gasoline supply
    shortages in times of disruption, such as occurred with the recent
    hurricanes.
        Roughly 15 States have adopted their own clean fuel programs--
    typically requiring fuels to be sold within the State or within certain
    areas in the State, to have a lower seasonal volatility than Federal
    standards. As noted in a Staff White Paper produced by EPA in 2001, we
    believe that constraining the number of boutique fuels could
    potentially be beneficial in terms of improving fuel distribution and
    fungibility. However, such action should be done in a careful manner in
    order to ensure that environmental benefits of clean fuels are
    maintained and any unintended negative impacts on fuel supply are
    avoided.
    Title V--Future Fuels
        This provision requires the EPA to conduct a research and
    demonstration program to evaluate the air quality benefits of Fischer-
    Tropsch transportation fuel and authorizes loan guarantees for domestic
    foal and petroleum coke-based Fischer-Tropsch commercial demonstration
    projects. We are currently evaluating this provision and its impact on
    the Agency's overall resources. A similar provision, including
    authorizations for the Department of Energy, was also part of the
    recently enacted Energy Policy Act of 2005.
                                   conclusion
        We believe S. 1772 takes several important steps in the right
    direction by including provisions to streamline refinery permitting
    requirements and expand refinery capacity in the U.S. This provides a
    mechanism to reduce the proliferation of State fuel requirements where
    such fuels are no longer utilized or duplicative of Federal standards,
    addressing the potential consequences of fuel waivers on State SIP
    compliance, among other provisions. We look forward to working with the
    Committee and its Members as it continues to consider this legislation
    and provide the Committee with any needed technical assistance.
        Thank you for the opportunity to appear before you today. I would
    be happy to answer any questions that you may have.
                                     ______

    Responses by Brian Mannix to Additional Questions from Senator Jeffords
        Question 1. Earlier this year, Congress passed provisions of the
    Energy bill that provide streamlined permitting procedures for
    refineries. These provisions are similar to those that are before us
    today, yet they would not create any conflicts with existing
    environmental laws. As you note in your testimony, EPA is reviewing its
    new authority under the law. What is EPA doing to implement these
    provisions? Is there any factual record that shows that we should
    change these provisions less than 3 months after they were passed? Has
    anyone even sought to use them yet?
        Response. The Energy Policy Act of 2005 made substantial changes to
    existing law regarding the production and regulation of fuels including
    removal of the oxygenate mandate in the reformulated gasoline (RFG)
    program and enactment of a renewable fuels standard (RFS). Following
    enactment of the legislation on August 8 of this year, EPA undertook to
    review the final statutory provisions contained in the conference
    report to accompany the legislation. The Agency then began a process to
    assess how the new law can be implemented across the range of current
    programs and responsibilities. The review of title III, subtitle H
    concerning refinery revitalization is part of this overall process, and
    is not yet complete.
        With respect to your question concerning whether anyone has sought
    to utilize this new law, as you know, subtitle H indicates that ``at
    the request of a Governor of a State, the Administrator may enter into
    a refinery permitting cooperative agreement.'' To date, EPA has not
    entered into such an agreement with a State. With respect to your
    question concerning whether the existing law should be changed, the
    Agency favors steps to improve the refinery permitting process.

        Question 2. EPA Assistant Administrator Jeffrey Holmstead testified
    in 2004 that the cost of reformulated gasoline was approximately 4-8
    cents per gallon more than conventional gasoline. Reformulated gasoline
    is one of the most expensive of the so-called ``boutique fuels.'' Mr.
    Holmstead noted that the primary component of the cost of gasoline was
    the price of crude oil. He stated: ``We believe that environmental
    regulations have had a minimal effect on gasoline prices.'' Do you have
    any evidence that EPA Assistant Administrator Holmstead's testimony was
    not accurate?
        Response. No. Assistant Administrator Holmstead's testimony is
    every bit as applicable and accurate today as it was in 2004. We did
    not see any evidence that the recent run up in gasoline prices was
    caused by environmental regulations. Current industry data continues to
    show that crude oil prices remain the single largest contributor to the
    overall fuel price. Refining margins, which include all components of
    refining costs, are about a quarter of the overall price of gasoline.
    Environmental requirements are a fraction of this refining factor.
    Additionally, distribution costs, a minor component, include a very
    small portion for environmental requirements.

        Question 3. In your written testimony you note, EPA waived both
    sulfur and volatility controls for fuel in the wake of the Hurricane
    Katrina. There have been national, regional, State and local waivers
    for various periods of time and some are still in effect. We have had
    very high gasoline prices as a result of Katrina. In light of the
    waivers, which temporarily eliminated fuels requirements, did
    environmental requirements contribute to increased gas prices resulting
    from the Katrina Hurricane? If they did, please explain how, since the
    EPA requirements were waived?
        Response. We do not believe environmental requirements were a
    contributing factor in gasoline price increases associated with
    Hurricanes Katrina or Rita. These extraordinary natural disasters in
    the Gulf of Mexico damaged refineries and pipelines that supply much of
    the Nation. The purpose of the waivers was to quickly address the
    impacts of the disaster on fuel supplies. In the days immediately
    following Hurricane Katrina, the disruption to the fuel production and
    distribution infrastructure made it necessary to minimize the potential
    for supply disruption and create the greatest flexibility possible for
    the fuel distribution system to respond to this disaster. The waivers
    we issued were all designed to address supply issues. Fuel prices were
    not taken into consideration in our deliberations. Additionally, during
    this period similar increases in higher gasoline prices could be
    observed in areas that received waivers and areas that did not.

        Question 4. In 2000, the EPA Administrator testified before the
    House Government Reform Committee providing precise information on
    refinery permit application and the processing time for permits for
    expansions at existing refineries. She indicated that between 1999-
    2000, there were 12 permits issued within that 2-year period. Half of
    the 12 permits were issued within 5 months and the other half within
    one year. You mention in your testimony that permitting can take 1-2
    years after a complete permit application is issued. Is that figure
    based on actual permitting times since 2000 or is it an estimate? Does
    EPA have any specific updated information regarding the actual time to
    process expansion permits at refineries? Why, in EPA's testimony before
    the Senate Environment and Public Works Committee on Oct. 18, 2005, was
    EPA unable to provide similar information? Why was EPA able to
    distinguish between permits for new facilities versus permits for
    expansion of existing facilities in 2000 but not in 2005?
        Response. My testimony citing the time it took to get a refinery
    permit as being 1 to 2 years was an estimate based on EPA and State
    experience for permits for other types of new facilities--facilities
    that are large and complex. We do not have data on permits for new
    refineries because only one has been issued in the past 25 years.
    Nonetheless, we expect 1 to 2 years, after a complete application is
    filed, to be a good estimate for permitting new refineries.
        The figures you cite from previous testimony are for issuing
    permits at existing refineries. These estimates--and it is most
    appropriate to call them estimates--are generally made by relying on
    data voluntarily provided by the States that actually do the refinery
    permitting. We recently reviewed these data, and do not see significant
    overall differences in the permitting time lines for existing
    facilities as compared to 2000. However, it is important to note that
    these data are not limited to refinery ``expansions'' and may consist
    of projects for other purposes, such as complying with Tier 2 fuel
    requirements. The data also include projects that do not trigger the
    ``major modification'' provisions of New Source Review and, as such,
    are subject to State ``minor NSR'' permitting, which can often be
    accomplished faster.
        To the best of my knowledge, EPA and States can distinguish new
    refinery permits from existing refinery permits. As I noted, there has
    been only one new refinery permit in the last 25 years.

        Question 5. In 2000, EPA testified before the House Government
    Reform Committee providing precise information on refinery permit
    applications. EPA testified that it received one permit application for
    a new refinery in 25 years and that between 1999 and 2000 EPA received
    12 applications for expansion of existing facilities.
        Response. [None.]

        Question 6. EPA testified in 2000 that most permit applications
    were resolved within 12 months and about half of them were acted upon
    within 5 months. EPA testified in Oct. 18, 2005 that the permitting
    process can take between 1 and 2 years to complete. Are you testifying
    that under the Bush administration the time to review a refinery permit
    has more than doubled? Why was EPA able to review permits quicker under
    the previous Administration than under the current Administration?
        Response. As noted in the answer to Question 4, the available data
    we have from States do not indicate any significant change in
    permitting time for permits at existing refineries between 2000 and
    2005. It is important to recognize the difference between permitting
    for new and existing refineries. As stated in my testimony, the 1- to
    2-year figure is referring to new (also referred to as ``greenfield'')
    refineries. The 2000 testimony was based on data related to existing
    refineries. There has only been one permit issued for a new refinery in
    more than 25 years, and that was issued in 2005. Thus, the 2000
    testimony did not address the 1- to 2-year timeframe for new
    refineries.
        It is also important to clarify that it is States, not EPA, who
    process air permit applications (except in some very rare instances
    where EPA is the permitting authority). These data refer to State
    review times, not, as the question suggests, EPA review times.
        Finally, note that both 2000 and 2005 testimony refer to the
    permitting time frames for New Source Review (NSR) permits. A Title V
    ``operating permit'' is also required for a refinery that constitutes a
    major source. States must take final action on an operating permit
    application within 18 months. If the permit applicant or an interested
    stakeholder disagrees with the permit terms or conditions, they may
    file an administrative appeal or petition. This will add additional
    time to the process, although the facility can continue to operate
    during the appeals process.

        Question 7. How many permit applications for new refineries did EPA
    receive between FY 2001-FY 2005?
        Response. EPA does not generally receive permit applications for
    refineries; State and local permitting agencies receive them. As noted
    in the answer to question 4 above, EPA occasionally receives data from
    the States concerning their permitting activities. We are aware of only
    one permit application for a new refinery: a major new refinery with a
    production capacity of 150,000 barrels per day of motor fuels
    (including gasoline, diesel fuel, and jet fuel), in the State of
    Arizona. This project received its major NSR construction permit
    earlier this year.
        We are also aware of a much smaller refinery being proposed by
    three affiliated tribes (the Mandan, Hidatsa, and Arikara Nation) on
    the Fort Berthold Indian Reservation in North Dakota. This proposed
    facility would produce gasoline, diesel fuel, and propane. Reportedly,
    the facility will not need to obtain a major NSR permit to construct
    this project. As such we have not received a permit application.

        Question 8. How many permit applications for refinery expansions
    did EPA receive between FY 2001-FY 2005?
        Response. As stated previously, EPA does not usually receive permit
    applications--States and local governments are generally the entity
    that issues permits of this type. However, we have some data from
    States concerning refinery applications that they have received in
    recent years. Unfortunately, it is nearly impossible to distinguish
    which of these projects should be classified as ``refinery expansions''
    because the permitting data generally cover permits for any project at
    a refinery, including changes to comply with environmental
    requirements, efficiency improvements, production increases, new
    equipment installations, etc., and often combinations of these. From
    these data, we can, however, estimate that there have been
    approximately 100 major and minor NSR air pollution permits issued to
    existing since September 2000.

        Question 9. Since FY 2001, how many of these permit applications
    took longer than 12 months to review? How many of these permit
    applications took less than 12 months to review. Please distinguish
    between new permits and expansion of existing refineries.
        Response. For the one new refinery, our best estimate from the data
    supplied by Arizona Department of Environmental Quality is that it took
    approximately nine months from the date of receipt of a complete
    application for the final air permit to be issued. However, it took
    more than three years of communication between the company and the
    State to reach the point where the company had supplied sufficient
    information for the application to be deemed complete. This process,
    while lengthy, allowed the application to be processed more efficiently
    once it was deemed complete.
        For existing refineries, our limited data suggest that it is not
    uncommon for it to take longer than 1 year for States to issue the
    permits. However, without a significant additional data collection
    effort, it is difficult for EPA to make an accurate assessment of the
    number or frequency of permit issuances from the States that exceed 12
    months. In many instances, we simply have not received permit time line
    data from States. To ensure data quality, we would need to follow up to
    determine if the time line data we received are consistently measured.
    Furthermore, there are other factors that should be controlled for,
    such as where States upgrade and reissue a facility's entire permit in
    conjunction with the expansion application. Also, as noted, not all of
    these permits are for refinery expansion projects.
        Finally, it is important to note that these permit processing times
    generally do not include administrative appeals during the permitting
    process and judicial review, which can add substantially to the time
    required for final approval.

        Question 10. You testified that most refineries are typically
    classified as generators under the Resource Conservation and Recovery
    Act since they generally send their wastes off site for disposal and
    therefore do not need a RCRA permit. Where refineries do require a RCRA
    permit, you testified that EPA provides temporary authorization. How
    many refinery permit applications in since FY 2001 have required a RCRA
    permit and how many of these were provided temporary authorization?
        Response. We are not currently aware of any RCRA applications for
    new refineries or permit modifications since FY 2001; however, EPA is
    performing a data run to verify this conclusion. Since most States are
    delegated the authority to operate the RCRA program, States are
    primarily responsible for granting permit modifications or new permits.

        Question 11. You testified that in September EPA issued a RCRA
    standardized permit that will save time and money. How much time and
    money does EPA estimate the RCRA standardized permit will save?
    Considering this RCRA permit streamlining has already been done, what
    greater efficiencies will S. 1772 provide in the RCRA permitting
    process? What authorities does S. 1772 provide to streamline the RCRA
    permitting process that EPA doesn't already have?
        Response. EPA estimates that the annual cost savings for
    standardized permit actions per new permit action to be $29,638. The
    estimated annual savings for permit renewals is $5,915, and the
    estimated annual savings for permit modifications was $15,229. More
    generally, the overall per facility annual savings is estimated to be
    between $2,478 and $4,023 annually, assuming the final rule is adopted
    by all States, based on burden reduction benefits of between $2.8 to
    $3.5 million for between 870 and 1,130 hazardous waste management
    facilities. Burden hour savings for hazardous waste facilities are
    estimated are estimated to be between 13,700 and 16,700 hours per year,
    based on between 166 and 202 permit-related actions per year. Without
    accounting for the prevalence of the type of facility activity (tank,
    container storage, containment building), the burden hour savings
    averages approximately 83 hours per facility. However, States may be
    more stringent than the Federal program in which case some States may
    not adopt the final rule. S. 1772 does not change the base RCRA
    permitting requirements, but allows for such efficiencies as
    consolidation, and for permitting by EPA. These efficiencies go beyond
    those EPA promulgated in the RCRA standardized permit rule.

        Question 12. EPA currently excludes specific industrial wastes,
    known as comparable fuels, from RCRA requirements when used for energy
    production. Since EPA provided this RCRA exclusion, how much hazardous
    waste is being diverted for energy generation? How much time and money
    does EPA estimate this has saved companies?
        Response. According to a 2003 survey by the American Chemistry
    Council, 26 million lb/per year of comparable fuel is currently
    excluded from hazardous waste management under the comparable fuels
    rule. Based on BTU content, this is equivalent to 2.1 million gallons/
    per year of No. 2 fuel oil.

        Question 13. What is the current budget for the Natural Gas Energy
    Star Program? If appropriated the authorized levels in S. 1772, how
    much more money would the Natural Gas Energy Star Program be provided?
    How would this money be used?
        Response. The budget for EPA's Natural Gas STAR Program is $4
    million in FY 2006. If appropriated at the authorized levels, S. 1772
    (title III, sec. 301) provides an additional $2,000,000 for the period
    of fiscal years 2006 through 2010. As outlined in Sec. 301, $1,000,000
    would be dedicated to an EPA grant program to facilitate methane
    emission reduction projects in the oil and natural gas industries. Each
    grant can not exceed $50,000 and the Federal cost share can not exceed
    50 percent. The remaining $1,000,000 would be used to support a series
    of technical workshops, conducted in association with the Interstate
    Oil and Gas Compact Commission, to provide information to officials in
    oil and gas producing States on methane emission reduction technologies
    and management practices.

        Question 14. EPA's Heavy Duty Engine rule, which sets both fuel and
    engine standards for heavy duty engines, is one of the most important
    initiatives under the Clean Air Act for reducing emissions that are
    harmful to public health. Under that rule, sulfur will be reduced to 15
    ppm between 2006 and 2009. Significant lead time is provided in the
    rule for the introduction of new cleaner fuel into the marketplace so
    that engine manufacturers can develop and market vehicles that meet the
    new standards using the Ultra Low Sulfur Fuel (ULSD). Engine
    manufacturers have flexibility to meet the new standards through a
    phase-in approach between 2007 and 2010. Many engine manufacturers are
    already producing vehicles designed to operate using the new fuel.
    Ensuring the availability of ULSD fuel (15PPM NTE) is critical to
    achievement of the Nation's air quality goals. This fuel is due to be
    at the retail pumps in September 2006. Does EPA fully commit to adhere
    to its own regulatory schedule for the availability of ULSD in 2006 and
    beyond?
        Response. Implementation of the Clean Diesel rules, which includes
    the ULSD requirements, is a priority. Based on the current information
    we have received from the fuels industry, there is no need to make any
    changes to the program. Any identified impacts associated with the
    hurricanes can be dealt with on a refinery-by-refinery basis through
    our existing regulatory provisions without negatively impacting the
    overall implementation of the program.
        Also on May 27, 2005, EPA announced that it would be seeking a 45-
    day extension to allow more time for terminals and retail outlets to
    comply with the 15 ppm USLD standard. This allows the fuel distribution
    system to successfully complete the transition to ULSD prior to the
    introduction of the new clean diesel engines and vehicles. We expect to
    announce this rulemaking soon. To be clear, however, it does not change
    the June 1, 2006 deadline for refiners to begin producing ULSD.
                                     ______

            Response by Brian Mannix to an Additional Question from
                               Senator Voinovich
        Question. As part of the Bush administration's suite of clean
    diesel rules, there will be a new requirement for ultra-low sulfur
    diesel (ULSD) fuel (diesel fuel containing no more than 15 parts per
    million sulfur) to be used for on highway diesel purposes. EPA recently
    announced that it will seek a 45-day delay of the requirement for the
    introduction of ULSD--pushing the ULSD requirement from September 1,
    2006 to October 15, 2006. EPA's on highway diesel rule is a systems
    approach to emissions controls. It requires new engine technologies,
    which in turn require the use of ULSD. Both parts of the system are
    essential to the success of the rule. This rule will result in an
    overall 90 percent reduction in diesel engine emissions from 2004
    levels. Furthermore, ULSD is essential to the success of the Diesel
    Emissions Reduction Act. According to EPA, the Diesel Emissions
    Reduction Act would leverage existing funding, and could result in a
    reduction of approximately 70,000 tons of PM over 30 years in a highly
    cost-effective manner.
        Does EPA and the Bush administration share my view that no
    legislation or administrative action should: (a) alter or delay the 15
    parts per million sulfur standard for on highway diesel fuel; or (b)
    push the deadline for ULSD beyond October 15, 2006?
        Response. Yes, EPA shares your view that no additional legislative
    or administrative actions beyond those already identified and discussed
    are necessary. The successful and timely implementation of the Clean
    Diesel rules, which includes the ULSD requirements, is a priority. This
    program will provide significant air quality benefits to the new engine
    and vehicle fleet as well as the existing diesel fleet. Based on the
    current information we have received from the fuels industry, there is
    no need to make any changes to the program.
        Also on May 27, 2005, EPA announced that it would be seeking a 45-
    day extension to allow more time for terminals and retail outlets to
    comply with the 15 ppm USLD standard. This allows the fuel distribution
    system to successfully complete the transition to ULSD prior to the
    introduction of the new clean diesel engines and vehicles. We expect to
    announce this rulemaking soon. To be clear, however, it does not change
    the June 1, 2006 deadline for refiners to begin producing ULSD.
                                     ______

     Responses by Brian Mannix to Additional Questions from Senator Warner
        Question 1. In title II of S. 1772 the term ``substantially
    similar'' is used. In your opinion does the definition of this term
    differ from ``substantially equivalent'' when considering environmental
    health and welfare? Is ``substantially similar'' equally protective of
    public health and the environment?
        Response. Based upon EPA's initial review, the ``substantially
    similar'' language goes to permit issuance procedures, as opposed to
    the stringency of any substantive requirements codified in the permit.
    In that context, there would be no practical difference between the
    phrases ``substantially similar'' and ``substantially equivalent'' with
    respect to human health and welfare, since both would be referring to
    process and not substance. Assuming, notwithstanding the bill's savings
    clause, Congress's intent is that EPA can rely on State permitting
    procedures provided that they result in a ``substantially similar''
    Federal permit, i.e., a permit that is as environmentally protective or
    stringent as a Federal permit, there still might not be a difference
    between the phrases ``substantially similar'' and ``substantially
    equivalent.'' Under many Clean Air Act programs, including NSR and
    Title V permitting, a State program can receive EPA authorization only
    if it is at least as stringent as the corresponding Federal base
    program. In these situations, following either the State or Federal
    permitting process would be protective of human health and the
    environment.

        Question 2. The Federal Government has substantial experience in
    the granting of loan guarantees. To your knowledge, has the EPA ever
    been involved in these types of projects?
        Response. EPA does not have any loan guarantee programs.
                                   __________
            Statement of Hon. Shawn Mitchell, Colorado State Senator
        Thank you Chairman Inhofe and Senator Jeffords for providing the
    State of Colorado with the opportunity to testify on the Gas PRICE Act
    today.
        My State strongly supports this legislation and we hope that the
    committee and the full Senate will pass the bill to provide incentives
    to States to expand existing and permit new refinery capacity in a
    fashion that would protect the environment while simplifying the
    permitting process to prevent delays for necessary projects.
        This issue before us today is one we've been grappling with for
    some time, as you noted in your hearing back in 2004. It is ever so
    more important now given the vulnerabilities exposed by Hurricane
    Katrina and the shortsightedness in essentially restricting the
    majority of the Nation's refinery capacity to the Gulf Coast region. I
    understand that 47 percent of our refining capacity and 28 percent of
    our oil production is concentrated in the Gulf Region and when
    Hurricane Katrina hit, we experienced significant price increases
    because of reduced supply. We're speaking in terms of a matter of days,
    though there is surely a long-term impact that I will touch on.
        Obviously, any incentive that can be provided to increase refinery
    capacity will benefit the country as a whole. Colorado's support for
    your legislation, Mr. Chairman, is based upon the incentives it would
    provide for States to expand capacity.
        The Gas PRICE Act provides incentives through the Economic
    Development Administration to those parts of the country that are
    impacted by the Base Closure and Realignment Commission (BRAC)
    designations. While my State was not negatively impacted by the most
    recent BRAC process, we have had military facilities in Colorado that
    were closed in the past and I we know from experience those impacts can
    be difficult to overcome.
        Fortunately, in Colorado we have managed to deal with base closures
    in a fashion that has resulted in economic development. For example,
    the former Lowry Air Force Base in Denver has been cleaned up and
    returned to productive civilian use as a residential neighborhood. We
    were blessed in that case that Lowry is close to the metropolitan area
    and redevelopment made sense economically. That's a success story.
        The same is true of Fitzsimmons Army Medical Center also in Denver.
    That site has been redeveloped and is now home to the University of
    Colorado Health Sciences Center and soon to be home to Children's
    Hospital. This redevelopment and transition also made sense for the
    State.
        However, I am certain there are circumstances around the country
    where the options Colorado had with respect to redevelopment of BRAC
    sites may not exist. Further enhancing the ability of the Economic
    Development Administration to address these kinds of circumstances
    while also addressing the Nation's need for additional refining
    capacity makes absolute sense.
        This bill addresses that issue directly by providing incentives for
    American communities to consider the construction of new refineries to
    expand our nationwide capacity while taking advantage of existing
    infrastructure and preserving and creating jobs. It is the very
    definition of a Win-Win.
        The legislation does not mandate any action on States, but merely
    provides additional incentives should they determine that is an
    appropriate use of the resource.
        The Gas PRICE Act provides flexibility that States can choose to
    exercise in environmental permitting by entering into a refinery
    permitting agreement.
        It's important to remember that this provision only applies to
    those States or tribes that choose to participate.
        No State or tribe will be forced to participate and there is no
    usurpation of the concepts behind any of the Federal environmental laws
    that States or tribes are delegated to enforce. In short, there is
    simply no credible argument that can be made in claiming this proposal
    would abuse State or tribal authorities as they currently exist.
        In fact, in Colorado, the State, Federal and tribal authorities
    have developed an excellent working relationship that has led to
    groundbreaking cooperation. For example, in southwest Colorado the
    three governmental entities have developed an air permitting program
    that places the Southern Ute tribe in charge of permitting on fee land
    within the tribal boundaries, ending a dispute over the question of who
    has authority on fee lands within tribal boundaries.
        What this bill does is provide Governors and tribal leaders the
    authority to combine the permitting requirements for all of the
    different medias into one permit that must be issued under a prescribed
    time frame.
        This is hardly a new concept in Colorado. In 2003, the Colorado
    State Legislature passed legislation providing the governor with the
    authority to consolidate different environmental permits into a single
    permit. The idea behind this concept is twofold.
        First, we believe that a single process ensures that there is one
    timeline for issuance of a permit. Timelines for different permits can
    be for a single project are often prolonged because, for example, an
    air division may have a different method for handling evaluation for
    permits applications than say a water division. The idea is that one
    permit merging different requirements will benefit the applicant by
    applying one process.
        Second, multi-media permitting is good for the environment.
    Colorado is currently piloting a multi-media performance based permit
    because we believe that eventually we will have to move to this kind of
    permit to continue making environmental improvement. Mr. Chairman, your
    proposal captures that concept and will not only provide needed relief
    from administrative burdens, but will also provide a better way to
    enhance environmental quality.
        The purpose of a multi-media permit is to identify where the net
    gains for the environment are and work expeditiously toward achieving
    those gains. For example, wet scrubbers are better for controlling
    sulfur dioxide and, therefore, when seeking SO2 reductions,
    you would immediately think to install a wet scrubber, which, as you
    probably know, requires a lot of water to operate. In Colorado we don't
    view the tradeoff between additional marginal SO2 controls
    to be worth the use of water it takes to operate a wet scrubber. In
    other words, not putting on a wet scrubber would be better for
    Colorado's environment because it would conserve water.
        Importantly, this legislation would force environmental agencies to
    take into account the net impacts to the environment to permitting a
    refinery by consolidating the permitting process.
        Another positive aspect of your proposal, Mr. Chairman, is the
    timeline associated with either construction of a new facility or
    expansion of an existing facility. My experience has been that hard
    timelines tend to focus attention on what is important and these
    statutory timelines would certainly focus the attention not only of
    State regulators but also of EPA regulators who are charged with
    reviewing permits on facilities.
        A definite endpoint to a permitting process is good for an agency
    as well as for a permittee.
        The end result of this process would be a permit that would be
    issued sooner and would provide better environmental results with less
    administrative burden historically associated with permitting
    processes.
        In fact, my State believes that a multi-media approach to
    permitting is so beneficial we are working with the refinery in the
    Denver Metro Area on a similar approach. Obviously, the State's
    foremost concern is for protecting our environment. However, we also
    believe that efficiencies can be gained for the refinery through this
    approach, and certainly for the State, as well. A single timeline and
    the ability to issue on consolidated permit will ensure that permitting
    will not be a hindrance should a State decide to attract new
    refineries.
        In short, we are putting our money where our mouth is with respect
    to this legislation, and believe that it would provide a key benefit to
    both the environment and to permittees.
        Finally, Colorado strongly supports the hold harmless provision on
    States for acting pursuant to the grant of an emergency waiver. In
    Colorado, waivers have been granted and both the State and EPA have
    collaborated so that they are issued in an appropriate and responsible
    manner.
        EPA has issued several emergency waivers, and, if those waivers
    result in an air quality problem, States should not be penalized under
    the Clean Air Act. I think that's just common sense.
        In conclusion, I would like to thank the committee for seeking our
    views and participation, and I would like to thank Chairman Inhofe for
    his leadership on this issue.
        While there are many promising technologies that may serve to
    replace fossil fuels in the future, it does appear as if the Nation
    will be relying upon them to some degree into the future. Because
    that's the case, we need to have sufficient capacity in our country to
    ensure that a disaster like Katrina doesn't have the same detrimental
    impact on our economy that Katrina had.
                                     ______

         Responses by Hon. Shawn Mitchell to Additional Questions from
                                 Senator Warner
        Question 1. Refinery Capacity.--We all know that the supply of
    crude, refinery capacity, and the transportation network are the three
    major variable costs associated with prices at the pump. How
    specifically will increased refinery capacity bring down the price
    consumers pay for a gallon of gasoline?
        Response. I am responding to those questions which relate to the
    areas surrounding my testimony. I will defer to other witnesses on the
    more technical questions.

        Question 2. Refinery Capacity.--Is the United States total refinery
    capacity truly a driver of gasoline cost by itself or is it events such
    as Hurricane Katrina that shut in many refineries that have the largest
    effect on price volatility?
        Response. I am responding to those questions which relate to the
    areas surrounding my testimony. I will defer to other witnesses on the
    more technical questions.

        Question 3. Refinery Capacity.--What is preventing refineries from
    being built or expanded today; cost; bureaucracy of local, State, and
    Federal permits; environmental regulations?
        Response. As other testimony at the hearing commented upon, there
    are numerous issues that go into a companies determination on whether
    to expand an existing or build a new refinery. However, our experience
    in Colorado, with all industries, is that the ability to obtain a
    permit in a finite timeline is a factor in their decision to build or
    expand. Further, the ability to combine requirements among different
    environmental media programs will provide efficiencies for permitting
    authorities as well as permit applicants that will provide incentives
    to companies who would like to expand or build a refinery. For those
    States that choose to opt into this program there will be a reduced
    cost to permit applicants through a process that is quicker and on a
    timeline that is predictable.
        In Colorado we have used both processes in order to provide
    incentives to business to locate in Colorado. Further, we have found
    that a multi-media permitting process as envisioned in S. 1772 can
    provide additional environmental protections while also making the
    process more convenient for the applicant. For example, if an industry
    in considering locating in Colorado they will often meet with the State
    Health Department about permitting issues and general timeframes will
    be agreed so that any uncertainty about permitting can be eliminated.
    Also, our pilot multi-media permitting program considers the total
    environmental impact of an industry and ensures that the permitting
    process doesn't merely drive pollution from one media into another.
    This allows those participating companies to know that they are
    spending money on environmental protection and improvement and not on
    process. Further, it allows for efficiencies in permitting between
    different government programs so that requirements are not duplicative.
        Taken as a whole the State of Colorado believes that whatever cost
    associated with permitting or environmental regulation can be
    ameliorated by the provisions of S. 1772 so that timelines and
    environmental requirements are minimized so that they are not
    determinative on whether a business will expand or build.

        Question 4. Fischer-Tropsch technology (converting coal to liquid
    fuel).--Given the long history of Fischer-Tropsch technology and the
    decades of Federal R&D investment, what is holding back the development
    of commercial F-T facilities in the United States?
        Response. I am responding to those questions which relate to the
    areas surrounding my testimony. I will defer to other witnesses on the
    more technical questions.

        Question 5. Fischer-Tropsch technology (converting coal to liquid
    fuel).--Would long-term contracts with price floors for F-T fuel
    provide substantial guarantees for companies to invest in the
    construction of a facility?
        Response. I am responding to those questions which relate to the
    areas surrounding my testimony. I will defer to other witnesses on the
    more technical questions.
        Question 6. Fischer-Tropsch technology (converting coal to liquid
    fuel).--What affect on national or worldwide demand might the existence
    of one or two F-T facilities that produce 100,000 barrels of fuel per
    day? How might that affect prices? Would price effects be more regional
    than national?
        Response. I am responding to those questions which relate to the
    areas surrounding my testimony. I will defer to other witnesses on the
    more technical questions.

        Question 7. Fischer-Tropsch technology (converting coal to liquid
    fuel).--What other benefits would F-T fuels have for the Nation/world?
        Response. I am responding to those questions which relate to the
    areas surrounding my testimony. I will defer to other witnesses on the
    more technical questions.

        Question 8. Boutique Fuels.--Many free market thinkers have argued
    that the expansion of the number of boutique fuels has been a
    contributing factor to rising prices. In addition, it is believed by
    some that a ratchet down of the number of boutique fuels would bring
    down gas prices without any adverse effect on the environment. Would
    you comment on this theory and whether or not limiting the number of
    boutique fuels would also limit a State's options to comply with
    Federal environmental laws?
        Response. Boutique fuels are often required by an area of the
    county that is much smaller than the area being supplied by the fuel
    provider(s). This requires the fuel supplier to create special blends
    that can only be distributed to limited regions or subregions of the
    county. The requirement to use specialized fuel blends in limited parts
    of the county creates additional handling and storage challenges that
    can translate into additional costs to the consumer. Also, the
    specialized blends require the blender or refiner to either add or
    remove some fraction of the fuel that must go to or come from come from
    another market to be utilized in some fashion. Therefore, if a fuel
    component is removed in one area because it is bad for air quality it
    must be put back into the fuel stream for another area, often at an
    increased cost as well as maybe not being ``good'' for that area.
        Limiting the number of special blends of gasoline or ``boutique
    fuels'' will reduce the overall cost of the fuel by reducing the amount
    of blending that is required for the fuel, allow fuel providers to more
    broadly distribute a single (or limited number of) fuel type, and will
    reduce storage and handling of numerous types of gasoline.
        The use of specialized fuel types is an option to achieve emission
    reductions. The elimination of a particular special blend of gasoline
    may reduce the number of options an area has to comply with specific
    Federal regulations, however, there are often several options available
    to comply with environmental standards. Reducing the number of
    specialized blends to only a few would continue to provide options that
    could be utilized solely or in conjunction with another strategy to
    achieve the desired environmental results.
        Also there are several scientists in the business that believe that
    specialized fuels create as many problems as they address. Boutique
    fuels have been heavily relied upon in the past to solve the ills of
    air quality across the county and once implemented have made little
    impact to poor air quality in an area. Boutique fuels may limit a
    States options but it may limit a States options to those options that
    actual do some good for the environment.
                                   __________
     Statement of Eric Schaeffer, Director, Environmental Integrity Project
        Thank you, Mr. Chairman, for the opportunity to testify today about
    S. 1772, the ``Gas Petroleum Refiner Improvement and Community
    Empowerment Act.'' My name is Eric Schaeffer, and I am director of the
    Environmental Integrity Project, a nonprofit organization dedicated to
    improving enforcement of the Clean Air Act and other environmental
    laws.
        S. 1772 is aimed at increasing the supply and reducing the price of
    gasoline and refined products by fast-tracking environmental permits.
    While this legislation tries to address a real problem, the solutions
    it offers could increase environmental risks without making much
    difference to the availability or cost of gasoline. More specifically,
    I am concerned that S. 1772 would:

         Result in poorly written permits that could increase the
    likelihood of accidents that could shut down refinery capacity;
         Delay refinery startups by encouraging litigation over vague new
    standards;
         Shut communities out of decisions that affect their health and
    property values;
         Subsidize the construction of refineries on government property
    for some of the richest companies in America;
         Reward refineries that locate or expand in hurricane zones;
         Have little effect on refinery investment decisions that are
    ultimately driven by profit margins and conditions in the world market.

        I would like to address each of these concerns in turn.
    haste makes waste: badly written permits increase the risk of shutdowns
        Refineries are inherently hazardous operations, and I have nothing
    but respect for the men and women who work hard to keep these
    facilities safe while meeting America's need for fuel. But setting
    artificially short deadlines for reviewing applications to build or
    expand refineries will only increase the likelihood of accidents or
    violations that could ultimately lead to shutdowns. And after seeing
    how vulnerable our refiners are to hurricanes and high winds, we ought
    to take more time reviewing their design, not less.
        It is also a mistake to assume, as S. 1772 does, that refinery
    expansions are relatively minor events that should require only a few
    days to permit. Such projects are a major enterprise, requiring the
    commitment of hundreds of millions of dollars in capital. Motiva is
    reportedly considering doubling the size of its existing refinery in
    Port Arthur, increasing current capacity by 325,000 barrels a day. An
    expansion on that scale is equivalent to adding two brand new
    refineries to the Nation's capacity. The engineering judgments required
    to complete such projects successfully are extremely complex,
    especially when they involve retooling existing capacity to process
    sour instead of sweet crudes, as most U.S. refiners are doing today.
        Permit reviews provide a critical opportunity to make sure these
    modifications meet environmental and safety requirements, and don't
    make air pollution worse in surrounding neighborhoods. Requiring hard-
    pressed Federal and State regulators to approve or deny every permit
    for a major refinery expansion in ninety days is just not realistic. S.
    1772 does not even require that permit applications be complete before
    the 90 day review period begins, which may force agencies to rubber
    stamp permits that are plainly inadequate.
        Nor would S. 1772 give regulators the time for careful review of
    accident-prone or particularly hazardous operations. For example, in
    March of this year, an explosion at BP's Texas City refinery killed
    fifteen workers and injured many more. Why should regulators face an
    artificial deadline for approving the next expansion of this plant,
    unless they can be sure that it will be more safely managed? Many
    refiners are investing in coking capacity that allows processing of
    higher sulfur crudes into gasoline. But cokers are prone to accidents,
    which require lengthy shutdowns for repair. Rubber-stamping such
    operations only increases the likelihood of malfunctions that can
    injure or kill workers while curtailing gasoline supplies.
         rushed permits could mean more litigation and delayed startup
        Poorly written permits seem likely to spawn the kind of legal
    challenges that this bill seeks to avoid. The problem is compounded
    when vague language is used that implies a shift in legal standards.
    For example, S. 1722 says that EPA ``shall use State permitting and
    monitoring procedures to satisfy substantially similar Federal
    requirements under this title.'' Speaking from experience, I can
    testify that lawyers love to fight over what words like,
    ``substantially similar'' really mean. The bill requires participating
    agencies to consolidate permits, but then appears to allow piecemeal
    approval of components, which could further add to the confusion.
    Permits that are rushed through review with ambiguous language left
    unresolved are more likely to face court challenges, which could add to
    the delay in starting up new capacity.
      the public needs a voice in permitting decisions that affect their
                              health and property
        Refineries are major sources of pollution and, with few exceptions,
    are situated right in the middle of heavily populated residential
    neighborhoods that must breathe the exhaust from the refining process
    every day. Communities like Port Arthur, Texas, and Lake Charles,
    Louisiana, suffer from chronic air pollution and high asthma rates, and
    are already overwhelmed with refinery expansions. In 2002, more than
    207,000 children in Texas attended school within 2 miles of a refinery
    or chemical plant.
        These are the very people hardest hit by Hurricanes Katrina and
    Rita which, in Louisiana alone, spewed more than 8 million gallons of
    oil across the State. The recent spill from the Murphy oil refinery
    contaminated as many as 1,000 homes, some of which may have to be
    bulldozed. The USEPA's own sampling shows that sediments in some
    neighborhoods are soaked with diesel oil and gasoline far above the
    State of Louisiana's cleanup standards.
        The Clean Air Act has always allowed for public review of major
    permitting decisions, on the reasonable assumption that those who live
    next to large refineries have an obvious stake in decisions that affect
    their health and property. These communities are not against
    refineries, but do expect that they will be built and managed as safely
    as possible. The rubber-stamp permit process authorized under S. 1722
    will eliminate any real public involvement, especially among those
    people still digging out after the hurricane. There is something
    fundamentally unfair about telling residents still scraping oil off
    their houses, some of whom may be suffering from asthma, that they had
    better make way for an even bigger refinery and be quick about it.
         oil companies do not need our tax dollars to build refineries
        S. 1722 would shift tax dollars to some of the richest industries
    in America, by subsidizing the construction of refineries on military
    property. The top five oil companies have reported a quarter of a
    trillion dollars a year since 2001. While the stock market has been
    flat for almost everyone else this year, at least three refiners
    (Valero, Conoco-Phillips and Sunoco) have offered stock splits in the
    last 6 months. Valero, now the Nation's largest refiner, has reported
    eight successive quarters of record earnings, and Citgo paid its
    shareholders a $400 million dividend earlier this year. I would
    respectfully suggest that this is not an industry that ought to qualify
    for a handout from hard-working taxpayers.
              will our refineries stand up to the next hurricane?
        Almost half of the Nation's refining capacity is in Gulf Coast
    States, which is also where the largest expansions are underway. In
    fact, Citgo and Murphy Oil in Louisiana had just completed such
    expansions before the recent hurricanes forced their shutdown. Katrina
    literally ripped oil tanks off their moorings, spewing their contents
    for miles around. The government of Jamaica recently announced that the
    expansion of a major aluminum refinery in that country would have to
    meet construction standards designed to withstand hurricanes and high
    winds. If Jamaica has figured out that its energy infrastructure must
    be designed for its climate, why can't we?
        Even if you don't believe global warming is the cause,
    meteorologists agree that we are entering a weather cycle in which
    tropical storms and hurricanes will be more severe. If Congress is
    going to encourage construction of more refineries, surely we should
    ask whether so much of our energy infrastructure ought to be situated
    where natural disasters are most likely to strike. S. 1722 does not
    address this problem.
      profit margins determine refinery capacity, not environmental rules
        Ultimately, the bill may rest on a shaky premise, as Clean Air Act
    permitting provisions seem to have only a marginal effect on decisions
    by oil companies to invest in new refining capacity. The President of
    the American Petroleum Institute informed Congressman Barton's
    subcommittee last year that, ``We have not said that environmental
    costs are responsible for the higher prices.'' The Department of Energy
    tells us that low sulfur gasoline and diesel fuels are not expected to
    affect refining costs over the next few years. Industry and government
    analysts alike agree that profit margins are the most significant
    factor, and record profits from high gasoline prices have encouraged a
    major investment in added refining capacity. Projects already reported
    or announced are expected to add nearly 600,000 barrels a day to our
    existing capacity over the next several years.
                 the public wants a more fuel-efficient economy
        Of course, the surest way to secure enough gasoline at a reasonable
    price is to reduce our consumption. New automotive technologies, even
    for heavier vehicles, are achieving much higher fuel efficiency without
    compromising safety. Data from the Department of Energy shows demand
    had begun moderating in response to high prices even before the
    hurricane, as consumers shop for more energy efficient choices. Last
    December, energy analysts at Booz-Allen cautioned refiners that demand
    for gasoline would ``plummet'' below supply as easily as 2007, if
    inflation adjusted prices remained at $2 per gallon, well above today's
    levels.
        A recent poll by the Pew Charitable Trusts shows that 86 percent of
    respondents would support tighter fuel economy standards. I hope that
    Congress will find time to consider a solution that the public is so
    clearly ready to embrace.
    [GRAPHIC] [TIFF OMITTED] T9520.001

    [GRAPHIC] [TIFF OMITTED] T9520.002

    [GRAPHIC] [TIFF OMITTED] T9520.003

                Oil-Contaminated Sediment in Louisiana EPA Post-Katrina Samples of Diesel Range Organics
    ----------------------------------------------------------------------------------------------------------------
                                                                                                Percent Above LDEQ
                 EPA Station                        Parish            Level Detected m/kg           Standard*
    ----------------------------------------------------------------------------------------------------------------
    8935.................................  St. Bernard............                9,920,000           16,300 percent
    9362.................................  Orleans................                2,010,000            3,300 percent
    9684.................................  Orleans................                9,140,000           15,000 percent
    9816.................................  Orleans................                1,280,000            2,100 percent
    9895.................................  Orleans................                1,140,000            1,900 percent
    9897.................................  Orleans................                1,180,000            1,900 percent
    9899.................................  Orleans................                8,250,000           13,500 percent
    9950.................................  Orleans................                1,430,000            2,300 percent
    9951.................................  Orleans................                3,160,000            5,200 percent
    9976.................................  Orleans................                6,850,000           11,200 percent
    9978.................................  Orleans................                1,310,000            2,100 percent
    9985.................................  Orleans................                2,490,000            4,100 percent
    9987.................................  Orleans................                2,200,000            3,600 percent
    10173................................  St. Bernard............                1,230,000            2,100 percent
    ----------------------------------------------------------------------------------------------------------------
    *The Louisiana Department of Environmental Quality has set their safe soil standard for Diesel Range Organics at
      61,000/m/kg.

                                     ______

                        Environmental Integrity Project
       refining capacity and gasoline price: separating fact from fiction
        In the wake of Hurricane Katrina, Congressman Barton (R-TX) is
    rushing legislation through Congress that would roll back Clean Air
    requirements for all industries and postpone deadlines for achieving
    air quality standards in some areas. The bill would also give the
    Department of Energy authority to issue permits on a fast track for
    refineries.
        Congressman Barton and his allies argue that these steps are needed
    to expand refining capacity and thereby reduce gasoline prices. But a
    closer look at the facts shows that profit margins, not environmental
    rules, are the primary factor in determining whether refiners expand.
    High gasoline prices have raised profit margins to record levels over
    the past 2 years, and refiners have responded with major investments to
    expand their capacity to produce motor fuels. In short, there is no
    basis for weakening the Clean Air Act and increasing pollution to
    encourage refiners to take advantage of the most favorable market
    conditions for expansion that we have seen in decades.
         market forces determine the supply and price of gasoline, not
                              environmental rules
        Red Cavaney, testifying before Representative Barton's House
    Subcommittee in July of 2004 insisted: ``We have not said that
    environmental costs are responsible for the higher prices.''
    i
        According to Valero's senior vice-president, it was, ``the poor
    margins that had the biggest impact, not the environmental rules.''
    ii
        The Department of Energy expects refining costs to stay constant,
    even after new clean fuel standards take effect, according to its 2005
    Annual Energy Outlook: ``Refining costs for gasoline and diesel fuel
    are expected to remain about the same, despite rising demand and new
    Federal requirements for low sulfur gasoline (`04 to `07) and ultra-low
    sulfur diesel fuel (`06 to `10).'' iii
        Until the mid 1990s, refiners argued that capacity had to be
    reduced to increase profit margins. A senior energy analyst warned an
    industry audience at an API convention in the fall of 1995 that: ``. .
    . if the U.S. petroleum industry doesn't reduce its refining capacity,
    it will never see any substantial increase in refining margins.''
    iv
        Refineries increased the rate of expansion as profits reached
    record levels.
     refiners have increased capacity at existing refineries, rather than
              building new ones, because it is far more profitable
        Only one permit application for a new refinery has been filed in
    the last 25 years. But EPA's June 13, 2002 report to the President on
    New Source Review found that NSR regulations had ``not significantly
    impeded investment in new power plants or refineries.'' v
    Instead, refiners have chosen to meet demand by expanding existing
    facilities.
        Refiners have added 1.4 million barrels per day of crude processing
    capacity at existing plants, which is equivalent to adding twelve new
    refineries. Motor gasoline production has increased 13 percent over the
    same period (from 7.2 million to 8.2 million barrels per day, or
    bpd).vi
        Exxon Mobil recently claimed that it adds 200,000 to 300,000
    barrels per day of additional capacity every three years at its
    existing refineries.vii
        Refiners have announced or just completed numerous expansion
    projects:

         At the end of 2003, Valero completed an expansion of its Texas
    City refinery, boosting capacity from 165,000 bpd to 243,000
    bpd.viii
         Citgo added more than 105,000 bpd to its crude processing
    capacity at its Lake Charles (LA) refinery in April of this
    year.ix (So far, the company has reported only minor damage
    at its Lake Charles refinery from Hurricane Rita).
         Marathon Ashland will increase crude processing capacity from
    74,000 bpd to 100,000 bpd by the end of this year at its Detroit
    refinery.x
         Valero's Port Arthur, TX facility is in the middle of an
    expansion that is expected to boost capacity by 75,000
    bpd.xi
         Chevron received permits in June of this year to increase
    production 25 percent at its Pascagoula (MS) refinery by about 75,000
    bpd.xii
         Suncor expects to complete expansion of its Denver refinery in
    2006, integrating 10,000 to 15,000 bpd of crude from oil sands into the
    process.xiii
         Flint Hill Resources has announced plans to increase crude oil
    processing by 50,000 barrels per day at its Minnesota refinery by the
    summer of 2007.xiv
         At least three Montana refineries are investing in coker projects
    to expand capacity.xv
         Tesoro Refining is adding a coker to boost output at its
    Anacortes refinery.xvi
         Even smaller refineries are announcing expansion plans. Frontier
    Oil secured permits to add 6,000 bpd of new capacity to its Cheyenne
    refinery in Wyoming, while United Refinery is permitted to increase
    capacity by 5,000 bpd at its Warren (PA) refinery.xvii

           refiners enjoying record profit margins are not hurricane
    ``victims'':--katrina relief ought to be reserved for those who really
                                    need it
        As the Washington Post reported on September 25, refiners are
    earning almost a dollar a gallon for gasoline today, almost three times
    the amount they earned a year ago.xviii
        Refinery profits have doubled since Katrina, according to Bloomberg
    news. Valero, the Nation's largest refiner, announced a stock split on
    a 2 for 1 basis on September 15, 2 weeks after the hurricane. The
    company has claimed eight successive quarters of successive earnings.
        Hurricanes and floods haven't tempered Valero's bullish outlook, as
    the company announced in September that, ``Structural changes have
    created a strong refining environment for 2005, 2006 and beyond . . .
    Forward markets reflect expectation for better product margins in '06
    than '05.'' xix
        Since 2001, the top five oil companies in the United States have
    recorded profits of $254 billionxx:

    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
    ExxonMobil................................  $89 billion
    Shell.....................................  $60.7 billion
    BP........................................  $53 billion
    ChevronTexaco.............................  $31 billion
    Conoco Phillips...........................  $20 billion
    ------------------------------------------------------------------------

        Since June of 2005, three oil companies have announced two for one
    stock splits.

    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
    Conoco Phillips...........................  June 1, 2005
    Sunoco....................................  July 7, 2005
    Valero....................................  September 15, 2005
    ------------------------------------------------------------------------

        Tesoro's stock price has tripled in the last year. Sunoco claimed
    ``record earnings'' in its 2004 annual report to stockholders. Citgo
    paid out a $400 million dividend to its shareholders earlier this year.
    Reports by these and other refiners acknowledge the record margins that
    refiners have enjoyed over the past 2 years, as oil and gas prices have
    increased.
     refinery expansions do not create long-term employment opportunities
                                 for americans
        From 1997 to 2004, refining capacity in the United States climbed
    6.63 percent. However, at the same time that oil refineries were
    expanding, they were also cutting, not adding, jobs. The number of
    employees actually employed at refineries between 1997 and 2004
    decreased by 27.9 percent.xxi
        In 1997, the oil refining industry employed 95,979 Americans. By
    2004, despite the industry's expansion and increase in profits, the
    industry only employed 69,168 Americans.xxii
    eliminating pollution control standards and short-cutting permitting is
         unfair to communities already overwhelmed with pollution from
                                   refineries
        Oil spilled in Louisiana during Katrina's aftermath has matched the
    total amount released during the Exxon-Valdez accident. Refinery
    communities need help with cleanup, not weaker Federal laws that
    compound the risks they already face.

         Over 57 percent of whites, 65 percent of African Americans, and
    80 percent of Hispanics live in 437 counties with substandard air
    quality. In the heavily populated Los Angeles air basin, over 71
    percent of African Americans and 50 percent of Latinos live in areas
    with the most polluted air, compared to 34 percent of
    whites.xxiii
         ``Data shows that African Americans and Hispanics suffer from
    some of the highest rates of environmentally triggered diseases,
    including asthma. Further, these same communities have the highest
    rates of health uninsurance, making it more difficult for them to treat
    and overcome these ailments.'' xxiv Marcela Urrutia, Senior
    Health Policy Analyst, National Council of La Raza--the largest
    national constituency based Hispanic civil rights organization in the
    country.
         In 2002, more than 207,000 children went to schools within a 2-
    mile radius of a chemical plant or a refinery in Texas. In one year,
    139 industrial facilities near Texas schools exposed children to 43.4
    million pounds of toxic pollutants.xxv
         Air pollution costs Americans $10 to $200 billion a year. Asthma
    and air pollution are linked. Asthma alone cost Americans over $14.5
    billion in 2000. Asthma accounts for more than 10 million lost school
    days, 1.2 million emergency room visits, 15 million outpatient visits,
    and over 500,000 hospitalizations each year. African Americans and
    Latino are almost three times more likely than whites to die from
    asthma. The hospitalization rate for African Americans and Latinos is 3
    to 4 times the rate for whites.xxvi

    i Testimony of Red Cavaney, President, American Petroleum
        Institute before the House Energy and Commerce Subcommittee on
        Energy and Air Quality. July 28, 2004.
    ii Nelson Schwartz, Is Dick Cheney the New Hillary? Fortune,
        June 11, 2001, at 37. See also Alexei Barrionuevo, Exxon-Mobil CEO
        Doubts Anyone Would Build U.S. Refinery, Dow Jones News Service
        (May 30, 2001) (citing Exxon Mobil's chairman and chief executive
        for the statement that no oil company was prepared to build a new
        refinery because they could make money from doing so).
    iii 2005 Annual Energy Outlook. See Energy Information
        Agency website (www.eia.doe.gov).
    iv See Foundation for Taxpayer and Consumer Rights website
        (www.corporatewatchdog.org).
    v EPA, New Source Review: Report to the President (June 13,
        2002), at 1.
    vi See Energy Information Agency website (http://
        www.eia.doe.gov/emeu/aer/txt/ptb0508.html).
    vii See My West Texas website (www.mywesttexas.com/site/
        news.cfm?newsid=15073025&BRD=2288&PAG=461).
    viii Statement made by Valero CEO Bill Klesse at Sept. 7,
        2005 Energy Conference.
    ix Citgo press release, April 21, 2005.
    x See Marathon Ashland website (www.mapllc.com).
    xi Statement made by Valero CEO Bill Klesse at Sept. 7, 2005
        Energy Conference.
    xii See Sun Herald website (www.sunherald.com) Sept. 2,
        2005.
    xiii See Suncor website (www.suncor.com/
        links_popup.aspx?ID=2393).
    xiv See Flint Hills Resources website (www.fhr.com/newsroom/
        news_detail.aspx?id=117).
    xv Minneapolis St. Paul Business Journal. July 13, 2005.
    xvi Presentation by Bruce Smith, President and CEO, at
        Lehman Bros. 19th Annual CEO Energy/Power conference. Sept. 8,
        2005.
    xvii PR newswire. July 25, 2005.
    xviii Gas Profit Guzzlers. Just Blum. Washington Post. Sept.
        25, 2005. See website(http://www.washingtonpost.com/wp-dyn/content/
        article/2005/09/24/AR2005092400253.html).
    xix Presentation by Bill Klesse at Lehman Bros. 19th Annual
        CEO Energy/Power conference. Sept. 7, 2005.
    xx See Public Citizen website (http://www.citizen.org/cmep/
        energy_enviro_nuclear/articles.cfm?ID=13912).
    xxi Available on file at EIP.
    xxii Available on file at EIP.
    xxiii See Environmental Justice Resource Center website
        (http://www.ejrc.cau.edu/NBEJNEJFS.html).
    xxiv La Raza letter to Congressman Joe Barton. June 16, 2004
    xxv See Public Citizen website (http://www.citizen.org/
        documents/Industrial%20Upset% 20Pollution_
        Who%20pays%20the%20price_2%20Aug%202005.pdf).
    xxvi See Environmental Justice Resource Center website
        (http://www.ejrc.cau.edu/NBEJNEJFS.html).
                                     ______

    Responses by Eric Schaeffer to Additional Questions from Senator Warner
        Question 1. Refinery Capacity. We all know that the supply of
    crude, refinery capacity, and the transportation network are the three
    major variable costs associated with prices at the pump. How
    specifically will increased refinery capacity bring down the price
    consumers pay for a gallon of gasoline?
        Response. As with any other product, the price of gasoline can be
    expected to decline to the extent that supply exceeds demand. Data from
    the Department of Energy suggests that refining accounts for about a
    quarter of the price of gasoline. The cost of crude oil remains the
    most significant factor, however; to the extent the cost of crude
    remains high, it could offset any reduction in prices that could come
    from increases in domestic refining capacity.
        The evidence suggests that it will be very difficult for Congress
    to legislate a solution that results in surplus refining capacity and a
    substantial decline in the price of gasoline. In other words, if gas
    prices decline too much, refiners will delay investment in new
    capacity, and even consider cutting back or closing their less
    efficient operations. Surplus capacity hurts refinery profit margins,
    and industry memoranda uncovered by the Foundation for Taxpayer and
    Consumer Rights (attached), shows that refiners were actively
    considering strategies to reduce capacity in the mid-nineties when
    gasoline prices were low.

        Question 2. Refinery Capacity. Is the United States total refining
    capacity truly a driver of gasoline cost by itself or is it events such
    as Hurricane Katrina that shut in many refineries that have the largest
    effect on price volatility?
        Response. According to the Department of Energy, more than 47
    percent of U.S. refining capacity is located in Gulf Coast States, and
    about one-fifth of total U.S. capacity was shut down as a result of
    Hurricanes Katrina and Rita. There is little question that the sudden
    loss of so much capacity had an impact, raising gasoline prices by
    perhaps 25 to 30 cents per gallon over pre-Katrina prices. As of today
    (October 24, 2005), prices are averaging about 3 cents above average
    levels before the most recent hurricanes. That decline is due partly to
    the restoration of more than half of the lost capacity to date, and
    what the American Petroleum Institute reports to be the largest year-
    to-year decline in demand for gasoline in more than a decade this
    September.
        Refiners have just completed major refinery expansions in the Gulf
    Coast region (e.g. Murphy Oil and Citgo in Louisiana, and Chevron in
    Mississippi), or are already undertaking expansions at existing plants
    (Citgo and Valero in Texas). Refining and offshore production will
    continue to be concentrated disproportionately in the Gulf Coast
    region, as companies take advantage of economies of scale and the
    proximity to oil and gas wells, ports, and pipelines. At the same time,
    meteorologists are predicting that hurricanes and tropical storms will
    increase in severity over the next decade. Congress should consider
    legislation to protect this infrastructure from hurricanes, e.g., by
    improving construction standards, so that the United States may avoid
    further outages from energy facilities along the Gulf Coast.
        Prices had been increasing prior to Hurricane Katrina, to about
    $2.75 per gallon in August. According to the American Petroleum
    Institute, these increases were due to the limited supply and higher
    price of crude oil, which in turn were driven in part by political
    instability in oil-producing countries, and increased demand in Asia
    and the U.S. Because the supply and price of crude oil are driven by
    fast-changing world markets, the price of petroleum-based products may
    be expected to remain volatile.

        Question 3. Refinery Capacity. What is preventing refineries from
    being built or expanded today? Cost? Bureaucracy of local, State, and
    Federal permits? Environmental regulation?
        Response. According to the Vice-President of Valero, the largest
    refiner in the United States, profit margins determine whether
    companies invest in new capacity, not environmental rules. As noted
    above, less than 10 years ago refiners were discussing closing plants,
    out of concern that the industry had a surplus of capacity relative to
    demand. As the demand for gasoline has increased over the past decade,
    refiners have responded by expanding existing refineries, and have
    increased U.S. capacity by about 12 percent, or 1.8 million barrels per
    day.
        Additional projects already announced or reported would add another
    600,000 barrels per day within the next several years. These
    investments are not surprising, given the record profits realized by
    refiners due to the higher prices American consumers have paid for
    gasoline over the last 2 years.
        In contrast to the expansion of existing facilities, only one
    company has applied for a permit to build a brand new refinery in
    recent memory. That company received its permit earlier this year, but
    is still struggling to find investors. Companies have preferred to
    expand incrementally at existing plants, and to take advantage of
    economies of scale, because it allows them to tailor increases in
    capacity to available demand in a volatile marketplace.

        Question 4. Fischer-Tropsch technology (converting coal to liquid
    fuel).--Given the long history of Fischer-Tropsch technology and the
    decades of Federal R&D investment, what is holding back the development
    of commercial F-T facilities in the United States?
        Response. I am not familiar with this technology.

        Question 5. Fischer-Tropsch technology (converting coal to liquid
    fuel).--Would long-term contracts with price floors for F-T fuel
    provide substantial guarantees for companies to invest in the
    construction of a facility?
        Response. I am not familiar with this technology.

        Question 6. Fischer-Tropsch technology (converting coal to liquid
    fuel).--What affect on national or worldwide demand might the existence
    of one or two F-T facilities that produce 100,000 barrels of fuel per
    day? How might that affect prices? Would price effects be more regional
    than national?
        Response. I am not familiar with this technology.

        Question 7. Fischer-Tropsch technology (converting coal to liquid
    fuel).--What other benefits would F-T fuels have for the Nation/world?
        Response. I am not familiar with this technology.

        Question 8. Boutique Fuels.--Many free market thinkers have argued
    that the expansion of boutique fuels has been a contributing factor to
    rising prices. In addition, it is believed by some that a ratchet down
    of the number of boutique fuels would bring down gas prices without any
    adverse effect on the environment. Would you comment on this theory,
    and whether or not limiting the number of boutique fuels would also
    limit a State's options to comply with Federal environmental laws?
        Response. State and Federal air pollution control officials agree
    that cleaner gasoline and diesel fuels have played a critical role in
    reducing unhealthy levels of ozone, particulate, lead, and carbon
    monoxide pollution. The so-called ``boutique'' fuels designed to reduce
    ozone were adopted largely to give both local governments and refiners
    the flexibility to offer alternatives at a lower price than the
    reformulated gasoline (RFG) or low Reid Vapor-Pressure (RPV) fuels
    already available. In short, boutique fuels arose in part to meet a
    demand for more economical alternatives, which is usually a goal of
    market-based policies. Some States were also looking for alternatives
    to reformulated fuels made with MTBE, after the discovery that MTBE had
    contaminated groundwater in a number of areas.
        Congress acted earlier this year to remove the 2 percent oxygenate
    requirement for clean fuels, although this may have effectively shrunk
    the supply of gasoline and increased its price (see attached memo from
    Texaco calling for elimination of the RFG requirement as a way to
    reduce the supply of gasoline and increase refinery profit margins).
        Bob Slaughter, President of the National Petroleum Refiners'
    Association, responded to a question in February of this year from the
    House Subcommittee on Energy and Air Quality that, ``Legislation aimed
    at boutique fuel limitations beyond repeal of the 2 percent oxygenate
    requirement may create unintended consequences that could undermine
    innovation or cost control in fuels production . . . In some
    circumstances, local fuels reduce or avoid inefficient investment costs
    for refiners and can lower overall costs to consumers.''
        There is little evidence that clean fuels have contributed to the
    long term price increases that have occurred over the past year-and-a-
    half. Disruptions in the supply of clean fuels destined for a local
    market have occurred infrequently (e.g., in California and Milwaukee),
    and are resolved quickly. The Environmental Protection Agency has used
    its enforcement discretion to resolve spot shortages that occur on an
    infrequent basis.
        If Congress wants to reduce the number of ``boutique'' fuels, it
    should make it easier for States to use RFG, one of the cleanest fuels
    available that is widely produced and distributed. Under current law,
    some 14 States outside the Ozone Transport Region with over 150
    counties in non-attainment for the eight hour ozone standard are not
    allowed to ``opt-in'' to the RFG program.

        Question 9. This bill would make State permitting of refineries
    subject to judicial review in Federal court. It also contains short
    timelines and it provides for separating out parts of the permit that
    cannot be processed within the timeframes. Is this a workable system or
    could it lead to confusion and possibly delay? How does it fit with the
    existing system under our environmental laws?
        Response. My understanding is that the latest draft of S. 1772 no
    longer applies to State permitting requirements, and that timeframes
    for reviewing permits have been extended slightly. For example, EPA and
    State agencies would be required to review and approve or disapprove
    any Federal permits for refinery expansions within 120 days, instead of
    90 days as originally proposed. As noted in my testimony, I remain
    concerned that this timetable, when combined with vague standards in
    the legislation, remains too short to complete an adequate review of a
    major refinery expansion in every case. It could also eliminate any
    meaningful public participation in the permit process for some
    communities.
        For example, the Motiva refinery in Port Arthur, Texas, is
    reportedly considering doubling the size of its capacity, to more than
    600,000 barrels per day, which would make it the largest refinery in
    the United States and one of the largest in the world. This is a huge
    project, equivalent in scale to adding two mid-sized refineries. Permit
    writers must assure that all requirements are met, that pollution
    control technologies meet Clean Air standards, that emissions will be
    accurately monitored and accounted for, that the public is given an
    opportunity to review and comment on the expansion, and that the
    additional emissions will not contribute to the degradation of local
    air quality. It is just not practical to expect permit writers to do a
    good job carrying out these responsibilities at every refinery, no
    matter what the circumstances, in just 4 months.
        Permits that are written in haste may include errors that increase
    the chances that a State agency's decision may be challenged, which in
    turn could lead to further delays in the project. In addition, permits
    that are rushed through review may overlook health and safety problems.
    Many refinery projects involve technologies, such as delayed cokers,
    that can be dangerous to both workers and nearby residents if they are
    not properly designed or operated. Poorly designed or maintained plants
    not only increase risk, they may also result in frequent shutdowns that
    limit the supply of gasoline or other petroleum products.

        Question 10. In light of the EPA waivers of Clean Fuel requirements
    after the Katrina Hurricane, is there any argument that clean fuel
    requirements lead to higher gas prices after Katrina?
        Response. EPA used its enforcement authority quickly and
    appropriately after Katrina to waive clean fuels requirements where
    they would otherwise have resulted in a shortage of gasoline. These
    waivers were temporary and limited in scope, but more than adequate to
    assure that clean fuel standards would not add to gasoline shortages in
    the wake of hurricanes in the Gulf Coast.
        As noted in my response to a previous question from Senator Warner,
    there is little evidence that either clean fuels requirements or other
    environmental rules have contributed to long-term increases in the
    price of gasoline. Red Cavaney, President of the American Petroleum
    Institute, testified before the House Energy and Air Quality
    Subcommittee last year that, ``We have not said that environmental
    costs are responsible for the higher prices.'' The Department of
    Energy's Annual Outlook for 2005 notes that refinery costs are not
    expected to increase over the next two decades, despite the imposition
    of clean fuels requirements. Finally, many of these environmental
    expenditures, such as high-pressure hydro-treating, may actually help
    to improve product yields and increase the supply of gasoline.
                                   __________
     Statement of Jonathan H. Adler, Associate Professor of Law; Associate
     Director, Center for Business Law & Regulation, Case Western Reserve
                            University School of Law
        Thank you, Mr. Chairman and members of this Committee, for the
    invitation to testify on S. 1772, the Gas Petroleum Improvement and
    Community Empowerment Act. My name is Jonathan H. Adler, and I am an
    associate professor of law and associate director of the Center for
    Business Law and Regulation at the Case Western Reserve University
    School of Law, where I teach several courses in environmental law. This
    fall, I am a visiting associate professor at George Mason University
    School of Law, where I am teaching environmental and administrative
    law.
        For the past fifteen years I have researched and analyzed Federal
    regulatory policies, with a particular focus on environmental
    regulations. Portions of my research and scholarship have focused
    extensively on the ways well-intentioned environmental regulations may
    have unforeseen and unfortunate consequences, on the impact of
    environmental regulations on the energy sector, and on the balance
    between Federal and State authority in environmental protection. I
    appreciate the opportunity to share my views on S. 1772, particularly
    as it relates to my ongoing research.
        Key provisions of S. 1772 seek to expand domestic refining
    capacity. This is an important goal, as domestic refining capacity is
    one of the many factors that can influence the cost and volatility of
    retail gasoline prices. While there have been recent increases in
    domestic refinery capacity, these increases have not kept pace with
    demand growth, and this trend is likely to continue. In recent years
    the lion's share of investment in the refining sector has gone to meet
    various environmental and other regulatory mandates, not to increasing
    refining capacity. Moreover, while some of the gap between domestic
    demand and domestic refining capacity can be made up through imports
    (which now account for approximately 10 percent of domestic
    consumption), strong and ever increasing global demand will put further
    upward pressure on prices. In addition, with the proliferation of
    additional fuel content and emission requirements, there is reason to
    question whether foreign refiners will continue to make gasoline for
    the U.S. market.
        Markets respond naturally to price fluctuations when they are able
    to do so. Higher prices signal to investors that there are potential
    profit-making opportunities. Where markets are free to operate, price
    increases should spur investments to increase supply (and should
    encourage consumers to reduce consumption). Government interventions in
    commodity markets, whether direct or indirect, tend to short-circuit
    the market's natural feedback mechanisms. This does not mean that such
    interventions are unwise or unjustified, but it does mean that they
    should be taken with care. Above all else, new policy measures should
    be careful not to cause further disruptions in the marketplace that
    could short-circuit the effective operation of supply and demand.
        Few markets today are fully free of government interference. Energy
    markets are a case in point. Myriad government policies at the Federal
    and State level affect the discovery production, transportation,
    processing, distribution, and sale of all forms of energy. These
    interventions, particularly in the aggregate, retard the market's
    ability to respond to changes in supply and demand and increase price
    volatility, as well as the likelihood of temporary supply disruptions.
        For these reasons, it is important that Federal responses to recent
    gasoline price increases seek to remove or ameliorate regulatory
    barriers to efficient market responses to current and prospective price
    changes. Such strategies are more sensible than chasing after alleged
    ``price gouging'' or adopting new mandates or subsidies for energy
    efficiency, as such market-enhancing strategies can unleash the
    market's natural tendency to equilibrate supply and demand. Alternative
    strategies, however well intentioned, tend to impose costs on consumers
    in excess of their putative benefits.
        While there is much popular discussion about oil industry profits
    and current margins within the refining sector, it is worth placing
    these figures in perspective. By historical measures, profit margins in
    the refining sector have been lower than in other segments of the oil
    and gas industry, and lower than the average for S&P 500 companies.
    Moreover, the greater the profit margin in the refining sector, the
    more rapidly the marketplace will adjust to meet increased demand for
    fuel products of various types. Insofar as this Committee is concerned
    that some suppliers are able to charge unduly high prices for gasoline,
    and reap ``excessive'' profits, the best policy response is to take
    measures that will ensure such firms are exposed to competition.
        From this perspective, titles II and IV of S. 1772, the Gas
    Petroleum Improvement and Community Empowerment Act, are most welcome.
    Rather than seeking to override or second-guess private market
    decisions, the bill seeks to minimize the extent to which desired
    environmental protections impede the efficient functioning of energy
    markets. Rather than imposing Federal mandates on State governments or
    trampling upon local communities, these provisions seek to provide
    greater opportunities for increases in refining capacity consistent
    with State and local preferences. While this legislation is not a
    panacea for current gas price concerns, it is a modest, welcome step
    toward addressing those concerns.
                          refinery permitting process
        There is a clear need for increased refining capacity in this
    country. While existing domestic refining capacity is adequate to meet
    current demands, it is unable to respond to surges in demand or
    disruptions in supply. The relative lack of refining capacity both
    supports higher prices and increases price volatility because it is
    more difficult to respond to regional changes in demand. Moreover, the
    steady increase in global demand for refined petroleum products makes
    it more expensive to meet increased domestic demand through imports.
        Insofar as regulations, including permit requirements, add to the
    financial cost of and potential delay in constructing or expanding a
    refining facility, they will reduce the likelihood that such
    investments will take place. Insofar as regulatory requirements create
    uncertainty, this will further discourage such investments on the
    margin. Streamlining the permit process, as proposed in S. 1772, is an
    effective way to reduce the cost and uncertainty involved with
    environmental compliance without sacrificing environmental protection
    or public participation. As the experiences of many State environmental
    agencies have shown, it is possible to streamline the permitting
    process without sacrificing environmental protection, through the
    adoption of coordinated, simultaneous reviews of various permitting
    requirements across environmental media, deadlines for permitting
    decisions, and other innovations.
        Unlike some other proposals to streamline the permitting process
    for refinery construction and expansion, the provisions in S. 1772 do
    not displace State authority or trample upon local communities. As the
    text of the legislation makes clear, the relevant provisions are only
    to be invoked at a State's request. Equally important, nothing in S.
    1772 alters the substantive environmental requirements of Federal or
    State law. While the legislation establishes clear deadlines for permit
    review, 270 days is an ample amount of time for the review of a
    completed permit application for the construction of a new refinery,
    and 90 days should be sufficient to review permits for the expansion of
    facilities that already exist. If a Federal Agency is to be involved in
    consolidating and streamlining the State and Federal permitting
    processes for refinery construction or expansion, it should be the
    Environmental Protection Agency, as the EPA is already responsible for
    oversight of much State permitting and enforcement under existing
    Federal environmental laws. Such expertise is important if the
    permitting process is to be accelerated without compromising
    environmental safeguards.
        Some may maintain that these provisions are unnecessary to increase
    domestic refinery capacity because existing regulations are not to
    blame for the relative lack of investment in increased refining
    capacity. While no single regulatory requirement should be blamed for
    discouraging investment in the refining sector, it is difficult to
    seriously maintain that regulatory costs in the aggregate do not effect
    industry investment decisions at the margin. Insofar as regulations
    increase the costs of constructing, expanding and/or operating a
    refining facility, they decrease the attractiveness of such investments
    as compared to available alternatives and potential investors will
    demand greater marginal returns before proceeding with such
    investments. Make no mistake, regulatory costs and permitting delays
    reduce the profit margins of proposed refinery projects. Thus, while
    regulatory burdens cannot explain the entirety of investment trends in
    this sector, there should be little doubt that regulatory costs have an
    effect on the margin and the greater the costs and uncertainty involved
    with existing regulations, the greater that effect will be. It is true
    that few firms have sought to construct new refineries in the past few
    decades, but this is not particularly relevant. Insofar as existing
    permitting requirements and other regulatory hurdles discourage the
    construction of new facilities, they discourage such investment before
    the siting and permitting process begins. If it took the Arizona Clean
    Fuels project a reported five years to obtain air quality permits for a
    proposed refinery project, few companies will be encouraged to follow
    their lead.
        Even were if it true that existing regulations and permitting
    requirements, in the aggregate, have little effect on industry
    decisions to construct or expand refineries in the United States, there
    is nothing to fear from S. 1772. If streamlining the permitting process
    for new refineries does not increase the attractiveness of such
    investments, then the law's permitting provisions will not be invoked,
    as no governor will seek a refinery permitting agreement if there is no
    interest in expanding or constructing a refinery. In short, while
    reasonable people may disagree on the extent to which title II of S.
    1772 will spur additional investment in refining capacity, adoption of
    such a measure is unlikely to cause any harm. The same cannot be said
    for many competing policy proposals.
        Streamlining permitting for new refinery capacity makes sense, but
    the problems faced by refineries are even larger. Indeed, I would
    suggest that these provisions do not go far enough. It is well known
    that many existing regulations impose substantial costs without
    producing corresponding environmental benefits. In particular, various
    studies, including the EPA's noted Yorktown study, have demonstrated
    that it is possible to meet or exceed current standards of
    environmental performance at substantially lower cost. During the
    Clinton Administration, the EPA launched several initiatives, including
    Project XL, that sought to improve the performance and reduce the cost
    of environmental programs simultaneously. These initiatives failed to
    produce substantial benefits because the EPA and State agencies
    implementing Federal programs pursuant to delegated authority under the
    various environmental laws lack the statutory to authorize deviations
    from existing requirements, even where such deviations will reduce the
    cost of meeting or exceeding existing environmental standards. For this
    reason, the Committee should consider authorizing EPA to waive
    applicable environmental requirements upon a demonstration that
    equivalent or greater environmental benefits can be achieved at lower
    cost. This could further reduce the regulatory costs associated with
    constructing or expanding refineries to serve domestic markets, while
    also spurring innovation in emissions control, regulatory
    implementation and design.
                            boutique fuel provisions
        Gasoline markets' ability to respond to supply disruptions and
    price changes have been severely hampered by Federal fuel content
    mandates under the Clean Air Act. Imposing various boutique fuel
    mandates on different regions of the country has balkanized domestic
    gasoline markets and increased prices for consumers for minimal
    environmental benefit. By segmenting national gasoline markets, these
    requirements have made some regions more vulnerable to supply
    disruptions and volatile gasoline prices. Some boutique fuel
    requirements have further strained gasoline supplies by reducing the
    volume of saleable product that can be produced. Yet since passage of
    the 1990 Clean Air Act, such mandates have been expanded, not reduced.
    This is ironic because one of the primary reasons for Federal, as
    opposed to State, regulation of fuel content is to take advantage of
    the economies of scale inherent in producing a fungible commodity for
    national markets. Because Federal laws have facilitated, and even
    mandated, the proliferation of various boutique fuels, they have
    contributed to some of the ills that Federal fuel regulation was
    intended to solve.
        Insofar as S. 1772 slows the proliferation of additional fuel
    mandates, it is a welcome step. Under these provisions, States will
    continue to benefit from the use of such fuels, but the aggregate
    number of fuel formulas that refiners are required to produce--and
    therefore the extent to which national gasoline markets are further
    fragmented--will not increase as the Nation seeks to reduce the amount
    of air pollution from automobiles.
        The Energy Policy Act allows States to seek emergency waivers from
    Federal boutique fuel requirements. S. 1772 sensibly reinforces these
    provisions by making clear that States will be held harmless under the
    Clean Air Act where the EPA has granted an emergency waiver. This
    removes a potential disincentive to States that would otherwise seek
    waivers under the newly adopted Energy Policy Act waiver provisions.
    This is a welcome step, but the Committee may wish to consider
    expanding the opportunities for States to seek waivers from existing
    boutique fuel requirements where such waivers are consistent with
    meeting relevant environmental standards. For instance, the Committee
    should consider granting the EPA broader authority to approve waivers
    from existing boutique fuel requirements when a State can demonstrate
    it will attain relevant air quality standards without such fuel
    mandates. From an environmental standpoint, it is more important that a
    State meet existing air quality standards than that State adopts
    specific regulatory controls. If States can meet existing environmental
    standards without adopting additional fuel content requirements, they
    should be allowed to do so.
        Federal interventions in energy markets always have the potential
    to do harm as well as good. Sometimes the net impact is negative. Given
    some of the troubling proposals recently advanced to address concerns
    about increased gasoline prices, this Committee is to be commended for
    its prudent approach to this important issue. It is far wiser to adopt
    modest measures designed to facilitate the market's natural response to
    supply disruptions and price increases than to adopt additional layers
    of regulatory mandates. Indeed, some proposals, such as those
    purportedly designed to prevent ``price gouging,'' could exacerbate the
    harms that they seek to prevent because the profit motive plays a key
    role in calibrating supply and demand. As the Federal Trade Commission
    noted in its June 2005 study, Gasoline Price Changes: The Dynamic of
    Supply, Demand, and Competition:

            Profits play necessary and important roles in a well-
            functioning market economy. . . . Profits compensate owners of
            capital for the use of the funds they have invested in a firm.
            Profits also compensate firms for taking risks, such as the
            risks in the oil industry that war or terrorism may destroy
            crude production assets or that new environmental requirements
            may require substantial new refinery capital investments.

        Therefore, even the best-intentioned regulatory initiatives to
    constrain profit-seeking, such as by defining what constitutes a
    ``fair'' or ``reasonable'' profit in a given industry, are more likely
    to produce future shortages and higher prices than the status quo.
        Other proposals would needlessly centralize the regulation of local
    land use decisions under the guise of facilitating increases in
    refinery capacity. Such measures would be equally unwise, and would
    likely undermine the protection of environmental resources at the State
    and local level. These measures, too, should be rejected.
        Mr. Chairman and members of this committee, I recognize the
    importance of these issues to you and your constituents, and I commend
    your efforts to develop a sound policy response to these concerns. I
    hope that my perspective has been helpful to you, and will seek to
    answer any additional you might have. Thank you.
                                     ______

    Responses by Jonathan Adler to Additional Questions from Senator Warner
        Question 1. Refinery Capacity.--We all know that the supply of
    crude, refinery capacity, and the transportation network are the three
    major variable costs associated with prices at the pump. How
    specifically will increased refinery capacity bring down the price
    consumers pay for a gallon of gasoline?
        Response. There are many factors that influence the retail price of
    gasoline. While the cost of crude oil is typically the largest single
    factor, refinery capacity also plays a role. Increased refinery
    capacity will increase the supply of gasoline and other refined
    petroleum products. All else equal, this should relieve upward pressure
    on gas prices. Increased refining capacity should also provide more
    flexibility in responding to temporary supply disruptions, as there
    would be more spare capacity available. It is worth noting that those
    regions of the country with greater refining capacity tend to have
    lower prices and less price volatility than those regions in which
    refining capacity is more limited. As the Federal Trade Commission's
    June 2005 study Gasoline Price Changes: The Dynamic of Supply, Demand,
    and Competition concluded ``Regional differences in refining capacity
    and gasoline transportation infrastructure can result in differences in
    average regional prices, as well as regional price variability.'' (P.
    69) The Energy Information Administration and the U.S. GAO have also
    cited refining capacity constraints as a factor influencing retail
    gasoline prices.

        Question 2. Refinery Capacity.--Is the U.S. total refinery capacity
    truly a driver of gasoline cost by itself or is it events such as
    Hurricane Katrina that shut in many refineries that have the largest
    effect on price volatility?
        Response. Limited refinery capacity itself can have an impact on
    gasoline prices. It also can exacerbate the effects of natural
    disasters and other events that can cause temporary supply disruptions.
    As noted above, one consequence of increased refinery capacity is an
    increase in spare capacity that can be used to meet temporary increases
    in demand or to compensate for supply disruptions. This is important
    because occasional supply disruptions, whether caused by natural
    disasters or other events, are inevitable. While increased refinery
    capacity will not eliminate such events, it would reduce the effect of
    such events on consumers.

        Question 3. Refinery Capacity.--What is preventing refineries from
    being built or expanded today; cost; bureaucracy of local, State, and
    Federal permits; environmental regulation?

        Response. All of the above play a role in industry decisions
    whether to expand or construct new refineries, as do profit margins
    within the refining sector. As the Federal Trade Commission concluded
    in its June 2005 report, Gasoline Price Changes: The Dynamic of Supply,
    Demand, and Competition, the reasons there have been no new gasoline
    refineries constructed since 1976 include ``costly and extensive
    permitting and licensing requirements mandated by various Federal,
    State, and local environmental and other laws, as well as community
    opposition.'' (P. 50).

        Question 4. Fischer-Tropsch technology (converting coal to liquid
    fuel).--Given the long history of Fischer-Tropsch technology and the
    decades of Federal R&D investment, what is holding back the development
    of commercial F-T facilities in the United States?
        Response. I do not know enough about the history or economics of
    Fisher-Tropsch technologies to comment.

        Question 5. Fischer-Tropsch technology (converting coal to liquid
    fuel).--Would long term contracts with price floors for F-T fuel
    provide substantial guarantees for companies to invest in the
    construction of a facility?
        Response. I do not know enough about the history or economics of
    Fisher-Tropsch technologies to comment.

        Question 6. Fischer-Tropsch technology (converting coal to liquid
    fuel).--What affect on national or worldwide demand might the existence
    of one or two F-T facilities that produce 100,000 barrels of fuel per
    day?
        --How might that affect prices?
        --Would price effects be more regional than national?
        Response. I do not know enough about the history or economics of
    Fisher-Tropsch technologies to comment.

        Question 7. Fischer-Tropsch technology (converting coal to liquid
    fuel).--What other benefits would F-T fuels have for the nation/world?
        Response. I do not know enough about the history or economics of
    Fisher-Tropsch technologies to comment.

        Question 8. Boutique Fuels.--Many free market thinkers have argued
    that the expansion of the number of boutique fuels has been a
    contributing factor to rising prices. In addition, it is believed by
    some that a ratchet down of the number of boutique fuels would bring
    down gas prices without any adverse effect on the environment. Would
    you comment on this theory and whether or not limiting the number of
    boutique fuels would also limit a State's options to comply with
    Federal environmental laws?
        Response. As I noted in my written statement, the ability of
    gasoline markets to respond to supply disruptions and price changes
    have been severely hampered by Federal fuel content mandates under the
    Clean Air Act. The proliferation of such requirements has balkanized
    domestic gasoline markets, resulting in higher consumer prices and
    increased price volatility in much of the country. Some boutique fuel
    requirements have further strained gasoline supplies by reducing the
    volume of saleable product that can be produced. This is not just the
    conclusion of ``free market thinkers.'' The Federal Trade Commission's
    2005 report on gasoline prices, cited above, reached similar
    conclusions, as have other analyses. For example, in May 2005 testimony
    before the Committee on Government Reform Subcommittee on Energy and
    Resources, the U.S. GAO observed that California's fuel requirements
    are among the reasons that California typically experiences higher
    gasoline prices than the rest of the country. The National Petroleum
    Council's December 2004 report on petroleum supply likewise concluded
    that boutique fuel requirements have ``fragmented the market,
    increasing the potential for supply disruptions and price volatility.''
        While the purpose of most boutique fuel requirements is to improve
    air quality, it is important to note that this has not always been the
    result. Some fuel requirements, such as the minimum oxygen requirement
    imposed under the 1990 Clean Air Act, did not have the environmental
    benefits that many had hoped. Indeed, in some parts of the country, it
    appears that the oxygenate requirement caused net environmental harm. I
    also believe that various fuel regulations requiring the increased use
    of ethanol have not had a beneficial impact on the environment.
        Gradually reducing the number of boutique fuel formulas that
    refiners can be required to meet should ease upward pressure on
    gasoline prices and reduce price volatility without compromising
    States' ability to meet Federal air quality standards. A more rapid
    reduction, such as would be mandated under the bill recently passed in
    the House of Representatives, might not have as benign an effect in the
    short to medium term. Because investments have already been made to
    meet existing boutique fuel requirements, a sudden, sharp drop in the
    number of fuel formulas could actually have an adverse effect on fuel
    prices, insofar as it could temporarily disrupt gasoline supplies in
    parts of the country. For this reason, a more gradual reduction in the
    number of fuels, as contemplated in S. 1772, is a more sensible
    approach.
        Nothing in S. 1772 will prevent a State from continuing to rely
    upon boutique fuel requirements in existing State Implementation Plans.
    To be sure, limiting the ability of individual States to adopt
    additional state-specific fuel requirements may limit States' future
    flexibility at the margin, but I do not believe this effect will be
    significant. States will retain the ability to adopt a wide range of
    fuel standards to reduce automotive emissions, and will continue to
    benefit from remaining clean fuels requirements.
                                     ______

           Responses by Jonathan Adler to Additional Questions from
                                Senator Jeffords
        Question 1. In your written statement you State that there is a
    reason to question whether foreign refiners will continue to
    manufacture gasoline for the U.S. market, particularly in light of our
    fuel content requirements. You make this statement despite the fact
    that the U.S. has and continues to increase its imports of refined
    product from foreign refiners. Do you have evidence based on your
    research of this, or an example that you can share with the Committee?
        Response. It is well known that foreign demand for both crude oil
    and refined petroleum products has increased dramatically and that this
    trend is likely to continue. While U.S. imports of gasoline have
    increased in recent years, imported gasoline (as opposed to imported
    crude oil) remains only a very small fraction of overall U.S. gasoline
    supply. This is because is has traditionally been far more economical
    to refine petroleum products closer to the end markets.
        The adoption of increasingly stringent fuel content requirements is
    likely to reduce the ability of the U.S. to rely upon foreign refiners
    to supply gasoline for the same reasons that the proliferation of
    regional boutique fuel requirements has balkanized domestic markets and
    made some regions of the country more vulnerable to supply disruptions.
    Insofar as any refiner, domestic or foreign, has to refine gasoline so
    as to meet the specific requirements of a given market, they sacrifice
    some of the economies of scale involved with producing a fungible
    commodity. As the National Petroleum Council observed in its December
    2004 report on petroleum supply, it is unlikely that foreign refiners
    will produce significant amounts of gasoline that meets the
    specifications of U.S. markets where those specifications are
    significantly different, and more expensive to meet, than foreign
    product specifications.

        Question 2. In your written statement, you state that, in the face
    of high gasoline prices, the Congress should not be seeking to address
    price gouging or adopting subsidies for energy efficiency because such
    strategies interfere with market operations. Why then are the loan
    guarantees for certain types of refineries, the grants to locate
    refineries on former defense sites, and the grants for EPA's Natural
    Gas STAR program economically preferable? Aren't these also subsidies
    that, in your view, would distort the market to pick winning
    technologies and promote efficiency?
        Response. My written statement was largely confined to titles II
    and IV of the bill. Insofar as other provisions of the bill provide for
    subsidies for particular energy technologies or investments, I am
    skeptical that such measures represent an efficient or effective way to
    address current concerns about energy prices and supply. With regard to
    the use of recently closed defense facilities as sites for new refinery
    construction, I would add the qualification that providing Federal
    redevelopment assistance directly to such communities is not
    necessarily tantamount to providing a subsidy to industry.

        Question 3. You have stated that one of the benefits of the bill is
    that it provides flexibility to States because ``the relevant
    provisions are only to be invoked at a State's request.'' Would you
    agree though that the two Clean Air Act changes in title IV are not
    invoked at a State's request, and that they are nationwide changes?
        Response. The provisions of title II are clearly only invoked at a
    State's request. The waiver provision in title IV is ``nationwide''
    insofar as it could apply to any part of the country subject to a
    waiver under Section 211(c)(4)(C) of the Clean Air Act, but I do not
    consider this provision to be a substantive change in the law. Rather,
    in my opinion, it merely clarifies that a ``waiver'' granted under this
    section of the CAA is a waiver in fact, and not just in name. The EPA
    cannot be said to have ``waived'' a fuel requirement under the CAA if
    States are to be held responsible for the impact of such a waiver.
        It could be argued that the boutique fuel reductions provision is a
    ``nationwide change.'' This provision does not alter in place emission
    controls, however. Nor does it otherwise effect existing State
    implementation plans in any part of the country, let alone nationwide.
    Moreover, this provision will not prevent any State from continuing the
    use of a given boutique fuel requirement that it has adopted as part of
    an approved State Implementation Plan. Its only effect is to reduce the
    number of boutique fuel formulas over time after States have decided to
    discontinue the use of such fuels under the SIPs. Thus, this provision,
    like those of title II, is ultimately dependent upon the decision of
    State policymakers.

        Question 4. I want to ask you about how the bill's changes to the
    Clean Air Act that would no longer require States to account for
    emissions associated with emergency fuel waivers benefit the market.
    You stated that the benefit of this provision is that it removes a
    ``disincentive'' States face in exercising a waiver. I have to tell you
    that I find this characterization somewhat surprising, because in my
    experience Governors have not been hesitant to request waivers during
    times of fuel supply disruption, emergency or high prices. It happened
    in 1995 when reformulated fuels were introduced, in 2000 and 2001 in
    the Midwest market, and, in my experience, Governors are more likely to
    request waivers than EPA is to grant them.
        Response. Whether or not Governors have requested waivers in the
    past, or will do so in the future, says nothing about whether a given
    provision of Federal law creates a ``disincentive'' to seek such a
    waiver. Where Governors seek waivers, it is because the incentives for
    such a waiver--incentives caused by supply disruptions and the like--
    are greater than the disincentives created by the prospect of potential
    consequences under the Clean Air Act.

        Question 5. Nevertheless, I want to understand your views about the
    effect on the market of removing requirements for compliance with the
    Clean Air Act once a waiver is granted. Suppose, as happened in the
    Gulf, there is a refiner, making reformulated gasoline or low sulfur
    diesel, there is a supply emergency and the use of these products in a
    State or several States is waived. Further, the State now, under this
    bill, no longer has to account for those emissions and use the
    refiner's product after the emergency has passed. How does this provide
    market surety to clean fuels manufacturers once they get back up and
    running, and what is a refiner's likely market behavior? Are they
    likely to manufacture more clean fuels, or produce and stockpile away
    some dirty fuels that they can still sell during supply emergencies?
        Response. If waivers are granted too often it could certainly
    reduce the incentive refiners have to ensure consistent supplies of
    boutique fuels. This is one of the reasons why I believe a gradual
    reduction in boutique fuel requirements, as contemplated under S. 1772,
    is preferable to more drastic approach adopted in the legislation
    recently passed in the House of Representatives. I also believe that
    these sorts of concerns justify the requirement in Section 211
    (c)(4)(C)(ii) that the EPA Administrator consult with the Secretary of
    Energy.
        More broadly I would note that Congress has already determined that
    it is important to have a provision in Section 211 of the Clean Air Act
    providing for the temporary waiver of boutique fuel requirements where
    necessary to serve the public interest and respond to temporary supply
    shortfalls. Congress has already concluded that the benefits of such
    waivers, particularly to those on fixed incomes for whom price spikes
    caused by natural disasters and other events have a disproportionate
    impact, justify the occasional waiver of boutique fuel requirements. If
    this is to be an actual waiver--that is, if the relevant requirements
    are actually to be ``waived''--then it makes sense that States should
    not be penalized when such a waiver is granted. If States are not held
    harmless for the consequences of such a waiver--waivers that the EPA
    and Department of Energy have concluded are in the public interest due
    to ``extreme and unusual'' circumstances--then it cannot be said that
    the requirements were actually ``waived.'' This is why I believe this
    provision is simply a clarification of the intent of the provisions
    that have already been adopted into law.

        Question 6. You indicate in your written testimony that ``nothing
    in this bill alters the substantive environmental requirements of
    Federal and State law.'' The bill does establish permitting deadlines
    and new judicial review requirements for participating States, would
    you agree that those changes, at a minimum, do result in a substantive
    change in the procedural requirements of Federal and State law?
        Response. These changes are not ``substantive environmental
    requirements.'' Limiting the number of days an agency can review a
    permit application before accepting or rejecting the permit does not
    change any substantive environmental requirement, as it does not change
    any of the environmental requirements imposed on the permit applicant.
    It is a procedural requirement. Similarly, the judicial review
    provision does not change the ``substantive environmental
    requirements'' of either State or Federal law. It does require that
    challenges to decisions made under this provision be brought in Federal
    court, but this does not change the substantive requirements that are
    to be reviewed.

        Question 7. With respect to the judicial review provisions of title
    II, for States that opt in to the new permitting system authorized by
    this bill, there would be a required change to the venue in which cases
    are litigated under Federal and State environmental law. Cases would
    now have to go to the district court in which the refinery is located.
    Though a litigated outcome is always difficult for companies to
    predict, isn't there some benefit to companies to stay within the
    current judicial forums because of precedent?
        Response. No. Where Federal courts are called upon to interpret
    State law, they are bound by State law precedents in State courts.
    Insofar as a challenge to a permit alleges that the EPA or relevant
    State agency violated State permitting rules, the Federal court would
    apply State law as it has been interpreted by State courts. In my
    opinion, the primary justification for the judicial review provision is
    that it avoids the incongruity of suits against the Federal EPA in
    State courts and provides a single forum for the resolution of
    challenges to permits issued under this provision. Indeed, by providing
    a single forum for such challenges, this provision will, if anything,
    reduce the uncertainty and unpredictability in the process.

        Question 8. You discuss in your testimony the need to reduce the
    proliferation of boutique fuels. The new energy law does just that, it
    caps the total number of fuels both nationwide and in each region. We
    cannot, as of the enactment of that law, have a greater number of fuels
    than we do today. It also requires EPA to remove fuels from the list if
    a State stops using them, just as this bill does. The difference is
    that under this bill, if a State stops using a fuel, the slot for that
    fuel goes away and cannot be replaced with another fuel. Can you
    explain why this provision of the bill, that prohibits market entry for
    new cleaner fuels, benefits the market or a manufacturer that has
    developed a clean fuel and wants to sell it?
        Response. As I noted in my written testimony, the proliferation of
    the number of boutique fuel requirements balkanizes energy markets and
    thereby creates upward pressure on gasoline prices and increases the
    risks of supply disruptions and resulting price volatility. This is not
    merely my personal view. The FTC, NPC, EIA, and GAO have all reached
    similar conclusions. The provision in S. 1772 seeks to address this
    concern, but does not prohibit the development of cleaner fuels. It
    does, however, control the number of fuel formulas that will be
    available and ensures that the aggregate number of fuel formulas will
    decline over time.