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



                                                       S. Hrg. 109-1001
 
     S. 1772, THE GAS PETROLEUM REFINER IMPROVEMENT AND COMMUNITY 
                        EMPOWERMENT ACT OF 2005

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


                                HEARING

                               before the

               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 18, 2005

                               __________

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


               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS




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                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                  JAMES M. INHOFE, Oklahoma, Chairman
JOHN W. WARNER, Virginia             JAMES M. JEFFORDS, Vermont
CHRISTOPHER S. BOND, Missouri        MAX BAUCUS, Montana
GEORGE V. VOINOVICH, Ohio            JOSEPH I. LIEBERMAN, Connecticut
LINCOLN CHAFEE, Rhode Island         BARBARA BOXER, California
LISA MURKOWSKI, Alaska               THOMAS R. CARPER, Delaware
JOHN THUNE, South Dakota             HILLARY RODHAM CLINTON, New York
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
JOHNNY ISAKSON, Georgia              BARACK OBAMA, Illinois
DAVID VITTER, Louisiana
                Andrew Wheeler, Majority Staff Director
                 Ken Connolly, Minority Staff Director



                            C O N T E N T S

                              ----------                              
                                                                   Page

                            OCTOBER 18, 2005
                           OPENING STATEMENTS

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

                               WITNESSES

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

                          ADDITIONAL MATERIAL

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


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

                              ----------                              


                       TUESDAY, OCTOBER 18, 2005

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Senator Boxer. Thank you very much, Mr. Chairman.
    I certainly agree we need to do something about extremely 
high gas prices. What is going on now across the country, gas 
at over $3 a gallon in many places, isn't new for those of us 
from California. We have been fighting these outrageous prices 
for years now.
    S. 1772, in my opinion, and I could be in a minority, I 
feel it is not the answer. First, the oil industry does not 
need government help. Let us face it, there are a lot of people 
out there that need government help. We saw their faces when we 
saw what happened after Katrina. We see the wounded veterans 
come back from Iraq. Yes, they need government help. The oil 
industry does not need government help.
    Let us look at some of the profits of the oil companies. 
Compared to the same period as last year, second quarter, 2005 
profits, BP up 31 percent, Conoco Phillips up 56 percent, 
Exxon-Mobil up 32 percent, Royal Dutch Shell up 118 percent. 
Right after Katrina, Exxon announced profits of $110 million 
per day, 60 percent higher than last year.
    According to the Denver Post, the gross profit margins of 
refineries more than tripled between September 2004 and 2005. 
That is the profits of refineries. By the way, this is a 
change. In the old days refineries didn't make money; today 
refineries make money. Their profits currently equal $23 a 
barrel. Here we are talking about money to the refineries, to 
the oil companies to build refineries.
    Second and interestingly, oil companies are the reasons 
there aren't more refineries. They don't want to increase 
supply. Let me tell you a story from California. Shell wanted 
to close the Bakersfield refinery in 2004. First, they said it 
wasn't profitable. Then when the Attorney General asked them 
for their information, they said, ``Oh, well, yeah, it is in 
fact profitable.'' When further pushed, they admitted it was 
the most profitable of their refineries.
    Let me tell you, Senators, why Shell finally agreed to sell 
off the refinery rather than just shut it down. We went public, 
all of us from California, elected officials across the board, 
and we said, if you shut down this refinery, California will 
get a 2 percent shortfall, it is going to really impact us on 
our gasoline. We pressed and pressed and essentially forced 
them to sell the refinery. They got a good price for it and it 
is profitable.
    During periods of high gasoline prices in California, 
refineries have actually shut down under the guise of ``routine 
maintenance.'' We saw Enron do this and then we saw this. This 
decreases the supply and keeps prices up. So let us not reward 
oil companies for this type of behavior.
    We can blame environmentalists and environmental groups all 
we want but we had better not blame the people of this country 
who vote for us who expect to have clean air, who want to have 
their children be healthy. In 2003, refineries emitted over 67 
million pounds of toxic chemicals. I will get specific, 3.6 
million pounds of known cancer causing substances, 2.4 million 
pounds of toxins that damage the reproductive system, 6.9 
million pounds of toxins that harm the development of children.
    In California, communities that border refineries and 
chemical plants have high concentrations of childhood asthma. 
We should be working to make the air cleaner, not allowing oil 
companies who are making record profits to make it worse. We 
already see the pullback on new source review. Is it too much 
to ask a company that is making billions and billions of 
dollars to clean up their act when they want to expand their 
capacity?
    Mr. Chairman, I know that we are good friends but we are so 
different on this point. I think it is a fallacy that there is 
an either/or option here, either we have refineries or we have 
strong environmental laws. I believe that two published studies 
by a professor at U.C. San Diego concluded that strong 
regulations and procedures governing refineries increased 
productivity at refineries and may actually increase job 
growth.
    Mr. Chairman, we do have a problem with high gas prices. We 
should close the SUV loophole, we should set CAFE standards at 
35 miles per gallon by 2013, we should promote more hybrids. I 
drive a hybrid, I know Senator Chafee has a couple of them. 
They work. Our latest hybrid is getting 52 miles per gallon and 
yes, gentlemen, because you always ask me, it has good pick-up. 
My male friends always say, does it have good pick-up. Yes, it 
has great pick-up.
    We should make sure we have better tires on our cars since 
that adds to fuel efficiency. We should require the FTC to 
investigate the gas market for manipulation. There are a few of 
us working to impose a windfall profits tax on oil companies 
that are taking advantage of consumers and rebate the tax 
collected back to the American consumer.
    The point is there are so many things we could do that 
don't involve giving government benefits to big oil companies 
who are making record profits and make it easier for them to 
pollute our air with deadly chemicals.
    I thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Boxer.
    I do have 10 here now, so we are going to recess our 
hearing for a moment while we take up the request that we have.
    [Recess.]
    Senator Jeffords. Mr. Chairman, I ask consent that I put in 
a longer version of my statement on this bill into the hearing 
record. I have to go to the Health Committee but I will try to 
return for questions.
    Senator Inhofe. Yes. Without objection, that will be the 
order.
    Senator Jeffords. For the record, I have a hybrid.
    Senator Voinovich. Mr. Chairman, as part of my statement, I 
would like to insert in the record a letter from the National 
Mining Association in regard to the issue of refining coal.
    Senator Inhofe. Certainly. Without objection that will be 
the order.
    [The referenced document follows:]
              Statement of the National Mining Association
    The National Mining Association (NMA) appreciates the opportunity 
to provide its views on S. 1772, the ``Gas Petroleum Refiner 
Improvement and Community Empowerment Act.'' NMA is a national trade 
association representing the companies that mine most of the coal, 
metals, industrial and agricultural minerals produced in the United 
States; manufacturers of mining and mineral processing machinery and 
supplies; transporters; financial and engineering firms; and other 
businesses related to mining.
    As the committee debates how America should rebuild and reform its 
energy infrastructure in the wake of natural disasters, persistently 
high energy prices and shortages of some domestic energy resources, it 
should not limit discussion to expansion of the number of refineries 
only. The committee also should look at expanding the kinds of 
refineries built. Coal liquefaction or coal-to-liquids (CTL) refineries 
can be located anywhere that coal is produced. This proven technology 
can produce clean transportation fuel using domestic coal thus 
expanding our supply of transportation fuels while decreasing 
dependence on overseas sources of energy.
    NMA strongly supports S. 1772, but urges the committee to amend the 
definition of ``refinery'' to include refineries that can use coal as a 
feedstock. This amendment is necessary to ensure that facilities that 
process and refine coal by any chemical or physical process, including 
liquefaction, to produce gasoline, diesel or other liquid fuels are 
afforded the same treatment under the Act as crude oil refineries. 
Equal treatment with petroleum refineries will encourage the widespread 
deployment of CTL facilities and promote the economic and national 
security benefits that modern and existing CTL technology can offer.
    According to the Energy Information Agency (EIA), the U.S. now 
depends on foreign sources of petroleum for 56 percent of its needs. 
EIA forecasts that share will increase to nearly 70 percent by 2025 if 
nothing changes. Our dependence on foreign sources extends to both 
crude oil and refined products, the later due to the lack of new 
refinery capacity in the U.S. Our existing refining capacity is 
stretched to its limits and beyond. America's energy security is 
challenged by both a dependence on foreign supplies and a geographic 
concentration of refining capacity.
    One solution to these, and other, problems related to the Nation's 
critical need for a reliable and affordable domestic supply of liquid 
transportation fuels is CTL. CTL fuel technologies are well-established 
and have been improved by 30 years of U.S. government research and 
development efforts. These efforts, undertaken directly and through 
industry partnerships, have produced innovative processes ready for 
widespread commercialization in the 21st century.
    CTL is not a new technology. By 1944, Germany had 25 liquefaction 
plants that produced up to 124,000 barrels daily and met 90 percent of 
the Nation's needs. In the 1950s, South Africa developed a commercial 
liquid fuels industry using synthesis gas to produce transportation 
fuels such as gasoline and diesel. Since the early 1980s, the 
technology has been developed further and has produced more than 700 
million barrels of synthetic fuels. CTL is not new, but advancements 
over the years mean that the CTL plant of today is modern, efficient 
and environmentally sound.
    Our Nation, with its abundant and readily available supplies of 
domestic coal combined with the nation's critical need for reliable and 
affordable supply of liquid fuel, should be promoting the commercial 
development of CTL refineries. There are more than 250 billion tons of 
recoverable U.S. coal reserves, the equivalent of an estimated 800 
billion barrels of oil. This is compared to Saudi Arabia's proven 
reserves of 260 billion barrels. United States coal can be converted 
into clean, zero sulfur synthetic oil and oil products at a cost of $35 
to $40 dollars per barrel compared to current prices that are averaging 
over $62 per barrel for oil.
    China, which is the world's second biggest consumer and importer of 
oil after the U.S., is planning a $6 billion investment in new 
liquefaction plants that would produce 440 million barrels of liquid 
fuel annually. While the stage is set for rapid commercialization and 
deployment in the U.S., China with its vast coal reserves and rapidly 
growing economy currently is ahead of the United States in developing 
the capability to use coal as a transportation fuel.
    A number of factors have discouraged the development of CTL plants 
in the U.S. First, if oil prices stay above $35 to $40 per barrel, a 
coal refinery makes economic sense. If the price drops below that range 
(as it has been for most of recent history), there are no assurances 
that a coal refinery can remain competitive. The historic volatility of 
oil prices combined with the relatively steady supply of affordable 
transportation fuel until now has made the risks unacceptable to 
investors.
    Second, coal refineries are expensive to construct with capital 
costs in the $600 million to $700 million range for a 10,000 barrel per 
day plant. The technical and financial risks of a ``first-of-a kind'' 
plant in the United States have discouraged consideration of this type 
of investment in the past.
    Finally, the lead time for a coal refinery, as with all refineries, 
is a minimum of five to seven years under optimal circumstances.
    But, the many advantages of CTL fuels mean that this committee 
should take steps to encourage its rapid use. The deployment of CTL 
facilities can improve national and economic security by lessening 
dependence on foreign oil and substituting plentiful, more affordable 
U.S. coal. By using this domestic resource, CTL deployment can produce 
more jobs for Americans and provide a positive influence on the U.S. 
balance of trade and the economy in general.
    From an environmental perspective, CTL is capable of carbon 
capture. CTL technology also can serve as a bridge to a hydrogen fuel 
future by linking multiple types of plants into one, such as co-
production of liquid fuels, electricity, hydrogen and other products.
    Coal reserves are located in 38 States and coal is mined in 26 
States representing every region of the country. This means that CTL 
facilities can be constructed across the country providing a geographic 
diversity which will reduce threats to energy security which may result 
from natural or other disasters.
    Although existing impediments to wide scale deployment of CTL 
technologies are challenging, they can be eliminated or mitigated 
through concerted and focused efforts by government, industry and 
public support. Many of these challenges also confront those who are 
attempting to refurbish or construct new oil refineries.
    Among the hurdles to deployment are those that are addressed in S. 
1772, including economic development assistance to encourage refinery 
activity on BRAC property and the streamlining of the refinery 
permitting process. Coal state economies as well as the energy 
consuming public will benefit from the provisions of the bill 
encouraging coal based refineries on BRAC properties. Needless permit 
delays will affect the construction of CTL refineries just as they do 
petroleum refineries.
    The mining industry is all too familiar with multiple permit 
challenges and repeated appeals. The delays caused by repetitive 
challenges and appeals can make projects unattractive to lenders who 
require a return on their investment within a reasonable period of 
time. This is particularly true with a first of a kind facility such as 
a CTL plant where the potential risks set out above are a considerable 
hurdle to obtaining project financing.
    Failure to afford the same incentives and protections for coal 
liquefaction refineries made available to petroleum refineries under S. 
1772, would deny the Nation the opportunity to use its domestic 
resources to address a significant energy and national security 
challenge.
    NMA appreciates the opportunity to provide the committee its views 
on S. 1772 and urges it to take advantage of this opportunity to 
provide a level playing field for coal-to-liquids technology, which 
could have a significant positive effect on our nation's energy and 
economic future.
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[GRAPHIC] [TIFF OMITTED] T9520.006

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

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

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

                            I. Introduction

    The National Association of Convenience Stores (``NACS'') and the 
Society of Independent Gasoline Marketers of America (``SIGMA'') 
respectfully submit this statement in support of S. 1772, the ``Gas 
Petroleum Refiner Improvement and Community Empowerment Act'' (Gas 
PRICE Act). NACS and SIGMA request that this statement be made a part 
of the official record of the October 18, 2005 hearing before the 
Senate Environment and Public Works Committee on S. 1772.

                          II. The Associations

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

                        III. Support for S. 1772

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

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

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

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

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

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

          STATEMENT OF HON. SHAWN MITCHELL, COLORADO 
                         STATE SENATOR

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

STATEMENT OF ERIC SCHAEFFER, DIRECTOR, ENVIRONMENTAL INTEGRITY 
                            PROJECT

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

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

    Mr. Adler. Thank you for the invitation to testify today. 
Thank you, Senator Voinovich, for your hospitality while I am 
away from the great State of Ohio. It is a pleasure to be here 
on this important issue.
    No one likes to pay high gas prices. Consumers 
understandably wish gasoline was less expensive and prices less 
volatile. The question is how to accomplish that goal without 
compromising environmental protection, trampling upon State 
prerogatives or disrupting the efficient operation of energy 
markets.
    History clearly demonstrates that well intentioned 
interventions can have perverse consequences and cause more 
harm than good. There have already been discussions today of 
some of this Nation's experiences in the 1970s when ill 
considered energy policies had quite disastrous effects.
    From this perspective, I commend this committee for taking 
a cautious and prudent approach in S. 1772 that should help 
ease pressures on gasoline supply without sacrificing other 
policy goals. I want to make a few brief comments about titles 
II and IV of the bill and submit my full written statement for 
the record.
    With regard to refinery permitting, as Senator Obama noted 
earlier, just about everyone agrees that there is a clear need 
for increased refining capacity in the country. While existing 
domestic refining capacity may be adequate to meet current 
needs, demand is rising and current capacity is unable to 
respond to surges in demand or disruptions in supply. This 
creates both upward pressure on prices as well as increased 
volatility of prices.
    I believe it is indisputable that cumulative regulatory 
burdens play some role in discouraging investment in the 
refining sector. This is also a conclusion reached by the 
Federal Trade Commission in its June 2005 report on gas prices. 
Insofar as regulations increase the cost of constructing, 
expanding and/or operating refinery facilities, they decrease 
the attractiveness of such investment as compared to available 
alternatives.
    While I would agree that regulatory burdens cannot explain 
the entirety of refinery investment trends, there should be 
little doubt that regulatory costs have an effect on the margin 
and the greater the costs and uncertainty involved with 
existing regulations, the greater that effect will be.
    Streamlining the permitting process is an effective way to 
reduce the cost of uncertainty involved with environmental 
compliance without sacrificing environmental protection. As the 
experiences of many State environmental agencies have shown, 
Colorado is certainly among them, it is possible to streamline 
the permitting process without sacrificing environmental goals 
through the adoption of coordinated, simultaneous reviews of 
various permitting requirements across environmental media, 
establishing deadlines for permitting decisions and other 
innovations. Some States even offer money back guarantees on 
permit fees for failure to meet deadlines. Such measures are 
fully compatible with high levels of environmental performance.
    Even if skeptics are correct, the regulations play a minor, 
insignificant role in investment decisions in this area. This 
provision proposes minimal risk. As Senator Mitchell already 
noted, if streamlining the permitting process for new 
refineries does not increase the attractiveness of such 
investments, permitting provisions will not be invoked as no 
Governor will seek a refinery permitting agreement if there is 
no interest in expanding or constructing a refinery. Nothing is 
lost.
    While reasonable people may disagree on the extent to which 
title II of this bill will spur additional investment in 
refining capacity, I do not see how adoption of this measure 
will cause any harm. It leaves in place the substantive 
requirements of State and Federal law that merely seeks to 
facilitate streamlining and the expeditious processing of the 
permitting process.
    As for the boutique fuel provisions, let me say the ability 
of gasoline markets to respond to supply disruptions and price 
changes have been severely hampered by the proliferation of 
boutique fuel requirements. While such regulations play an 
important role in reducing air pollution, they have balkanized 
gasoline markets making some regions more vulnerable to supply 
disruptions and volatile gasoline prices. Again, I refer this 
committee to the June 2005 FTC report which talks about how the 
proliferation of boutique fuel requirements have left certain 
regions of the country particularly vulnerable to price 
volatility and price increases.
    Insofar as this bill provides for a gradual reduction in 
fuel types, it is a welcome step. Under these provisions, 
States will continue to benefit from the pollution reduction 
benefits of such fuels with the aggregate number of fuel 
formulas a refiner is required to produce and therefore the 
extent to which national gasoline markets are further 
fragmented will decline over time.
    In closing, let me reiterate that Federal interventions in 
energy markets have always had the potential to do harm as well 
as good. Given some of the troubling proposals recently 
advanced to address concerns about increased gasoline prices 
including some of the provisions of the recently enacted House 
bill, I appreciate this committee's prudent approach to this 
important issue. It is far wiser to adopt modest measures 
designed to facilitate the market's natural response to supply 
disruptions and price increases than to adopt additional layers 
of regulatory mandates or to trample upon State and local 
prerogatives.
    I recognize the importance of these issues to you and your 
constituents. I commend our efforts to develop a sound policy 
response to these concerns and to increase refinery capacity. I 
hope my perspective has been helpful. I am happy to answer any 
questions.
    Senator Inhofe. Thank you, Professor Adler.
    Mr. Schaeffer, you are the director of the Environmental 
Integrity Project. Tell me what that is?
    Mr. Schaeffer. We are a public interest group that tries to 
promote enforcement of environmental laws.
    Senator Inhofe. Are you involved in any challenges of any 
laws?
    Mr. Schaeffer. We have challenged successfully a law that 
would have rethought pared back emission monitoring 
requirements.
    Senator Inhofe. In your statement you said S. 1772 is 
``likely to face court challenges.'' Would that be from you?
    Mr. Schaeffer. That is possible.
    Senator Inhofe. Senator Mitchell, it is interesting that 
all the members here, all five were in State or local 
government so we all know what unfunded mandates are, we know 
what local concerns are. I think we probably share the concept 
that the closer to the people, the better the decisions.
    I think we have all felt the insufficient refining capacity 
for quite a while and we are concerned about the Federal 
Government and what we should do to act to address this problem 
but the Federal role has to be considered with the States. The 
Gas PRICE Act was carefully drafted to assist participating 
States voluntarily, not to preempt them.
    As a local elected representative and speaking on behalf of 
the State, do you think we have managed to meet this goal, this 
challenge we have?
    Mr. Mitchell. I believe you have met that goal entirely in 
several different ways. The opportunities and incentives that 
are available for BRAC placement of refinery facilities are 
entirely optional to the States and local communities that will 
be affected. If they want to pursue those opportunities, they 
have incentives and additional assistance afforded by the Act. 
There is no pressure or requirement or mandate that they pursue 
those opportunities.
    Similarly, with respect to the streamlining, the permitting 
agreement, that again is entirely optional with the State. Any 
State executive is entirely free to ignore that opportunity but 
if he or she wishes to facilitate and to streamline the process 
of approving permitting, then they are granted the opportunity 
to reach an agreement with EPA to do just that, to streamline 
the process and they have a voice throughout the entire 
process.
    Senator Inhofe. Professor Adler, I will read a statement by 
the distinguished Minority Leader of the Senate. It says, ``I 
think we need more refining capacity but you need to expand it 
according to the law.'' In reading title II, which you quoted, 
it says, ``Savings, nothing in this section affects the 
operation or implementation of otherwise applicable law 
regarding permits necessary for the construction and operation 
of a refinery.'' Do you think this statement and the law in 
general in S. 1772 complies with the desires of Senator Reid?
    Mr. Adler. Certainly. I think the bill is trying to 
facilitate and streamline the permitting process without 
changing the substantive laws that apply to refining 
facilities. I think, as I mentioned in my testimony, States 
have demonstrated there is substantial ability to make these 
processes quicker, to streamline the process without 
sacrificing the substantive requirements. We are not talking 
about exempting refineries from air pollution or water 
pollution limits; we are talking about making it easier for 
States to site facilities and expansions if those expansions 
are desired.
    Senator Inhofe. Isn't it true that as a general rule and 
perhaps Senator Mitchell would be a better one to answer this, 
the State permit requirements are more stringent in most cases 
than the Federal requirements?
    Mr. Adler. It is going to vary from State to State and it 
is going to vary on the subject matter. We see quite a bit of 
diversity. One thing we do see across the board is that States 
increasingly take environmental issues seriously and there 
certainly are many States that exceed Federal standards both in 
terms of their substantive requirements but as well as in terms 
of the amount of innovation they have demonstrated in ways of 
meeting environmental goals without sacrificing economic 
benefits.
    Senator Inhofe. Senator Mitchell.
    Mr. Mitchell. The States have to at least meet Federal 
standards but they are free to be more protective of their 
environmental quality and many are. One of the virtues of your 
proposal is that it does nothing to limit that State 
flexibility. By streamlining the process and bringing everyone 
to the same table, the States still maintain all of their 
substantive environmental protections.
    Senator Inhofe. Thank you.
    Senator Jeffords.
    Senator Jeffords. Senator Mitchell have you discussed the 
reuse of the Lowry Air Force Base in Denver in your testimony. 
At any time did Lowry consider locating a refinery on that 
property, even in the absence of the grants authorized by this 
bill?
    Mr. Mitchell. Lowry Air Force Base would not be an 
appropriate site to consider for a refinery because it is in 
the middle of a residential area. The opportunity afforded by 
this bill for communities within reasonable distance of bases 
that are not in close proximity to residential areas that I 
think is so important.
    Senator Jeffords. Thank you.
    Senator Inhofe. Senator Voinovich.
    Senator Voinovich. Mr. Adler, one of the things you 
mentioned were boutique fuels, reformulated gasoline. Could you 
tell us how they impact refining capacity and spikes in oil 
prices?
    Mr. Adler. Sure.
    Senator Voinovich. Do you think we will have more requests 
for reformulated gasoline with the advent of the new ozone and 
particulate matter standards that States are going to have to 
comply with?
    Mr. Adler. First, I certainly think States will be looking 
at pretty much everything available. Certain States will be 
looking at virtually everything available to meet the new NOx 
standards.
    Boutique fuels generally, I should note the entire 
justification for Federal regulation of gasoline was premised 
on the idea that the Nation as a whole benefits if there is a 
single standard for a fungible product so that you can make it, 
refine it in Texas, refine it in California and refine it in 
Illinois but it doesn't have to be sold there. That reduces the 
price of the product because you can take advantage of 
economies of scale. It also means there is a supply disruption. 
Several years ago if I recall correctly, there was an Illinois 
refinery that primarily made gasoline for midwestern markets. 
There was a supply disruption and they were unable to produce 
for a while.
    When you have boutique fuel requirements, different parts 
of the country are required to sell different types of 
gasoline, that means when you have a shortage like this, they 
can't go to the general market and get gasoline from anywhere, 
they have to get gasoline being produced that meets the 
specific demands of the Illinois market.
    When you have in the neighborhood of a dozen different 
boutique fuels, that means the options for communities that 
face supply disruption using some of these fuels are more 
limited and the ability of the market as a whole to respond to 
those supply disruptions and to prevent prices from spiking are 
limited. I would note the Federal Trade Commission report from 
June 2005 did note those parts of the country that have the 
most stringent boutique fuel requirements have also been most 
vulnerable to price volatility because they are least able to 
get gasoline from other parts of the country. California is a 
good example of this. California's fuel standard is the most 
stringent in the country and there aren't many places outside 
of California where they can acquire gasoline that meets the 
same standards.
    One thing about this bill in terms of meeting future air 
quality standards is that unlike the Barton bill, it doesn't 
eliminate boutique fuels tomorrow, doesn't eliminate boutique 
fuels the second it is enacted, it merely says once States are 
finished using a certain fuel requirement, once it is no longer 
in an existing State implementation plan, then the list of 
fuels will be reduced.
    I don't believe this in any significant way reduces State 
flexibility. I think it leaves on the table for the foreseeable 
future all the tools States need. I have written extensively on 
the need to get States lots of flexibility. Just over time in a 
gradual way, it is going to reduce the total number of fuels 
that refiners may have to produce. Over time that will reduce 
volatility and make it easier for the refining sector to 
respond to supply disruptions.
    Senator Voinovich. Do you think this legislation is going 
to cause anyone to build a refinery?
    Mr. Adler. It is hard to know. Certainly profit margins are 
a big deal in terms of refining investment, so are permitting 
and regulatory requirements. The FTC report I keep mentioning 
specifically notes that permitting and regulatory requirements 
influence decisions to invest in part because they influence 
profit margins. If it takes a company 3 years to get a permit, 
that investment is going to look much less attractive than if 
they know they are going to get an up or down decision in 1 
year.
    Historically, refining investments have yielded just over 
half the returns as investments in crude oil production or in 
pipelines and distribution. So for large, integrated oil 
companies, it has typically been the last place they want to 
invest their money. Currently, oil companies are experiencing 
really high margins in refining sector and one thing this bill 
does is it makes it easier both for existing companies to 
expand capacity but also makes it easier for the new firm that 
wants to come in to do that. If margins stay high, I would 
think this bill would increase the amount of investment in 
refining sector than we would have without this bill.
    Senator Voinovich. Is there anything else you think we 
could put in this that would make it more attractive to get new 
refineries built?
    Mr. Adler. I think one of the things this committee should 
consider is authorizing the sort of experiments begun in the 
Clinton administration under things like Project Excel to say 
to States if they can meet or exceed existing environment 
requirements in a less expensive way, then they should have the 
ability to do that and have the ability to petition the EPA for 
that permission.
    To give one example, there was a study about a dozen years 
ago of the Amoco Refinery in Yorktown finding that many of the 
environmental requirements placed on that refinery could be at 
much less cost and much lower cost. If I remember correctly, 
benzene emissions in particular could be reduced more cheaply 
than regulations provided for.
    Giving States that sort of opportunity and encouraging them 
to take advantage of meeting or exceeding environmental goals 
at lower cost I think could further reduce the cost of 
expanding capacity without sacrificing environmental 
performance and creating that option for State environmental 
agencies I think would be a step in the right direction.
    Senator Inhofe. Thank you.
    Senator Boxer.
    Senator Boxer. Thank you.
    Mr. Adler, do you support S. 1772?
    Mr. Adler. I certainly like title II and title IV. I don't 
know enough about Fischer-Tropsch fuel to know whether or not 
they are worthy of Federal loan guarantees.
    Senator Boxer. Do you support the bill at this stage?
    Mr. Adler. At this stage, I think the principles underlying 
titles II and IV are the right principles. Could you tweak 
language here? Probably but that is always the case with a new 
bill.
    Senator Boxer. The reason I am asking, you have made a very 
strong statement on the general issue of subsidizing energy. I 
want to read it to you. You said, ``Before new regulatory 
controls or subsidy programs are even considered, the entire 
Federal budget should be reviewed with an eye toward 
eliminating those Federal programs which inflate the use of 
energy, particularly those energy sources that are blamed for 
contributing to global warming. Instead of seeking to use 
fiscal instruments to accelerate or slow down the development 
of given energy technologies, energy policy should be shifted 
to neutral so as not to distort the energy marketplace.''
    My understanding of your work is (I am a very old economics 
major) that you have great faith in the marketplace. This type 
of bill is picking a winner clearly by what I consider to be 
subsidies, giveaways to the oil companies. How does that square 
with your very strong point that we should shift to neutral so 
as not to distort the energy marketplace?
    Mr. Adler. I don't think titles II and IV of the bill do 
pick winners. I think they are about getting out of the way so 
the market can operate.
    Senator Boxer. But I asked about the whole bill, so you are 
not taking a position on the rest of it? You either are for it 
or against it.
    Mr. Adler. As you well know, Senator, sometimes to get 
things passed, different constituencies want different things. 
I leave to this committee what sorts of compromises need to be 
made but I think titles II and IV are very important.
    Senator Boxer. You are willing to give up the heart of free 
market economics to get a couple of things in that you like 
because this is very strong.
    Mr. Adler. I would be happy to have titles II and IV pass 
by themselves.
    Senator Boxer. That helps.
    Mr. Adler. That would be fine with me.
    Senator Boxer. That would be fine with me.
    Mr. Schaeffer, welcome back. I thought you raised a very 
important point about whether oil refineries can withstand 
damage caused by powerful hurricanes; you point out this bill 
doesn't do anything about upgrading existing oil refineries to 
harden them against damage that can cause disruptions in the 
fuel supply.
    In California, we have everything in the book, not 
hurricanes but we have everything else. We have earthquakes, 
floods, fires, everything. We also have 21 oil refineries so I 
am concerned that the streamlining that Mr. Adler loves, called 
for in this bill, may interfere with applying California's 
earthquake standards to oil refineries by rushing the 
permitting process and in the long run could do more harm than 
good. Do you have a sense there is a danger here?
    Mr. Schaeffer. As I understand, the bill would pull out 
State requirements as well and consolidate it in one 
transaction and put them in front of Federal court. They would 
all be subject to that fast tracking procedure.
    Sure, I would be concerned. To use the Gulf example which I 
am a little more familiar with, you have more than half our 
capacity there. That is where the big expansion projects are, 
that is where the industry wants to go in the short run. There 
will be more hurricanes, there will be more shutdowns. It 
doesn't seem that we are planning for that in this kind of 
legislation.
    Senator Boxer. Thank you. If there is an area where we 
could agree, I would rather focus this bill on that whole issue 
because it is really key to us. We lost so much capacity and we 
are suffering all over the country because of it.
    Mr. Schaeffer. If I could have a few seconds to answer the 
Chairman's question.
    Senator Boxer. You can't because I only have 44 seconds and 
I have to ask Mr. Adler a question. Sorry.
    You said you didn't see any substantive changes in 
environmental law.
    Mr. Adler. Substantive requirements, no.
    Senator Boxer. Mr. Schaeffer, I don't think you agree with 
that?
    Mr. Schaeffer. No.
    Senator Boxer. I don't either. Let me lay out where I see 
major changes and I would like you both to comment.
    I see just the following changes to environmental laws. 
States that get fuel waivers no longer have to make up for 
emissions in their SIPs. Federal monitoring requirements can be 
replaced by potentially less comprehensive State requirements. 
It changes judicial review of environmental laws, eliminating 
State court review. It forces local permitting decisions into 
mandated rigid timeframes, rushing environmental review. I 
guess I would start with the person who agrees with me first, 
Mr. Schaeffer. Did I leave anything out or are those the main 
things?
    Mr. Schaeffer. I think that is a good summary to start 
with.
    Senator Boxer. Mr. Adler, do you agree with what I said?
    Mr. Adler. I do think it clarifies what I understood and I 
think most people understood was the intent of the waiver 
provisions in the Energy Policy Act with regard to boutique 
fuels. I think on the other provisions, I don't believe 
streamlining the permitting process or giving Governors the 
opportunity to participate in a streamlining permitting process 
changes the substantive requirements, the substantive limits on 
emissions will remain in place.
    Senator Boxer. States that get fuel waivers no longer have 
to make up for emissions in their SIP.
    Mr. Adler. My understanding is making clear what the Energy 
Policy Act intended which is an emergency waiver is granted 
that they will be held harmless for that.
    Senator Boxer. You look at this as a statement of current 
law?
    Mr. Adler. A clarification.
    Senator Boxer. Clarification and a restatement are very 
different things. I might clarify it one way and you might 
clarify it another way. It to me ends up having probably 
dirtier air at the end of the day.
    My time is up and I thank you.
    Senator Inhofe. Senator Jeffords didn't have his full time.
    Senator Jeffords. I have a question for Eric Schaeffer. In 
your view, is there a sufficient record here to legislate? Have 
we heard from all the parties that we need to? Do we know what 
the position of the refinery industry is with regard to these 
changes? What about the States and local governments?
    Mr. Schaeffer. Representatives of the refinery industry at 
other hearings made statements suggesting that these kinds of 
fixes to permits are, and I am paraphrasing and interpreting to 
be fair, not going to significantly affect capacity decisions. 
They have said flat out, we have not said environmental rules 
drive gasoline prices. That is from the head of API, the 
American Petroleum Institute.
    Bob Slaughter, National Petroleum Refiners Association, has 
said, ``I don't tinker anymore with boutique fuels 
requirements. We have eliminated the oxygenate rules that were 
giving us heartburn. Let us let it lie.'' So they are on the 
record.
    Having said that, I notice they are not here today and it 
might be useful to get their testimony and whether they feel 
this would make a significant impact.
    You do have people that are kind of hurting now in Gulf 
Coast communities. I would ask them if they think 90 days is 
enough for them to get their arms around an expansion the size 
of Motiva's at Port Arthur which was only recently under water.
    Finally, I would hope that you can find a way to talk to 
people who actually write the permits. I understand folks have 
different positions at the political level. Get to the people 
who actually write the permits and find out if they think some 
of these projects can really be reviewed seriously in the time 
this bill would allow.
    Senator Jeffords. Thank you.
    Senator Inhofe. I want to thank our witnesses and we are 
adjourned.
    [Whereupon, at 4:19 p.m., the committee was adjourned.]
    [Additional statements submitted for the record follow.]
     Statement of Hon. Christopher S. Bond, U.S. Senator from the 
                           State of Missouri
    Thank you, Mr Chairman. I commend your leadership in drafting this 
important legislation and bringing it in front of this committee for a 
hearing. I believe that passing this legislation is another important 
step in helping our Nation reduce its dependence on foreign sources of 
energy. Conservation must be an important component of our energy 
policy, but it cannot be the only component. We simply cannot conserve 
our way to energy independence.
    The simple fact of the matter is that our Nation's energy supplies 
are not keeping up with demand. This situation has been further 
exacerbated by the recent hurricanes of Katrina and Rita, which shut 
down a dozen refineries and disrupted a fifth of our Nation's gasoline 
supply.
    One of the main reasons why our Nation's supply of energy is not 
keeping pace with demand and causing higher prices is due to the lack 
of refining capacity. The last oil refinery built in the United States 
was almost 30 years ago. According to the Wall Street Journal, in 1981, 
there were 125 refineries in the United States with a capacity of 18.6 
million barrels a day. Today, there are 148 refineries with a capacity 
of 16.8 million barrels per day this despite the fact that U.S. demand 
for gasoline has increased more than 20 percent.
    A big reason for the lack of refining capacity is because, over the 
years, we have created a regulatory climate that has made it 
extraordinarily difficult and costly to build new refineries. The 
permitting process for building these new refineries along with the all 
of the court challenges can take years to accomplish. One such company 
in Arizona that intends to build a new refinery has been trying for 
almost ten years. These delays, in turn, drive up costs so much that 
constructing the refinery becomes economically infeasible.
    I believe S. 1772 takes an important step forward in streamlining 
the permitting process for new refineries. Specifically, title II of 
the establishes an opt-in program for State Governors requiring the EPA 
to coordinate all necessary permits for the construction or expansion 
of refineries. It also provides participating States with technical and 
financial resources to assist in permitting and establishes deadlines 
for permit approval. The bill does this without changing or modifying 
any existing laws. I am also pleased that the bill provides economic 
development incentives for building refineries at BRAC sites. Finally, 
the bill establishes demonstration projects for future fuels (diesel 
and jet fuel) as an emission control strategy, and holds States 
harmless for acting pursuant to the emergency waivers under EPACT 
2005's Sec 1541.
    While I very much support this bill, I believe that it is 
absolutely critical that coal-based refineries be included in as part 
of the definition of ``refinery'' in this bill. The definition of 
refinery should be amended to include refineries that can use coal as 
feedstock. There are over 250 billion tons of recoverable coal reserves 
in the United States, which is equivalent to an estimated 800 billion 
barrels of oil. Saudi Arabia has reserves of roughly 260 billion 
barrels of oil. Coal already provides more than half of the Nation's 
electricity and is the largest single source of energy production at 
more than 31 percent of the total. Coal can be converted, through 
proven existing modern technology, into clean, zero sulphur synthetic 
oil and oil products at roughly $35 per barrel compared to $67 per 
barrel of oil.
    Coal liquefaction or coal to liquid refineries can be located 
anywhere that coal is produced. This proven technology can produce 
clean transportation fuels using domestic coal; thereby expanding our 
supply of transportation fuels while decreasing our dependence on 
foreign sources of energy. This includes gasoline, diesel and other 
liquid fuels. The great thing about coal refined diesel fuel is that it 
will now be low in sulphur--it will come out cleaner, enable refiners 
meet their clean-air requirements and help the public lead healthier 
lives.
    Unfortunately, much like oil refineries, there are serious 
impediments to constructing coal to liquid plants. One reason is that 
the front end cost of construction for these plants is very high. 
According to the National Mining Association, capital costs for 
constructing a 10,000 barrel per day plant can range between $600-700 
million. Furthermore, the lead time for a coal refinery, as with most 
refineries is usually a minimum of five to seven years even under the 
best circumstances.
    The existing obstacles to deploying coal to liquid technologies are 
challenging. Like the oil industry, the coal mining industry faces 
numerous permit requirements, permit challenges and repeated appeals. 
As with oil refinery permitting, the delays in this process can drive 
up costs and make constructing coal-based or coal to liquid plants 
economically infeasible.
    That is why I believe that it is imperative to give the same 
incentives and protection for coal to liquid refineries that are 
provided to petroleum refineries under S. 1772. According to the Energy 
Information Agency (EIA), the U.S. now depends on foreign sources of 
petroleum for 56 percent of its needs. The EIA estimates that this 
share will increase to 70 percent by 2025 if nothing changes. With our 
Nation's abundant supply of domestic coal, increasing dependence on 
foreign sources of energy, and our urgent need for reliable and 
affordable supplies of fuel; I believe we should be promoting the 
deployment of coal to liquid refineries. Including coal based and coal 
to liquid refineries in S. 1772 would be positive step in this 
direction.
    Thank You, Mr. Chairman, and I ask that my remarks be included in 
the record.
                               __________
 Statement of Brian Mannix, Associate Administrator, Office of Policy, 
    Economics, and Innovation, U.S. Environmental Protection Agency
                              introduction
    Thank you, Mr. Chairman and Members of the Committee for the 
invitation to appear here today and provide testimony on S. 1772, the 
Gas Petroleum Refiner Improvement and Community Empowerment Act. I am 
Brian Mannix, the Associate Administrator of the Office of Policy, 
Economics and Innovation at the Environmental Protection Agency (EPA). 
I commend the Committee for proposing steps to address the Nation's 
critical need for additional refining capacity and a sustained fuel 
supply. The issue of refinery permitting is not new. I was at the 
Energy Department during the 1978-79 oil crisis and we tried to address 
it then. While conditions in 2005 are certainly different from those 
that occurred at the end of the 1970s, it is incumbent on us both to 
learn from the past experience as well as to plan for the future.
    I know that you have also heard that more than 100 refineries have 
been closed during the past 25 years. Most of the refineries that 
closed were not economically feasible, and existed to collect a variety 
of government subsidies, mostly associated with oil price and 
allocation regulations, which disappeared in 1981. Since that time, 
overall refining capacity has increased primarily through expansion at 
existing facilities.
    As the events of the last 2 months have helped demonstrate, 
however, the Nation needs to expand and diversify the location of its 
modern refining capacity. The entire country has felt the impact of the 
hurricanes on retail gas prices. Major refineries remain shut down or 
are operating at a reduced capacity in Louisiana and Texas due to 
Hurricanes Katrina and Rita. I believe a streamlined permitting process 
can be part of the solution. We also should make other improvements in 
the operation of our Nation's fuel production and supply system.
    This Administration is committed to ensuring that industry is able 
to produce and distribute gasoline, diesel fuel, jet fuel, and home 
heating oil to consumers while protecting the environment and public 
health. To assist the Senate in its review of these conditions and 
consideration of legislation, I would like to briefly: (1) review the 
Agency's actions with respect fuel supply and distribution issues that 
occurred in response to the recent hurricanes; (2) outline current 
environmental permitting requirements for petroleum refineries; (3) 
highlight some of our most recent regulatory reforms and initiatives 
that are reducing unnecessary burden and streamlining the regulatory 
requirements that affect the fuel sector; and (4) discuss S. 1772, the 
Gas Petroleum Refiner Improvement and Community Empowerment Act.
                response to hurricanes katrina and rita
    Over the past 2 months, natural disasters in the Gulf region have 
resulted in increased gasoline prices. The damage caused by Hurricanes 
Katrina and Rita disrupted between 13 and 25 percent of the Nation's 
fuel capacity and the recovery of oil production, natural gas 
production and refinery throughput is continuing.
    EPA responded quickly and decisively in addressing the fuel supply 
disruption in the Gulf Region, in conjunction with the Department of 
Energy. In the days immediately following Hurricane Katrina, the 
disruption to the fuel production and distribution infrastructure made 
it necessary to minimize the potential for supply disruption and create 
the greatest flexibility possible for the fuel distribution system.
    Beginning on August 30, 2 days after Hurricane Katrina hit the Gulf 
Coast, EPA issued various temporary waivers that applied to: (1) low 
sulfur diesel fuel requirements; (2) Reid Vapor Pressure (RVP) 
standards for the control of volatility of gasoline during the summer 
months; (3) State gasoline sulfur limits; and (4) reformulated gasoline 
requirements (RFG). To address each fuel supply situation, the waivers 
were issued for various periods of time and have been applicable at the 
national, State or local level. Several waivers are still in effect for 
RFG requirements in the Houston/Dallas Ft. Worth area, for the Texas 
Low-Emission Diesel Program, for RFG requirements applicable to the 
Richmond, Virginia, and St. Louis, Missouri, and certain conventional 
fuel produced in Louisiana. In addition, waiver of low-sulfur diesel 
requirements are continuing in the Petroleum Administration for Defense 
District (PADD) III and certain other PADD I and II states. These 
waivers were granted in response to requests from Governors to address 
fuel supply and distribution issues, and to serve the public interest. 
Whenever we issue such fuel waivers, we address the risk of 
contamination of emission control systems in motor vehicles.
    In addition to our short-term actions, we are working to address 
long-term concerns. To facilitate construction of new refineries to 
meet energy needs, EPA is reviewing the new authority conferred on the 
Agency through title III, subtitle H of the Energy Policy Act of 2005. 
This law authorizes the Administrator to enter into a refinery 
permitting cooperative agreement with a State; to accept a consolidated 
application for all environmental permits required by EPA for a 
refinery; and to enter into a Memorandum of Agreement with other 
Federal Agencies and States to coordinate consideration of refinery 
permits. It also authorizes the EPA to provide financial, technical and 
other assistance to States related to refinery permits.
   s. 1772, the gasoline petroleum refiner improvement and community 
                            empowerment act
    I would like to address various provisions of this bill that either 
confer new authority to EPA or involve the Agency's implementation of 
existing statutory authority.
Title II--Refinery Permitting Process
    We can, and should, take steps to improve the efficiency of our 
permitting process and remove any unnecessary burden and delay.
    In general, domestic refining capacity has increased through steady 
expansion of operations at existing refineries, even as smaller 
refineries have closed. Because most permits are issued by State and 
local authorities, EPA does not routinely track permitting activities 
for refineries and cannot provide precise numbers concerning such 
activity. However, based on information we currently have in technology 
clearinghouses and a recent survey of refinery activities, we estimate 
that approximately 100 permits have been issued to refineries since 
2000. It should be noted that, at this juncture, EPA cannot determine 
how many of these permits were issued for expanded production. 
Approximately 60 of the permit applications in2000-2003 involved 
projects to comply with Tier 2 gasoline requirements and may not 
necessarily involve increased production capacity.
    A broad scope of environmental issues may be present in siting a 
new facility or expanding the capacity of an existing one pursuant to 
the Clean Air Act, the Clean Water Act, the Resource Conservation and 
Recovery Act, the National Environmental Policy Act and other Federal, 
State and local laws. Substantial ``up front'' work is also required 
regarding site and design factors prior to the submission of an 
application for a new refinery. Depending on the complexity of the 
refinery and the siting, the permitting process can take between one 
and 2 years after a complete application is filed. Those seeking to 
construct refineries may also revise their applications after they have 
been submitted. In addition, administrative appeals during the 
permitting process and judicial review can add substantially to the 
time required for final approval.
    As mentioned earlier, under current Federal environmental law and 
regulations, State and local authorities consider and approve most of 
the environmental permits that are required for refineries. States may 
also impose separate or additional requirements on refineries that can 
be more stringent than those required for compliance with Federal law 
and regulations. In addition, State and local decisionmaking with 
respect to refineries and other large industrial and commercial 
facilities can frequently involve land use and other local issues, such 
as conditional use permits, local fire, building and plumbing codes, as 
well as connections to sewer systems and construction approvals.
    With respect to the Committee's review of S. 1772, it may be 
helpful to briefly outline in more detail some of the specific 
requirements applicable to refineries under our Nation's major 
environmental laws.
                        clean air act permitting
    Currently, a number of permitting provisions stemming from the 
Clean Air Act apply to construction of a new refinery or expansion of 
an existing refinery. A New Source Review (NSR) permit must be obtained 
before construction starts. States typically take 12-18 months to issue 
NSR permits for large facilities, although this time period can vary 
significantly and does not include the additional time needed if an 
administrative appeal is filed.
    A Title V ``operating permit'' is also required for a refinery that 
constitutes a major source. This program was added to the Clean Air Act 
in the 1990 amendments to consolidate in a single document all Federal 
and State regulations applicable to the source. It does not create new 
substantive requirements. Once it submits a complete application, the 
facility can operate under an ``application shield'' while the title V 
permit is being processed. States must take final action on the permit 
application within 18 months. If the permit applicant or an interested 
stakeholder disagrees with the permit terms or conditions, they may 
file an administrative appeal or petition. This will add additional 
time to the process, although the facility can continue to operate 
during the appeals process.
    Applicants for a new refinery would also need to comply with other 
Clean Air Act regulations including New Source Performance Standards, 
emission standards for hazardous air pollutants and Compliance 
Assurance Monitoring requirements. Depending on the location of a 
facility, emission ``offsets'' may also be required based on the 
facility's emissions.
    The President's Clear Skies cap and trade approach will give our 
States a powerful, efficient and proven tool for meeting new, health-
based air quality standards for fine particles and ozone. EPA has 
informed over 500 counties that they either do not meet or that they 
contribute to another county not meeting the new standards. That 
relatively straightforward action has now triggered a complex process 
for the States to develop and implement plans to meet the national 
standards.
    Clear Skies, in conjunction with the Bush administration's new 
rules cutting diesel engine pollution by more than 90 percent and other 
Clean Air Act programs, will bring most counties into attainment with 
the new standards without having to take any new local measures beyond 
the Clear Skies power plant reductions. To the extent Clear Skies can 
provide for attainment of Clean Air Act health-based standards, States 
and local governments will have a lighter burden in putting together 
their local control strategies to attain the National Ambient Air 
Quality Standards (NAAQS). This may result in an ability at the State 
and local level to accommodate new or expanded manufacturing or 
refining activities within plans to meet the NAAQS.
                       clean water act permitting
    As you know, refineries, similar to other facilities, are required 
to obtain a National Pollutant Discharge Elimination System (NPDES) 
permit if they discharge pollutants from a point source into waters of 
the U.S. Similar to our Clean Air Act programs, EPA has authorized 
States to issue permits to most States with a few exceptions. The State 
programs closely mirror the Federal program, but some have additional 
requirements such as public notice and comment periods or technical 
requirements that go beyond the Federal requirements. The Federal 
program does provide a number of permitting flexibilities.
    EPA recently finalized the pretreatment streamlining rule, which 
amends certain provisions of the General Pretreatment Regulations 
regarding oversight of industrial users that discharge to Publically 
Owned Treatment Works (POTWs). The pretreatment streamlining rule will 
reduce the regulatory burden on both indirect industrial dischargers as 
well as POTW Control Authorities without adversely affecting 
environmental protection. It will also allow Control Authorities to 
better focus oversight resources on Industrial Users with the greatest 
potential for affecting POTW operations or the environment. The 
reduction in regulatory burden is applicable to both existing 
Industrial Users and to any new Industrial Users, including any new 
refineries which choose to discharge pollutants to a POTW, rather than 
directly to surface waters via a NPDES permit. One change to the 
regulations specifically benefits refineries and organic chemical 
manufacturers. POTWs are allowed to use concentration-based standards 
rather than calculate mass limits based on a facility's wastewater 
discharge. This amendment will make it easier for POTWs to implement 
the standards and for facilities to monitor their own performance.
    The changes EPA recently adopted also provide another type of 
flexibility to POTWs by authorizing them to use general permits instead 
of an individual permit in certain circumstances. General permits cover 
multiple facilities within a specific category. This type of permit 
provides a cost-effective option for permitting agencies because of the 
large number of facilities that can be covered under a single permit. 
For example, a large number of facilities that have certain elements in 
common may be covered under a general permit without expending the time 
and money necessary to issue an individual permit to each of these 
facilities. In addition, using a general permit ensures consistency of 
permit conditions for specific facilities.
        resource conservation and recovery act (rcra) permitting
    Regulated entities that generate hazardous waste are subject to 
waste accumulation, manifesting, and record-keeping standards. 
Facilities that treat, store, or dispose of hazardous waste must obtain 
a permit either from EPA or, more likely from a State agency that EPA 
has authorized to implement the permitting program. States may have 
more stringent requirements than the Federal RCRA program.
    It has been the EPA's experience that more recent petroleum 
refineries generally are designed to only store materials in secure 
containers and tanks for less than 90 days, so that they are most often 
classified as generators only, and thus are not subject to RCRA 
permitting. However, a few petroleum refineries do have RCRA permits 
and in circumstances where a refinery expansion results in a change in 
hazardous waste management, a permit modification may be required. The 
modification process depends on the significance of the modification 
and obtaining a permit could take 1-2 years, depending on complexity. A 
temporary authorization (to start constructing the changes while 
awaiting the modification approval) may be allowable in certain 
circumstances.
    The Agency has already taken steps to streamline the RCRA 
permitting process. Specifically, in September, EPA issued the RCRA 
standardized permit rule, which allows certain waste facilities to 
submit an abbreviated permit application. These newly streamlined 
permitting requirements result in a shorter permitting time line and 
shorter time lines for any subsequent permit modifications. It is 
estimated that the standardized permitting process will save the States 
and industry more than three million dollars a year.
    Finally, the Agency continues to promote innovative ways waste can 
be used to supplement the Nation's energy supplies. EPA currently 
excludes specific industrial wastes, known as comparable fuels, from 
the hazardous waste management requirements of RCRA when they are used 
for energy production and do not contain hazardous constituent levels 
that exceed those found in a typical benchmark fuel used by facilities. 
This type of waste utilization saves energy by reducing the amount of 
hazardous waste that would otherwise be treated and disposed. EPA is 
examining the effectiveness of the current RCRA comparable fuel program 
and considering whether other industrial wastes could be safely used as 
well.
Title III--Efficiency
    Now I would like to briefly discuss Title III, Efficiency. These 
provisions concern utilizing EPA's Natural Gas STAR program as a grant 
vehicle for entities seeking to reduce methane emissions in the oil and 
gas industries, and direct EPA to organize workshops on methane 
emission reduction techniques. The Natural Gas STAR Program is a 
voluntary partnership that encourages companies to adopt cost-effective 
technologies and practices that improve operational efficiency and 
reduce emissions of methane. EPA managers and program staff are 
currently assessing this provision of the bill, including its effect on 
current program resources.
Title IV--Fuel Emergency Waivers and Boutique Fuel Requirements
    Section 401 of this title provides a ``hold harmless'' provision 
for States for emissions resulting from waivers granted by EPA under 
the new fuel emergency waiver provisions contained in the Energy Policy 
Act of 2005.
    To date, EPA believes that its exercise of the new waiver authority 
contained in section 1541 of the Energy Policy Act of 2005 has not 
resulted in excessive emissions. For example, on August 30, EPA issued 
waivers of Federal RVP standards effectively allowing the early sale of 
``wintertime gasoline.'' Since the sale of ``summertime'' RVP-
controlled gasoline ends in most parts of the country on September 15, 
as an initial matter, the Agency does not believe that any increased 
emissions resulting from the waiver for the 2-week period prior to 
September 15 were substantial. In addition, EPA would note that the 
letter informing States and other parties that the waiver had been 
granted provided that, to the extent practicable, those involved in the 
fuel distribution system take all reasonable steps to distribute and 
sell on-hand inventories of compliant fuel. The Agency, however, will 
continue to review this matter as conditions justifying the granting of 
fuel waivers continue to exist.
    Section 402 of S. 1772 amends section 211(c)(4)(C)(vii) of the 
Clean Air Act. This provision was also part of the recently enacted 
Energy Policy Act of 2005. This provision requires the EPA to remove a 
fuel from the list of fuels that are otherwise approvable as part of a 
State Implementation Plan (SIP) if such a fuel ceases to be included in 
a SIP or is identical to a Federal fuel formulation implemented by EPA.
    In general, section 211 of the Clean Air Act authorizes EPA, under 
certain conditions, to approve individual State fuels as part of a 
State Implementation Plan. While such individual State fuels, often 
known as ``boutique fuels'' normally do not strain the fuel production 
and distribution system, the variation in State and local fuel 
requirements can make it more difficult to address gasoline supply 
shortages in times of disruption, such as occurred with the recent 
hurricanes.
    Roughly 15 States have adopted their own clean fuel programs--
typically requiring fuels to be sold within the State or within certain 
areas in the State, to have a lower seasonal volatility than Federal 
standards. As noted in a Staff White Paper produced by EPA in 2001, we 
believe that constraining the number of boutique fuels could 
potentially be beneficial in terms of improving fuel distribution and 
fungibility. However, such action should be done in a careful manner in 
order to ensure that environmental benefits of clean fuels are 
maintained and any unintended negative impacts on fuel supply are 
avoided.
Title V--Future Fuels
    This provision requires the EPA to conduct a research and 
demonstration program to evaluate the air quality benefits of Fischer-
Tropsch transportation fuel and authorizes loan guarantees for domestic 
foal and petroleum coke-based Fischer-Tropsch commercial demonstration 
projects. We are currently evaluating this provision and its impact on 
the Agency's overall resources. A similar provision, including 
authorizations for the Department of Energy, was also part of the 
recently enacted Energy Policy Act of 2005.
                               conclusion
    We believe S. 1772 takes several important steps in the right 
direction by including provisions to streamline refinery permitting 
requirements and expand refinery capacity in the U.S. This provides a 
mechanism to reduce the proliferation of State fuel requirements where 
such fuels are no longer utilized or duplicative of Federal standards, 
addressing the potential consequences of fuel waivers on State SIP 
compliance, among other provisions. We look forward to working with the 
Committee and its Members as it continues to consider this legislation 
and provide the Committee with any needed technical assistance.
    Thank you for the opportunity to appear before you today. I would 
be happy to answer any questions that you may have.
                                 ______
                                 
Responses by Brian Mannix to Additional Questions from Senator Jeffords
    Question 1. Earlier this year, Congress passed provisions of the 
Energy bill that provide streamlined permitting procedures for 
refineries. These provisions are similar to those that are before us 
today, yet they would not create any conflicts with existing 
environmental laws. As you note in your testimony, EPA is reviewing its 
new authority under the law. What is EPA doing to implement these 
provisions? Is there any factual record that shows that we should 
change these provisions less than 3 months after they were passed? Has 
anyone even sought to use them yet?
    Response. The Energy Policy Act of 2005 made substantial changes to 
existing law regarding the production and regulation of fuels including 
removal of the oxygenate mandate in the reformulated gasoline (RFG) 
program and enactment of a renewable fuels standard (RFS). Following 
enactment of the legislation on August 8 of this year, EPA undertook to 
review the final statutory provisions contained in the conference 
report to accompany the legislation. The Agency then began a process to 
assess how the new law can be implemented across the range of current 
programs and responsibilities. The review of title III, subtitle H 
concerning refinery revitalization is part of this overall process, and 
is not yet complete.
    With respect to your question concerning whether anyone has sought 
to utilize this new law, as you know, subtitle H indicates that ``at 
the request of a Governor of a State, the Administrator may enter into 
a refinery permitting cooperative agreement.'' To date, EPA has not 
entered into such an agreement with a State. With respect to your 
question concerning whether the existing law should be changed, the 
Agency favors steps to improve the refinery permitting process.

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

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

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

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

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

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

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

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

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

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

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

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

    Question 14. EPA's Heavy Duty Engine rule, which sets both fuel and 
engine standards for heavy duty engines, is one of the most important 
initiatives under the Clean Air Act for reducing emissions that are 
harmful to public health. Under that rule, sulfur will be reduced to 15 
ppm between 2006 and 2009. Significant lead time is provided in the 
rule for the introduction of new cleaner fuel into the marketplace so 
that engine manufacturers can develop and market vehicles that meet the 
new standards using the Ultra Low Sulfur Fuel (ULSD). Engine 
manufacturers have flexibility to meet the new standards through a 
phase-in approach between 2007 and 2010. Many engine manufacturers are 
already producing vehicles designed to operate using the new fuel. 
Ensuring the availability of ULSD fuel (15PPM NTE) is critical to 
achievement of the Nation's air quality goals. This fuel is due to be 
at the retail pumps in September 2006. Does EPA fully commit to adhere 
to its own regulatory schedule for the availability of ULSD in 2006 and 
beyond?
    Response. Implementation of the Clean Diesel rules, which includes 
the ULSD requirements, is a priority. Based on the current information 
we have received from the fuels industry, there is no need to make any 
changes to the program. Any identified impacts associated with the 
hurricanes can be dealt with on a refinery-by-refinery basis through 
our existing regulatory provisions without negatively impacting the 
overall implementation of the program.
    Also on May 27, 2005, EPA announced that it would be seeking a 45-
day extension to allow more time for terminals and retail outlets to 
comply with the 15 ppm USLD standard. This allows the fuel distribution 
system to successfully complete the transition to ULSD prior to the 
introduction of the new clean diesel engines and vehicles. We expect to 
announce this rulemaking soon. To be clear, however, it does not change 
the June 1, 2006 deadline for refiners to begin producing ULSD.
                                 ______
                                 
        Response by Brian Mannix to an Additional Question from 
                           Senator Voinovich
    Question. As part of the Bush administration's suite of clean 
diesel rules, there will be a new requirement for ultra-low sulfur 
diesel (ULSD) fuel (diesel fuel containing no more than 15 parts per 
million sulfur) to be used for on highway diesel purposes. EPA recently 
announced that it will seek a 45-day delay of the requirement for the 
introduction of ULSD--pushing the ULSD requirement from September 1, 
2006 to October 15, 2006. EPA's on highway diesel rule is a systems 
approach to emissions controls. It requires new engine technologies, 
which in turn require the use of ULSD. Both parts of the system are 
essential to the success of the rule. This rule will result in an 
overall 90 percent reduction in diesel engine emissions from 2004 
levels. Furthermore, ULSD is essential to the success of the Diesel 
Emissions Reduction Act. According to EPA, the Diesel Emissions 
Reduction Act would leverage existing funding, and could result in a 
reduction of approximately 70,000 tons of PM over 30 years in a highly 
cost-effective manner.
    Does EPA and the Bush administration share my view that no 
legislation or administrative action should: (a) alter or delay the 15 
parts per million sulfur standard for on highway diesel fuel; or (b) 
push the deadline for ULSD beyond October 15, 2006?
    Response. Yes, EPA shares your view that no additional legislative 
or administrative actions beyond those already identified and discussed 
are necessary. The successful and timely implementation of the Clean 
Diesel rules, which includes the ULSD requirements, is a priority. This 
program will provide significant air quality benefits to the new engine 
and vehicle fleet as well as the existing diesel fleet. Based on the 
current information we have received from the fuels industry, there is 
no need to make any changes to the program.
    Also on May 27, 2005, EPA announced that it would be seeking a 45-
day extension to allow more time for terminals and retail outlets to 
comply with the 15 ppm USLD standard. This allows the fuel distribution 
system to successfully complete the transition to ULSD prior to the 
introduction of the new clean diesel engines and vehicles. We expect to 
announce this rulemaking soon. To be clear, however, it does not change 
the June 1, 2006 deadline for refiners to begin producing ULSD.
                                 ______
                                 
 Responses by Brian Mannix to Additional Questions from Senator Warner
    Question 1. In title II of S. 1772 the term ``substantially 
similar'' is used. In your opinion does the definition of this term 
differ from ``substantially equivalent'' when considering environmental 
health and welfare? Is ``substantially similar'' equally protective of 
public health and the environment?
    Response. Based upon EPA's initial review, the ``substantially 
similar'' language goes to permit issuance procedures, as opposed to 
the stringency of any substantive requirements codified in the permit. 
In that context, there would be no practical difference between the 
phrases ``substantially similar'' and ``substantially equivalent'' with 
respect to human health and welfare, since both would be referring to 
process and not substance. Assuming, notwithstanding the bill's savings 
clause, Congress's intent is that EPA can rely on State permitting 
procedures provided that they result in a ``substantially similar'' 
Federal permit, i.e., a permit that is as environmentally protective or 
stringent as a Federal permit, there still might not be a difference 
between the phrases ``substantially similar'' and ``substantially 
equivalent.'' Under many Clean Air Act programs, including NSR and 
Title V permitting, a State program can receive EPA authorization only 
if it is at least as stringent as the corresponding Federal base 
program. In these situations, following either the State or Federal 
permitting process would be protective of human health and the 
environment.

    Question 2. The Federal Government has substantial experience in 
the granting of loan guarantees. To your knowledge, has the EPA ever 
been involved in these types of projects?
    Response. EPA does not have any loan guarantee programs.
                               __________
        Statement of Hon. Shawn Mitchell, Colorado State Senator
    Thank you Chairman Inhofe and Senator Jeffords for providing the 
State of Colorado with the opportunity to testify on the Gas PRICE Act 
today.
    My State strongly supports this legislation and we hope that the 
committee and the full Senate will pass the bill to provide incentives 
to States to expand existing and permit new refinery capacity in a 
fashion that would protect the environment while simplifying the 
permitting process to prevent delays for necessary projects.
    This issue before us today is one we've been grappling with for 
some time, as you noted in your hearing back in 2004. It is ever so 
more important now given the vulnerabilities exposed by Hurricane 
Katrina and the shortsightedness in essentially restricting the 
majority of the Nation's refinery capacity to the Gulf Coast region. I 
understand that 47 percent of our refining capacity and 28 percent of 
our oil production is concentrated in the Gulf Region and when 
Hurricane Katrina hit, we experienced significant price increases 
because of reduced supply. We're speaking in terms of a matter of days, 
though there is surely a long-term impact that I will touch on.
    Obviously, any incentive that can be provided to increase refinery 
capacity will benefit the country as a whole. Colorado's support for 
your legislation, Mr. Chairman, is based upon the incentives it would 
provide for States to expand capacity.
    The Gas PRICE Act provides incentives through the Economic 
Development Administration to those parts of the country that are 
impacted by the Base Closure and Realignment Commission (BRAC) 
designations. While my State was not negatively impacted by the most 
recent BRAC process, we have had military facilities in Colorado that 
were closed in the past and I we know from experience those impacts can 
be difficult to overcome.
    Fortunately, in Colorado we have managed to deal with base closures 
in a fashion that has resulted in economic development. For example, 
the former Lowry Air Force Base in Denver has been cleaned up and 
returned to productive civilian use as a residential neighborhood. We 
were blessed in that case that Lowry is close to the metropolitan area 
and redevelopment made sense economically. That's a success story.
    The same is true of Fitzsimmons Army Medical Center also in Denver. 
That site has been redeveloped and is now home to the University of 
Colorado Health Sciences Center and soon to be home to Children's 
Hospital. This redevelopment and transition also made sense for the 
State.
    However, I am certain there are circumstances around the country 
where the options Colorado had with respect to redevelopment of BRAC 
sites may not exist. Further enhancing the ability of the Economic 
Development Administration to address these kinds of circumstances 
while also addressing the Nation's need for additional refining 
capacity makes absolute sense.
    This bill addresses that issue directly by providing incentives for 
American communities to consider the construction of new refineries to 
expand our nationwide capacity while taking advantage of existing 
infrastructure and preserving and creating jobs. It is the very 
definition of a Win-Win.
    The legislation does not mandate any action on States, but merely 
provides additional incentives should they determine that is an 
appropriate use of the resource.
    The Gas PRICE Act provides flexibility that States can choose to 
exercise in environmental permitting by entering into a refinery 
permitting agreement.
    It's important to remember that this provision only applies to 
those States or tribes that choose to participate.
    No State or tribe will be forced to participate and there is no 
usurpation of the concepts behind any of the Federal environmental laws 
that States or tribes are delegated to enforce. In short, there is 
simply no credible argument that can be made in claiming this proposal 
would abuse State or tribal authorities as they currently exist.
    In fact, in Colorado, the State, Federal and tribal authorities 
have developed an excellent working relationship that has led to 
groundbreaking cooperation. For example, in southwest Colorado the 
three governmental entities have developed an air permitting program 
that places the Southern Ute tribe in charge of permitting on fee land 
within the tribal boundaries, ending a dispute over the question of who 
has authority on fee lands within tribal boundaries.
    What this bill does is provide Governors and tribal leaders the 
authority to combine the permitting requirements for all of the 
different medias into one permit that must be issued under a prescribed 
time frame.
    This is hardly a new concept in Colorado. In 2003, the Colorado 
State Legislature passed legislation providing the governor with the 
authority to consolidate different environmental permits into a single 
permit. The idea behind this concept is twofold.
    First, we believe that a single process ensures that there is one 
timeline for issuance of a permit. Timelines for different permits can 
be for a single project are often prolonged because, for example, an 
air division may have a different method for handling evaluation for 
permits applications than say a water division. The idea is that one 
permit merging different requirements will benefit the applicant by 
applying one process.
    Second, multi-media permitting is good for the environment. 
Colorado is currently piloting a multi-media performance based permit 
because we believe that eventually we will have to move to this kind of 
permit to continue making environmental improvement. Mr. Chairman, your 
proposal captures that concept and will not only provide needed relief 
from administrative burdens, but will also provide a better way to 
enhance environmental quality.
    The purpose of a multi-media permit is to identify where the net 
gains for the environment are and work expeditiously toward achieving 
those gains. For example, wet scrubbers are better for controlling 
sulfur dioxide and, therefore, when seeking SO2 reductions, 
you would immediately think to install a wet scrubber, which, as you 
probably know, requires a lot of water to operate. In Colorado we don't 
view the tradeoff between additional marginal SO2 controls 
to be worth the use of water it takes to operate a wet scrubber. In 
other words, not putting on a wet scrubber would be better for 
Colorado's environment because it would conserve water.
    Importantly, this legislation would force environmental agencies to 
take into account the net impacts to the environment to permitting a 
refinery by consolidating the permitting process.
    Another positive aspect of your proposal, Mr. Chairman, is the 
timeline associated with either construction of a new facility or 
expansion of an existing facility. My experience has been that hard 
timelines tend to focus attention on what is important and these 
statutory timelines would certainly focus the attention not only of 
State regulators but also of EPA regulators who are charged with 
reviewing permits on facilities.
    A definite endpoint to a permitting process is good for an agency 
as well as for a permittee.
    The end result of this process would be a permit that would be 
issued sooner and would provide better environmental results with less 
administrative burden historically associated with permitting 
processes.
    In fact, my State believes that a multi-media approach to 
permitting is so beneficial we are working with the refinery in the 
Denver Metro Area on a similar approach. Obviously, the State's 
foremost concern is for protecting our environment. However, we also 
believe that efficiencies can be gained for the refinery through this 
approach, and certainly for the State, as well. A single timeline and 
the ability to issue on consolidated permit will ensure that permitting 
will not be a hindrance should a State decide to attract new 
refineries.
    In short, we are putting our money where our mouth is with respect 
to this legislation, and believe that it would provide a key benefit to 
both the environment and to permittees.
    Finally, Colorado strongly supports the hold harmless provision on 
States for acting pursuant to the grant of an emergency waiver. In 
Colorado, waivers have been granted and both the State and EPA have 
collaborated so that they are issued in an appropriate and responsible 
manner.
    EPA has issued several emergency waivers, and, if those waivers 
result in an air quality problem, States should not be penalized under 
the Clean Air Act. I think that's just common sense.
    In conclusion, I would like to thank the committee for seeking our 
views and participation, and I would like to thank Chairman Inhofe for 
his leadership on this issue.
    While there are many promising technologies that may serve to 
replace fossil fuels in the future, it does appear as if the Nation 
will be relying upon them to some degree into the future. Because 
that's the case, we need to have sufficient capacity in our country to 
ensure that a disaster like Katrina doesn't have the same detrimental 
impact on our economy that Katrina had.
                                 ______
                                 
     Responses by Hon. Shawn Mitchell to Additional Questions from 
                             Senator Warner
    Question 1. Refinery Capacity.--We all know that the supply of 
crude, refinery capacity, and the transportation network are the three 
major variable costs associated with prices at the pump. How 
specifically will increased refinery capacity bring down the price 
consumers pay for a gallon of gasoline?
    Response. I am responding to those questions which relate to the 
areas surrounding my testimony. I will defer to other witnesses on the 
more technical questions.

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

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

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

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

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

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

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

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

[GRAPHIC] [TIFF OMITTED] T9520.002

[GRAPHIC] [TIFF OMITTED] T9520.003


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

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

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

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


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

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


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


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

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


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

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

i Testimony of Red Cavaney, President, American Petroleum 
    Institute before the House Energy and Commerce Subcommittee on 
    Energy and Air Quality. July 28, 2004.
ii Nelson Schwartz, Is Dick Cheney the New Hillary? Fortune, 
    June 11, 2001, at 37. See also Alexei Barrionuevo, Exxon-Mobil CEO 
    Doubts Anyone Would Build U.S. Refinery, Dow Jones News Service 
    (May 30, 2001) (citing Exxon Mobil's chairman and chief executive 
    for the statement that no oil company was prepared to build a new 
    refinery because they could make money from doing so).
iii 2005 Annual Energy Outlook. See Energy Information 
    Agency website (www.eia.doe.gov).
iv See Foundation for Taxpayer and Consumer Rights website 
    (www.corporatewatchdog.org).
v EPA, New Source Review: Report to the President (June 13, 
    2002), at 1.
vi See Energy Information Agency website (http://
    www.eia.doe.gov/emeu/aer/txt/ptb0508.html).
vii See My West Texas website (www.mywesttexas.com/site/
    news.cfm?newsid=15073025&BRD=2288&PAG=461).
viii Statement made by Valero CEO Bill Klesse at Sept. 7, 
    2005 Energy Conference.
ix Citgo press release, April 21, 2005.
x See Marathon Ashland website (www.mapllc.com).
xi Statement made by Valero CEO Bill Klesse at Sept. 7, 2005 
    Energy Conference.
xii See Sun Herald website (www.sunherald.com) Sept. 2, 
    2005.
xiii See Suncor website (www.suncor.com/
    links_popup.aspx?ID=2393).
xiv See Flint Hills Resources website (www.fhr.com/newsroom/
    news_detail.aspx?id=117).
xv Minneapolis St. Paul Business Journal. July 13, 2005.
xvi Presentation by Bruce Smith, President and CEO, at 
    Lehman Bros. 19th Annual CEO Energy/Power conference. Sept. 8, 
    2005.
xvii PR newswire. July 25, 2005.
xviii Gas Profit Guzzlers. Just Blum. Washington Post. Sept. 
    25, 2005. See website(http://www.washingtonpost.com/wp-dyn/content/
    article/2005/09/24/AR2005092400253.html).
xix Presentation by Bill Klesse at Lehman Bros. 19th Annual 
    CEO Energy/Power conference. Sept. 7, 2005.
xx See Public Citizen website (http://www.citizen.org/cmep/
    energy_enviro_nuclear/articles.cfm?ID=13912).
xxi Available on file at EIP.
xxii Available on file at EIP.
xxiii See Environmental Justice Resource Center website 
    (http://www.ejrc.cau.edu/NBEJNEJFS.html).
xxiv La Raza letter to Congressman Joe Barton. June 16, 2004
xxv See Public Citizen website (http://www.citizen.org/
    documents/Industrial%20Upset% 20Pollution_ 
    Who%20pays%20the%20price_2%20Aug%202005.pdf).
xxvi See Environmental Justice Resource Center website 
    (http://www.ejrc.cau.edu/NBEJNEJFS.html).
                                 ______
                                 
Responses by Eric Schaeffer to Additional Questions from Senator Warner
    Question 1. Refinery Capacity. We all know that the supply of 
crude, refinery capacity, and the transportation network are the three 
major variable costs associated with prices at the pump. How 
specifically will increased refinery capacity bring down the price 
consumers pay for a gallon of gasoline?
    Response. As with any other product, the price of gasoline can be 
expected to decline to the extent that supply exceeds demand. Data from 
the Department of Energy suggests that refining accounts for about a 
quarter of the price of gasoline. The cost of crude oil remains the 
most significant factor, however; to the extent the cost of crude 
remains high, it could offset any reduction in prices that could come 
from increases in domestic refining capacity.
    The evidence suggests that it will be very difficult for Congress 
to legislate a solution that results in surplus refining capacity and a 
substantial decline in the price of gasoline. In other words, if gas 
prices decline too much, refiners will delay investment in new 
capacity, and even consider cutting back or closing their less 
efficient operations. Surplus capacity hurts refinery profit margins, 
and industry memoranda uncovered by the Foundation for Taxpayer and 
Consumer Rights (attached), shows that refiners were actively 
considering strategies to reduce capacity in the mid-nineties when 
gasoline prices were low.

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

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

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

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

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

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

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

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

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

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

    Therefore, even the best-intentioned regulatory initiatives to 
constrain profit-seeking, such as by defining what constitutes a 
``fair'' or ``reasonable'' profit in a given industry, are more likely 
to produce future shortages and higher prices than the status quo.
    Other proposals would needlessly centralize the regulation of local 
land use decisions under the guise of facilitating increases in 
refinery capacity. Such measures would be equally unwise, and would 
likely undermine the protection of environmental resources at the State 
and local level. These measures, too, should be rejected.
    Mr. Chairman and members of this committee, I recognize the 
importance of these issues to you and your constituents, and I commend 
your efforts to develop a sound policy response to these concerns. I 
hope that my perspective has been helpful to you, and will seek to 
answer any additional you might have. Thank you.
                                 ______
                                 
Responses by Jonathan Adler to Additional Questions from Senator Warner
    Question 1. Refinery Capacity.--We all know that the supply of 
crude, refinery capacity, and the transportation network are the three 
major variable costs associated with prices at the pump. How 
specifically will increased refinery capacity bring down the price 
consumers pay for a gallon of gasoline?
    Response. There are many factors that influence the retail price of 
gasoline. While the cost of crude oil is typically the largest single 
factor, refinery capacity also plays a role. Increased refinery 
capacity will increase the supply of gasoline and other refined 
petroleum products. All else equal, this should relieve upward pressure 
on gas prices. Increased refining capacity should also provide more 
flexibility in responding to temporary supply disruptions, as there 
would be more spare capacity available. It is worth noting that those 
regions of the country with greater refining capacity tend to have 
lower prices and less price volatility than those regions in which 
refining capacity is more limited. As the Federal Trade Commission's 
June 2005 study Gasoline Price Changes: The Dynamic of Supply, Demand, 
and Competition concluded ``Regional differences in refining capacity 
and gasoline transportation infrastructure can result in differences in 
average regional prices, as well as regional price variability.'' (P. 
69) The Energy Information Administration and the U.S. GAO have also 
cited refining capacity constraints as a factor influencing retail 
gasoline prices.

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

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

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

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

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

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

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

    Question 8. Boutique Fuels.--Many free market thinkers have argued 
that the expansion of the number of boutique fuels has been a 
contributing factor to rising prices. In addition, it is believed by 
some that a ratchet down of the number of boutique fuels would bring 
down gas prices without any adverse effect on the environment. Would 
you comment on this theory and whether or not limiting the number of 
boutique fuels would also limit a State's options to comply with 
Federal environmental laws?
    Response. As I noted in my written statement, the ability of 
gasoline markets to respond to supply disruptions and price changes 
have been severely hampered by Federal fuel content mandates under the 
Clean Air Act. The proliferation of such requirements has balkanized 
domestic gasoline markets, resulting in higher consumer prices and 
increased price volatility in much of the country. Some boutique fuel 
requirements have further strained gasoline supplies by reducing the 
volume of saleable product that can be produced. This is not just the 
conclusion of ``free market thinkers.'' The Federal Trade Commission's 
2005 report on gasoline prices, cited above, reached similar 
conclusions, as have other analyses. For example, in May 2005 testimony 
before the Committee on Government Reform Subcommittee on Energy and 
Resources, the U.S. GAO observed that California's fuel requirements 
are among the reasons that California typically experiences higher 
gasoline prices than the rest of the country. The National Petroleum 
Council's December 2004 report on petroleum supply likewise concluded 
that boutique fuel requirements have ``fragmented the market, 
increasing the potential for supply disruptions and price volatility.''
    While the purpose of most boutique fuel requirements is to improve 
air quality, it is important to note that this has not always been the 
result. Some fuel requirements, such as the minimum oxygen requirement 
imposed under the 1990 Clean Air Act, did not have the environmental 
benefits that many had hoped. Indeed, in some parts of the country, it 
appears that the oxygenate requirement caused net environmental harm. I 
also believe that various fuel regulations requiring the increased use 
of ethanol have not had a beneficial impact on the environment.
    Gradually reducing the number of boutique fuel formulas that 
refiners can be required to meet should ease upward pressure on 
gasoline prices and reduce price volatility without compromising 
States' ability to meet Federal air quality standards. A more rapid 
reduction, such as would be mandated under the bill recently passed in 
the House of Representatives, might not have as benign an effect in the 
short to medium term. Because investments have already been made to 
meet existing boutique fuel requirements, a sudden, sharp drop in the 
number of fuel formulas could actually have an adverse effect on fuel 
prices, insofar as it could temporarily disrupt gasoline supplies in 
parts of the country. For this reason, a more gradual reduction in the 
number of fuels, as contemplated in S. 1772, is a more sensible 
approach.
    Nothing in S. 1772 will prevent a State from continuing to rely 
upon boutique fuel requirements in existing State Implementation Plans. 
To be sure, limiting the ability of individual States to adopt 
additional state-specific fuel requirements may limit States' future 
flexibility at the margin, but I do not believe this effect will be 
significant. States will retain the ability to adopt a wide range of 
fuel standards to reduce automotive emissions, and will continue to 
benefit from remaining clean fuels requirements.
                                 ______
                                 
       Responses by Jonathan Adler to Additional Questions from 
                            Senator Jeffords
    Question 1. In your written statement you State that there is a 
reason to question whether foreign refiners will continue to 
manufacture gasoline for the U.S. market, particularly in light of our 
fuel content requirements. You make this statement despite the fact 
that the U.S. has and continues to increase its imports of refined 
product from foreign refiners. Do you have evidence based on your 
research of this, or an example that you can share with the Committee?
    Response. It is well known that foreign demand for both crude oil 
and refined petroleum products has increased dramatically and that this 
trend is likely to continue. While U.S. imports of gasoline have 
increased in recent years, imported gasoline (as opposed to imported 
crude oil) remains only a very small fraction of overall U.S. gasoline 
supply. This is because is has traditionally been far more economical 
to refine petroleum products closer to the end markets.
    The adoption of increasingly stringent fuel content requirements is 
likely to reduce the ability of the U.S. to rely upon foreign refiners 
to supply gasoline for the same reasons that the proliferation of 
regional boutique fuel requirements has balkanized domestic markets and 
made some regions of the country more vulnerable to supply disruptions. 
Insofar as any refiner, domestic or foreign, has to refine gasoline so 
as to meet the specific requirements of a given market, they sacrifice 
some of the economies of scale involved with producing a fungible 
commodity. As the National Petroleum Council observed in its December 
2004 report on petroleum supply, it is unlikely that foreign refiners 
will produce significant amounts of gasoline that meets the 
specifications of U.S. markets where those specifications are 
significantly different, and more expensive to meet, than foreign 
product specifications.

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

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

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

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

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

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

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


                                  
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