[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
__________
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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.
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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.