[Senate Hearing 109-1026]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 109-1026
 
                 THE IMPACT OF THE ELIMINATION OF MTBE

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 29, 2006

                               __________

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


      Available via the World Wide Web: http://www.access.gpo.gov/
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                               __________

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               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                       ONE HUNDRED NINTH CONGRESS
                             SECOND 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

                                  (ii)

  
                            C O N T E N T S

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                                                                   Page

                             MARCH 29, 2006
                           OPENING STATEMENTS

Boxer, Hon. Barbara, U.S. Senator from the State of California...     4
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, 
  prepared statement.............................................    36
Lautenberg, Hon. Frank R., U.S. Senator from the State of New 
  Jersey.........................................................     6
Lieberman, Hon. Joseph I., U.S. Senator from the State of 
  Connecticut, prepared statement................................    38
Murkowski, Hon. Lisa, U.S. Senator from the State of Alaska, 
  prepared statement.............................................    37
Obama, Hon. Barack, U.S. Senator from the State of Illinois, 
  prepared statement.............................................    37
Warner, Hon. John W., U.S. Senator from the Commonwealth of 
  Virginia.......................................................     5

                               WITNESSES

Caruso, Guy, Administrator, Energy Information Administration, 
  U.S. Department of Energy, Accompanied by: Joanne Shore, Lead 
  Analyst, Energy Information Administration.....................     8
    Prepared statement...........................................    39
    Response to an additional question from Senator Thune........    49
Dinneen, Bob, president and chief executive officer, Renewable 
  Fuels Association..............................................    26
    Prepared statement...........................................    75
    Responses to additional questions from Senator Inhofe........    78
Douglass, Bill, chief executive officer, Douglass Distributing 
  Company........................................................    23
    Prepared statement...........................................    70
    Responses to additional questions from Senator Inhofe........    74
Early, A. Blakeman, American Lung Association....................    25
    Prepared statement...........................................    58
Meyers, Robert, Associate Assistant Administrator, Office of Air 
  and Radiation, U.S. Environmental Protection Agency............    10
    Prepared statement...........................................    52
    Responses to additional questions from Senator Inhofe........    54

                          ADDITIONAL MATERIAL

Analysis, Energy Information Administration, Eliminating MTBE in 
  Gasoline in 2006...............................................    40
Article, Hidden Poison, MTBE Tainting Water Across State, by Matt 
  Pacenza, staff writer, April 9, 2006...........................    66
Chart, Estimated Increase in Ethanol Demand, Relative to Recent 
  Ethanol Use....................................................    91
Study, A Review of Cost Estimates of MTBE Contamination of Public 
  Wells, American Water Works Association........................    60
Court Case, South Tahoe Public Utility District vs., Atlantic 
  Richfield Company.............................................119-126
Letters from:
    American Lung Association, April 20, 2006....................    65
    U.S. House of Representatives, Committee on Commerce, Bob 
      Meyers, counsel; Stephen Sayle, counsel, June 5, 1995......92-118
Statements:
    American Petroleum Institute.................................    80
    National Petrochemical and Refiners Association.............. 82-90


                 THE IMPACT OF THE ELIMINATION OF MTBE

                              ----------                              


                       WEDNESDAY, MARCH 29, 2006

                                       U.S. Senate,
                 Committee on Environment and Public Works,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m. in room 
628, Senate Dirksen Building, Hon. James M. Inhofe (chairman of 
the committee) presiding.
    Present: Senators Inhofe, Warner, Murkowski, Thune, 
Jeffords, Boxer, Carper, Lautenberg, and Obama.
    Senator Inhofe. Our meeting will come to order. I 
understand Senator Boxer is almost here, and some others, here 
she is. We went ahead and decided to start without you, but I 
was going to talk until you got here. How is that?
    Senator Boxer. All right.
    Senator Inhofe. We will have others that will be joining 
us.
    We have two panels today, and I want to welcome the first 
panel. Guy Caruso, it is nice to have you here, and Robert 
Meyers. You have an extensive background over in the House. You 
have all the answers and it's always refreshing to know that 
there is someone on a panel that has all the answers.
    [Laughter.]

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

    Senator Inhofe. We appreciate your being here.
    We will have other members here on both sides of the aisle 
and their staffs are here. There will be questions submitted 
for the record.
    MTBE may be the most carefully scrutinized and debated 
substance since the 1990 Clean Air Act amendments required its 
use. Today's oversight hearing on the impacts if the 
elimination of MTBE is the latest in a long history before this 
committee. I am going to summarize that history.
    The 1990 Clean Air Act Amendments established the 
reformulated gas program, that's the RFG program, which most 
regard as an environmental success story. Yet, the inclusion of 
the oxygenate requirement as a component of RFG resulted in a 
few unintended consequences. I would like to remind my 
colleagues that the 2 percent oxygen requirement was not 
included in the bill passed by this committee which laid on the 
foundation for the amended Clean Air Act.
    Rather, the oxygenate requirement was added after vigorous 
debate and was the only successful amendment on the Senate 
floor. Senators from both sides of the aisle hope that the 
requirement would lay the groundwork for greater ethanol use, 
but acknowledged that MTBE would likely be preferred as it is 
more affordable to the consumers.
    Yet, although MTBE exceeded air-related goals, it tainted 
the taste and the smell of the water in some instances. 
Further, the 2 percent oxygenate requirement and the air 
quality concerns of the certain areas created boutique fuel 
regions, leading to higher prices during supply problems.
    Last year, this committee passed S. 606, the Reliable Fuels 
Act, which called for the elimination of the 2 percent 
requirement and the phase-out of MTBE within 4 years, but still 
preserving the MTBE authority for States. As was the case with 
the bill that passed this committee in 1989, S. 606 was changed 
in material ways after we reported the bill. Today the Nation 
faces--although temporary--some potential unintended 
consequences.
    Pursuant to the Energy bill, the 2 percent oxygenate 
requirement will be repealed this May. A majority of members 
recommended that oxygenate producers and marketers be afforded 
liability protection against defective product lawsuits for 
their mere compliance with the law. Unfortunately, that 
provision was not included in the Energy bill. To me, that is 
just remarkable, that we as Government can mandate things to 
take place and then not offer the protection for those who are 
simply following the law.
    Therefore, refiners have been forced to stop using MTBE 
more suddenly than stakeholders, industry or the committee have 
ever considered. They had to stop, because after this is no 
longer a requirement, then that could be used against them in 
lawsuits, as we all know.
    One of the facts is that MTBE has been the preferred 
oxygenate used in reformulated gas, and its elimination means a 
corresponding loss of fuel supply that must be made up. Ethanol 
is needed to replace MTBE, but the ethanol industry, refiners 
and marketers, infrastructure operators, are working hard to 
make sure that the transition is as painless as possible.
    We have a chart up here and you can see, in terms of the 
supply, the green bar on this chart from the EIA illustrates 
just how much ethanol is currently being produced, a 
significant amount in a relatively short period of time. 
However, the sudden elimination of MTBE and the current state 
of the ethanol industry means that significant volumes of 
ethanol must be imported.
    The orange bar shows that about 130,000 barrels per day of 
additional ethanol is needed to replace MTBE. In other words, 
the United States needs to come up with close to half of the 
ethanol currently being produced domestically.
    Actually, the transition means even greater supply loss 
than this chart illustrates, because the production of ethanol-
blended RFG, yields 5 to 6 percent less fuel per barrel. It is 
critical for the Nation to increase its petroleum and 
biorefinery capacity. My legislation, the Gas PRICE Act, and 
then the amendment that we tried to put on LIHEAP, the Energy 
Price Reduction Act, would have assisted in this transition.
    I really believe that the Gas PRICE Act was one of the 
biggest surprises I had here, to see it defeated right down 
party lines, when it was a very moderate bill that would have 
had a dramatic effect, a positive effect on the refining 
capacity of this country. We would expedite the permitting 
process for traditional as well as renewable fuels 
infrastructure, so that regions of the country would not have 
to face the temporary supply shortfalls and corresponding price 
increases likely this summer.
    Congress must be mindful of the unintended consequences 
before considering any future action. I urge my colleagues, 
stakeholders and the public to allow the recently enacted fuels 
title of the Energy bill to be fully implemented.
    The EIA and our other witnesses will testify that the 
Nation's fuel system requires infrastructure investment and 
most importantly, time to develop. The refining industry's 
position dealing with fuels policy, warning against sudden 
transition, the need for liability protection and so forth, 
that is very understandable. This hearing is squarely centered 
on the imminent future, not the past. I look forward to hearing 
from our witnesses if they have any policy recommendations for 
Congress, including the likelihood of importing more ethanol.
    [The referenced chart referred to may be found on page 91.]
    [The prepared statement of Senator Inhofe follows:]

       Statement of Hon. James M. Inhofe, U.S. Senator from the 
                           State of Oklahoma

    MTBE may be the most carefully scrutinized and debated substance 
since the 1990 Clean Air Act amendments required its use. Today's 
oversight hearing on the impacts on the elimination of MTBE is the 
latest in a long history before this committee. I am going to summarize 
that history.
    The 1990 Clean Air Act amendments established the reformulated 
gasoline or RFG program, which most regard as an environmental success 
story. Yet, the inclusion of the oxygenate requirement as a component 
of the RFG program resulted in a few unintended consequences.
    I would like to remind my colleagues that the 2 percent oxygen 
requirement was not included in the bill passed by this committee, 
which laid the foundation for the amended Clean Air Act. Rather, the 
oxygenate requirement was added after vigorous debate and was the only 
successful amendment on the Senate floor.
    Senators from both sides of the aisle hoped that the requirement 
would lay the groundwork for greater ethanol use, but acknowledged that 
MTBE would likely be preferred as it is more affordable for consumers.
    Yet, although MTBE exceeded air-related goals, it tainted the taste 
and smell of water in some instances. Further, the 2 percent oxygenate 
requirement and air quality concerns of certain areas created boutique 
fuel regions, leading to higher prices during supply problems.
    Last year, this committee passed S. 606, the Reliable Fuels Act 
which called for the elimination of the 2 percent requirement and a 
phase-out of MTBE within 4 years, while preserving the authority of 
States to continue its use.
    As was the case with the bill that passed this committee in 1989, 
S. 606 was changed in material ways after we reported the bill and 
today the Nation faces, although temporary, some potential unintended 
consequences.
    Pursuant to the Energy bill, the 2 percent oxygenate requirement 
will be repealed this May.
    A majority of members recommended that oxygenate producers and 
marketers be afforded liability protection against defective product 
lawsuits for their mere compliance with the law. Unfortunately, that 
provision was not included in the Energy bill either.
    Therefore, refiners have been forced to stop using MTBE more 
suddenly than stakeholders, industry, or this committee had ever 
considered.
    Fact: MTBE has been the preferred oxygenate used in reformulated 
gasoline, and its elimination means a corresponding loss of fuel supply 
that must be made up.
    Fact: Ethanol is needed to replace MTBE.
    Fact: The ethanol industry, refiners, marketers, and infrastructure 
operators are working hard to make sure that the transition is as 
painless as possible.
    The green bar on this chart from EIA illustrates just how much 
ethanol is currently being produced--a significant amount in a 
relatively short period of time.
    However, the sudden elimination of MTBE and the current state of 
the ethanol industry means that significant volumes of ethanol must be 
imported.
    The orange bar shows about 130,000 barrels per day of additional 
ethanol is needed to replace MTBE. In other words, the United States 
needs to come up with close to half of the ethanol currently being 
produced domestically.
    Actually, the transition means even greater supply loss than this 
chart illustrates because the production of ethanol-blended RFG yields 
5 to 6 percent less fuel per barrel.
    It is critical for the Nation to increase its petroleum and bio-
refinery capacity. My legislation--the Gas PRICE Act and Energy Price 
Reduction Act amendment to the LIHEAP bill--would assist with the 
transition away from MTBE.
    We would expedite the permitting process for traditional as well as 
renewable fuel infrastructure so that regions of the country will not 
have to face the temporary supply shortfalls and corresponding price 
increases likely this summer.
    Congress must be mindful of the unintended consequences before 
considering any future action. I urge my colleagues, stakeholders, and 
the public to allow the recently enacted fuels title of the Energy bill 
to be fully implemented.
    As EIA and our other witnesses will testify, the Nation's fuel 
system requires infrastructure, investment, and most importantly, time 
to develop.
    The refining industry's positions dealing with fuels policy--
warning against sudden transitions, the need for liability protection, 
etc.--are well understood.
    This hearing is squarely centered on the imminent future not the 
past. I look forward to hearing from our witnesses and if they have any 
policy recommendations for Congress, including the likelihood of 
importing more ethanol.
    Thank you.

    Senator Inhofe. Senator Boxer, would you like to be 
recognized for an opening statement?

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

    Senator Boxer. I would. I thank you very much, Mr. 
Chairman. Thank you for holding this hearing and I am pleased 
to say that we have a ban on MTBE in California already in 
place, which will without a doubt aid in the prevention of 
additional damage to our drinking water supply, damage already 
estimated to reach $7 billion.
    Seeing an end in sight to MTBE use nationwide is good. I 
want to add that MTBE is gone from the gas in California, and 
the removal of it was never, to my knowledge, and we have 
researched all the records on this, cited as a reason for high 
gas prices. Oil companies have been long on notice that MTBE 
must be phased out of the gas supply. Its use was never 
mandated by the Clean Air Act. In fact, oil companies have even 
been found to have acted ``with malice'' by a California jury 
in the South Lake Tahoe case. They settled for nearly $70 
million.
    It has long been obvious that MTBE was the wrong oxygenate 
to use in gasoline. The oil companies have known for years that 
MTBE is extremely soluble in water, persistent and smells and 
tastes foul. Even if it was safe to drink, no one would drink 
it because of the odor and the appearance. It renders water 
containing fairly low levels, 20 to 40 parts per billion, 
unusable for drinking.
    There are also potential health concerns with MTBE, 
including possible carcinogenicity and other toxicity. The oil 
companies were also put on notice of the serious problems with 
MTBE when 25 States, including California, enacted some sort of 
MTBE ban. The question I would have liked to have posed to the 
oil companies in today's hearing, although they were not 
invited, is what has taken them so long to deal with this 
threat to our drinking water. Why haven't they addressed the 
MTBE problems years ago?
    Unfortunately, again, they were not invited here to explain 
why they have let this mess go on all these years. We have 
asked to have them here. The claim that the Government made 
them use MTBE is patently false. In the Lake Tahoe case, for 
example, the court found that use of MTBE was permissible, but 
not required, underscore, not required. We now hear the oil 
companies intend to phaseout MTBE immediately and may 
potentially disrupt gas supplies. It's sort of like, let's 
punish the public again, for something they had nothing to do 
with. It's the oil companies who chose MTBE.
    Interestingly, the oil companies themselves testified in 
hearings almost 5 years ago on this issue. Mr. Edward Murphy 
stated in a House hearing on behalf of the American Petroleum 
Institute that phasing out MTBE would be, and here it is, a 
walk in the park. He said, making up roughly 300,000 barrels a 
day of MTBE volumes when we are producing gas at 8 million 
barrels a day over a 4-year-period is a virtual walk in the 
park.
    So lots of crocodile tears and worries about nothing. That 
was almost 5 years ago. The oil companies were ready then for a 
walk in the park, now it would be a stroll in the park all 
these years later.
    That gentleman who testified for the oil companies never 
said disruption was inevitable, gas price hikes were 
inevitable, or that consumers would have to pay through the 
nose. The oil companies failed to remove MTBE for years, even 
though they knew and they admitted that a reasonable phase-out 
would smooth the way. The oil companies now claim legal 
liability due to the elimination of the oxygenate requirement 
which forces them to act immediately. It is not true. Nothing 
in the law forces them to act immediately. Period. These 
liability defenses have not been accepted by the courts.
    What are the oil companies taken for now? We've heard 
waivers from environmental laws are on their wish list, they 
also again may want waivers of liability for MTBE. That's a get 
out of jail free card. Tom DeLay led that fight in the House 
and lost.
    There are new initiatives underway in my own State to get 
big oil off the hook, a proposed ballot initiative in 
California that would eliminate punitive damages for MTBE. No 
surprise, the L.A. Times reports this proposal is backed by 
Chevron.
    Mr. Chairman, I see my time is running low. I would ask 
that the rest of my statement be placed into the record. But 
the bottom line here is that all the crocodile tears about how 
they always wanted these liability waivers, the fact is, oil 
profits have never been as good and they have always been 
liable for MTBE as they should be, as the courts have so 
stated. Thank you.
    Senator Inhofe. Without objection, all the entire 
statements will be a part of the record.
    Senator Warner.

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

    Senator Warner. Thank you, Mr. Chairman.
    First, I supported you on the amendment that this committee 
very wisely and properly put into the Energy bill, the 4-year 
phase-out program. I am not a fan of MTBE. All of us who have 
been around here for a while recognize this is one of the 
political footballs that is being kicked back and forth. But it 
really has a serious impact on the health of the Nation and 
other things. I am fully supportive of whatever initiatives 
this committee wishes to take regarding this problem.
    I think this hearing is timely to try and elevate from 
politics some of the real serious ramifications in the 
marketplace of this conference revision of your amendment. So I 
would simply ask to have my full statement placed in the record 
and once again commend the Chair for its leadership on this 
issue.
    [The prepared statement of Senator Warner follows:]

        Statement of Hon. John W. Warner, U.S. Senator from the 
                        Commonwealth of Virginia

    Mr. Chairman. Thank you for calling this hearing today on the 
impact of the elimination of MTBE from the Nation's fuel supply. Like 
you, I share significant concerns about our fuel supply system and our 
ability to meet market demands as well as minimize price volatility. 
That is why I have long advocated an expansion in the sources of our 
domestic supply of oil and natural gas and supported efforts to expand 
the capacity of our refineries.
    The supply of transportation fuels in our Nation are subject to 
myriad influences including national and global politics, increasing 
worldwide demand, Federal and State policy, and the ever unpredictable 
Mother Nature. As a result of last year's Hurricanes we saw supply 
disruptions that this committee attempted to address through a refining 
capacity bill and we now see the potential for a similar situation with 
regard to supply as a result of the virtual wholesale replacement of 
MTBE with ethanol.
    With the removal of the oxygenate requirement and industry's 
decision to effectively eliminate MTBE from our fuel mix, octane boost 
and emission requirements must be met with some sort of additive. 
Ethanol is the obvious answer for to near term because of relatively 
widespread infrastructure, the ability for 99.9 percent of vehicles to 
accept the fuel, and a generous Federal tax code.
    However, as the Energy Information Administration (EIA) has 
provided in its report, there are regions of the country that will 
likely see short-term disruptions in supply due to a number of factors. 
In the mid-Atlantic for example, we currently rely on MTBE and don't 
have the infrastructure set up for the transportation and distribution 
of ethanol. Other areas of the country with established distribution 
systems, an educated marketing and customer base, and boutique fuels 
requiring ethanol will continue to be a draw on this supply. All the 
while we are expecting a net increase in ethanol consumption of more 
than 200,000 barrels a day of ethanol nationwide in a very short period 
of time. The competition for this demand surely will place pressure on 
prices.
    I have been critical of our Federal policy toward ethanol, 
especially in the current climate, because I feel that market forces 
are already strong enough to support the ethanol industry and meet 
demand. And while I don't agree with all of our current Federal policy 
in this arena, our mission today is not necessarily to debate those 
points. We have a responsibility to explore the potential effects 
during this transition phase to ethanol during the upcoming peak 
driving season and discuss possible solutions. One thing is clear, the 
removal of the oxygenate requirement is going to have a significant 
effect on the market this season and I look forward to hearing from our 
witnesses about this issue and how Congress may address it.

    Senator Inhofe. Thank you, Senator Warner.
    Senator Lautenberg.

  OPENING STATEMENT OF HON. FRANK R. LAUTENBERG, U.S. SENATOR 
                  FROM THE STATE OF NEW JERSEY

    Senator Lautenberg. Mr. Chairman, thank you for calling 
this hearing.
    I sit here as a grandfather of a child who has asthma and 
that, for those who witness the condition, know that it a 
blight and often with serious overtones. His life depends on 
the quality of air and his functioning, as a child, and my 
daughter's functioning as a mother of four, in many areas 
during the summertime there are days when parents are advised 
not to let their children play outdoors if they have asthma.
    What my daughter does is when he plays sports and when they 
go away from the home area, she checks to see where an 
emergency facility is, just to be prepared. It is painful to 
hear him wheeze and lose his energy. So in many areas during 
the summertime, there are days when parents are advised not to 
let their children play outdoors if they have asthma, because 
the air is unhealthy and could trigger an attack.
    But air pollution is not only a threat to children with 
asthma. According to a study from the Harvard School of Public 
Health, as many as 4 percent of premature deaths in the United 
States can be attributed to air pollution. When we look at the 
costs for shifting away from MTBE, I don't think we dare ignore 
the other side of the seesaw which says all kinds of expenses 
are incurred as a result of the cost of health and family 
dislocation and other problems. As many as 30,000 Americans die 
prematurely every year because of problems related to air 
pollution.
    So I support the Clean Air Act and I support the 
requirement for the past decade for cleaner gasoline in cities 
with the worst air pollution, something I supported. It is up 
to the oil companies to decide how they met the requirements 
for cleaner fuel. Some used ethanol, others chose to use MTBE. 
The problem with MTBE, we know now, it is polluting 
groundwater, that's been known for several years. It's 
considered to be a likely human carcinogen. Many States are 
banning this chemical, including New Jersey. Now New Jersey is 
going to take some time for it to be fully in effect, 4 years 
to be specific. I wish that we could accelerate that pace. 
Apparently California has done much better in clearing up that 
problem.
    So this issue doesn't come up overnight. The oil companies 
have plenty of time to consider other options. They certainly 
have been making enough money to invest in developing for 
alternative additives. I hope these companies will not use this 
phase-out of MTBE as an excuse to manipulate a shortage in the 
market, drive up prices further.
    Mr. Chairman, Exxon reported the largest profit ever, not 
just for an oil company, but for any company, $36 billion in a 
single year. That was in the year when Hurricane Katrina struck 
and Americans were being hit hard at the pump. It was a bad 
year for everybody, everyday Americans, but a great year for 
big oil.
    We need to put the oil companies on notice that they can't 
use MTBE as another excuse to boost up oil prices. Mr. 
Chairman, I appreciate the fact that you've called this hearing 
and I look forward to the testimony from our witnesses and the 
opportunity to talk to them.
    Senator Inhofe. Thank you, Senator Lautenberg.
    We will now proceed to our witnesses. We would like to ask 
you to try to confine your statements to 5 minutes. Your entire 
statement will be a part of the record. We will start with you, 
Mr. Caruso.

  STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION 
  ADMINISTRATION, U.S. DEPARTMENT OF ENERGY, ACCOMPANIED BY: 
 JOANNE SHORE, LEAD ANALYST, ENERGY INFORMATION ADMINISTRATION

    Mr. Caruso. Thank you, Mr. Chairman, members of the 
committee. I appreciate the opportunity to appear before you 
today to discuss possible consequences of eliminating MTBE in 
U.S. gasoline supplies this summer.
    I am accompanied by Joanne Shore, the EIA's lead analyst on 
this issue.
    EIA is the independent statistical and analytical agency in 
the Department of Energy. We do not promote or formulate policy 
positions. We do conduct analyses. Last month we completed an 
analysis of the effects of the elimination of MTBE on gasoline 
in 2006, which I will be summarizing and updating.
    In 2005, a number of petroleum companies announced that 
they would remove MTBE from their gasoline in 2006, due to a 
number of State bans and liability concerns. EIA's discussions 
indicate that the industry is trying to eliminate virtually all 
MTBE prior to the driving season this summer.
    Currently the largest use of MTBE is in reformulated 
gasoline, or RFG, in Texas and in parts of the East Coast. 
Other areas are using reformulated gasoline--in the Midwest, 
California, New York and Connecticut. They have already removed 
MTBE and moved to ethanol as the oxygenate replacement.
    Due to a provision in last year's Energy Policy Act, as the 
Chairman has mentioned, as of May 2006 the previous oxygen 
content requirement for reformulated gasoline will no longer be 
in effect. In theory, this means that suppliers could sell 
reformulated gasoline made without either MTBE or ethanol. 
However, given the need to replace the octane and clean-burning 
properties of MTBE, nearly all companies have been planning to 
blend ethanol into gasoline as they eliminate MTBE.
    This shift from MTBE to ethanol involves major changes in 
operations and supply sources to the East Coast and Texas, 
particularly for those reformulated gasoline markets. While 
refiners, marketers, pipelines, terminal operators and ethanol 
suppliers have been preparing for the transition, this change 
is taking place on a tighter time schedule than previous MTBE 
to ethanol transitions in California, for example, which was 
noted by Senator Boxer. A shift in this magnitude in this short 
of time could cause temporary local supply dislocations and 
price volatility.
    To make reformulated gasoline using ethanol, refiners must 
change their operations to produce a base reformulated gasoline 
blend stock, so-called RBOB. This change results in some loss 
of RFG production capability and product volume. Other 
petroleum blending components can be used to replace the lost 
volume and meet emissions limitations. But finding supply of 
suitable blending components may pose a problem for some 
gasoline producers, limiting their production and requiring 
other refiners to find or produce more.
    The Northeastern gasoline markets receive about 90 percent 
of their RFG supplies from East Coast refineries and imports 
into the New York harbor area, with the remainder coming from 
Gulf Coast refineries. As the shift to ethanol reduces RFG 
production capability at East Coast refineries, supplies from 
the Gulf Coast and imports are expected to increase. However, 
some foreign refiners are currently unable to produce RBOB 
components, and hence there will be fewer potential foreign 
suppliers for ethanol blended reformulated gasoline. Shifts in 
past supply patterns for RFG will add to supply uncertainty 
during this transition.
    Changes are also required to the distribution system. 
Ethanol-blended gasoline cannot be mixed with other gasolines 
and cannot be moved through pipelines. RBOB is moved through 
the petroleum distribution system, but unlike MTBE, ethanol 
must be transported and sold separately, then blended with RBOB 
at the end of the distribution chain. This requires time and 
investment to add blending facilities, to add or convert 
storage facilities and to convert retail outlets.
    Pipelines and terminals are limited in the number of 
products they can carry efficiently. In many cases, the system 
would be strained to handle MTBE-blended RFG, ethanol and RBOB. 
As a result, even if some suppliers had wanted to continue to 
use MTBE-blended RFG, the distribution system could become a 
barrier in many areas. The recent FERC decision regarding the 
Colonial Pipeline announcement raised the question of whether 
or not suppliers were planning on using MTBE into this summer 
season. The FERC decision was only directed at how Colonial 
Pipeline should respond if a supplier wished to continue 
shipping MTBE RFG. Colonial is still bound by its usual 
shipping requirements and physical constraints and EIA is not 
aware of suppliers wanting to provide MTBE-blended RFG this 
summer.
    This large increase in ethanol demand and associated 
transportation needs implies a tight ethanol market at least 
the first half of 2006. As noted, January 2006 production of 
ethanol was 288,000 barrels a day and about 130,000 barrels a 
day may be needed to replace MTBE.
    Moving additional ethanol from the Midwest to the East 
Coast----
    Senator Inhofe. Mr. Caruso, try to wind up, would you, 
please?
    Mr. Caruso. Yes, sir. Moving additional ethanol from the 
Midwest to the East Coast also poses a transportation 
challenge. East Coast ethanol use is expected to increase 
90,000 barrels a day, which, if it all came from the Midwest, 
would result in 3\1/2\ times the volume in 2006 compared with 
2005.
    In conclusion, Mr. Chairman and members of the committee, 
petroleum and ethanol companies are working diligently to make 
this transition away from MTBE to ethanol. This transition does 
pose some of the challenges that I have mentioned for both 
supply and logistics. As a result, ethanol supplies are 
expected to remain tight through the summer, and increased 
potential exists for short-term supply disruptions and 
associated price volatility.
    Mr. Chairman, I would be pleased to answer questions at the 
appropriate time.
    Senator Inhofe. Thank you, Mr. Caruso.
    Mr. Meyers.

STATEMENT OF ROBERT MEYERS, ASSOCIATE ASSISTANT ADMINISTRATOR, 
  OFFICE OF AIR AND RADIATION, U.S. ENVIRONMENTAL PROTECTION 
                             AGENCY

    Mr. Meyers. Yes, Mr. Chairman, members of the committee, I 
appreciate the opportunity to come before you today to testify 
regarding the impact of eliminating MTBE.
    My testimony will address how recent amendments to fuel 
quality regulations and ongoing implementation of the Energy 
Policy Act of 2005 affect U.S. fuel programs, in particular, 
the Reformulated Gasoline Program, or RFG. Following passage of 
the 1990 Amendments to the Clean Air Act, EPA was tasked with 
developing and implementing several new motor vehicle emission 
and motor vehicle fuel quality programs to reduce harmful 
evaporative and exhaust emissions that negatively impact our 
Nation's environment and the public health. Among many other 
new provisions, the Clean Air Act required implementation of 
new fuel quality programs with prescribed fuel parameters.
    In 1992, the Wintertime Oxygenate Fuels Program was 
implemented, and that program was required in more than 30 
areas exceeding air quality standards for carbon monoxide.
    Senator Boxer. Would you speak up a little, Mr. Meyers? I'm 
having a hard time hearing you.
    Senator Inhofe. Move your microphone a little closer to 
you, Mr. Meyers.
    Mr. Meyers. I apologize. I was just referencing the 
implementation in the 1990 Amendments, and in 1992, we began 
that implementation in our fuel quality programs by 
implementing the Oxygenated Fuels Program at that point in 
time. This program required gasoline to contain 2.7 weight 
oxygen and it was instrumental, actually, in bringing many of 
the areas that had been in carbon monoxide non-attainment into 
attainment.
    Subsequently, in 1995 after a period of regulatory 
negotiations, we began implementation of the RFG program. The 
1990 amendments, I think as people are well aware, required RFG 
to contain 2.0 weight percent oxygen and established 
essentially a two-phase program in 1995 and 2000. Historically, 
the RFG program has used large quantities of MTBE. In 1995, I 
think our figures showed about 2.5 billion gallons of MTBE was 
used in RFG compared with about 300 million gallons of ethanol.
    Today, after roughly 10 years of the program, 35 percent or 
thereabouts of our gasoline is RFG. Both ethanol and MTBE have 
been used in the program, but until recently, the MTBE 
percentage was approximately 85 percent or so.
    Over the last 6 to 7 years, concerns have arisen with 
respect to groundwater contamination from leaking underground 
storage tanks having gasoline containing MTBE. As the Senator 
from California referenced, these concerns have prompted some 
States to ban MTBE, including such large markets as California, 
New York and Connecticut. That has had an impact on MTBE usage 
over the last 2 or 3 years.
    Altogether, EPA estimates that about 3.2 billion gallons of 
MTBE were used in the RFG program in 1997. This level increased 
about 3.4 billion gallons in 2000. In 2004, following 
California's ban, the use of MTBE declined to around 2.1 
billion gallons. Correspondingly, ethanol usage in the RFG 
program has grown from 420 million gallons since 1997 to 1.7 
billion gallons in 2004.
    I mentioned before at the beginning of the testimony the 
Energy Policy Act, which Congress passed in August of last 
year. So far, in response to the law's enactment, EPA has 
promulgated a direct final rule of the RFG regulations in order 
to eliminate regulatory standards requiring the use of 
oxygenates in RFG. This rule, when it becomes effective, will 
remove the current regulatory standards nationwide. The rule 
will also serve to implement provisions regarding commingling 
of ethanol and non-ethanol blended reformulated gasoline.
    In terms of other energy-packed provisions, we have 
published a direct final rule regarding the default rule for 
RFS compliance in 2006. We are continuing to work on the 
renewable fuels standard regulation, which will be necessary 
for 2007 and beyond.
    I don't have much time left, so I would just sum up to say 
that the Agency understands as a result of the changes made by 
the Energy Policy Act of 2005, in particular the removal of the 
RFG oxygen requirement, MTBE use in the RFG program will 
decline significantly. As noted by EIA, some providers are 
already transitioning away. The Northeast market may undergo 
substantial conversion to ethanol RFG. Southern RFG markets, 
too, such as Houston and Dallas, are likely experiencing a 
changeover to ethanol RFG as well.
    While we defer to EIA on the broad economic analysis, as an 
Agency we remain committed to successful implementation of the 
Energy Policy Act. I want to thank the Chairman of the 
committee and members of the committee for your attention. This 
concludes my prepared statement and I am willing to answer 
whatever questions you might have.
    Senator Inhofe. Thank you, Mr. Meyers, for that excellent 
statement.
    Mr. Caruso, I am going to pick up on his last statement 
concerning what will result from the oxygenate elimination. For 
years, refining and related industries urged Congress to 
protect them from product liability lawsuits for following the 
law and using MTBE under the oxygenate requirement. The Energy 
bill repealed that requirement but did not include the product 
liability protection. We spent a long time on the floor looking 
at this, because this is one of the things that seemed to be so 
logical.
    Yesterday, the Wall Street Journal, I suspect everyone in 
here has read that article, it is an excellent article, they 
published a piece about the elimination of MTBE from gasoline 
without liability protection, noting that Congress was well 
aware that high prices would result. I imagine that you are 
familiar with that article.
    Would you agree that much of the industry made the public 
aware that it would stop using MTBE without the liability 
protection? To me, it's a no-brainer. In a court of law, I 
would assume if they had the oxygenate requirement, that would 
offer some defense. But you take that away, then they would be 
without defense. Would you agree with that, and what's your 
assessment of the conclusions of the article that I referred 
to?
    Mr. Caruso. Well, the specific issue of how well informed 
the public was, that's very difficult to know. But certainly 
it's clear that the refining interests sought the MTBE 
liability protection, based on testimony before this committee 
and the Energy and Natural Resources Committee during the 
debate on EPACT last year. So I don't think there's any doubt 
about that part of it.
    It's also my impression that they generally favored the 
repeal of the oxygenate requirement and/or were actually 
opposed to an explicit near-term Federal ban on MTBE during 
those hearings.
    Senator Inhofe. All right, thank you. Mr. Meyers, you 
testified that MTBE was among, I'm quoting now, ``the primary 
product used to implement both the winter oxy and RFG 
programs.'' According to the information we have seen, 
implementing these Federal mandates would have been practically 
impossible without MTBE. Would you agree with that?
    Mr. Meyers. Well, as I noted in my testimony, the RFG 
program heavily utilized MTBE from the initial start of the 
program in 1995. I cited 2.5 billion gallons.
    If you look at the regulatory history of the program, I 
think it is also instructive to look at what the EPA did in 
1999. At that point in time, there was concern about the 
utilization of ethanol and the Agency promulgated what was 
known as the renewable oxygenate requirement, which would have 
established a 30 percent renewable standard for the RFG 
program. That requirement was later overturned in the courts, 
but is instructive in terms of the views at that point in time 
concerning renewables and the RFG program.
    If you step it up a little bit further after that, in 1999, 
there was a blue ribbon panel commission on this issue on the 
use of oxygenates in RFG. In that report, it seems to indicate 
from the 1999 perspective that moving away from MTBE would be 
very difficult in the short term, because of the heavy reliance 
of MTBE in the program. Although it urged that in terms of 
recommendations it noted the difficulties, since MTBE at that 
point was so integral to the program.
    I think going further, until very recently, MTBE has 
certainly been the most predominant oxygenate utilized in the 
program. In 2000, it was about 87 percent of the entire RFG 
program.
    Senator Inhofe. Well, I think that it's been stated by a 
lot of the strongest supporters of ethanol. I remember Senator 
Daschle made the statement that MTBE would still be necessary. 
Of course, what all this translates in, back in supply and 
demand, is increased costs.
    Mr. Caruso, your report notes that ethanol production is at 
capacity, and tight capacity leads to higher prices, a 
situation facing the refinery industry for years. I have tried 
twice now to introduce legislation that would increase capacity 
at the traditional and biorefineries. The Gas PRICE Act was one 
that I thought was a very moderate and modest proposal that 
would encourage additional refineries, really at virtually no 
cost.
    Now, I would ask you the question, is it true that 
consumers want reasonably or lower priced fuels? Since tight 
capacity leads to higher prices, wouldn't it make sense that 
greater capacity leads to lower prices? In other words, do you 
believe in supply and demand?
    Mr. Caruso. Most definitely. As an economist and the head 
of a statistical, analytical agency, all of our studies 
indicate that one of the reasons prices are so volatile and the 
market inflexible now is lack of spare capacity from the 
upstream all the way through the downstream.
    Senator Inhofe. Yes, it's obvious.
    Senator Jeffords, let's go ahead and have 6-minute rounds, 
because we're going to have to confine this to one round. I 
will recognize Senator Jeffords.
    Senator Jeffords. Mr. Caruso, in gathering information for 
its report in February, did EIA learn whether the oil companies 
had an extensive planning effort in place to minimize price 
impact of removal of MTBE from gasoline, and ease any supply 
disruptions?
    Mr. Caruso. I'm not aware of any information that we may 
have gotten on the price aspect of it. Most of our focus was on 
asking the industry how they were going to deal with the 
requirement in EPACT 2005 to eliminate or remove the oxygenate 
requirement in 270 days, which comes up in early May of this 
year.
    So we are focused on how are they going to meet this and 
how are they going to deal with their statements that they felt 
that without the oxygenate requirement they no longer had 
product liability coverage. Most of them said to us that they 
were going to move out of MTBE into ethanol as quickly as 
possible. So that's the information we gathered from not only 
those companies, but the distribution companies, to see if it 
could be done--are the rail cars there, the whole logistical 
chain of this moving out of MTBE within 270 days from the 
passage of EPACT 2005.
    Senator Jeffords. Do you believe your report spurred the 
market to begin grappling with possible supply issues this 
spring?
    Mr. Caruso. Well, we'd like to think that one of the roles 
we play is to inform the market participants when we think an 
issue such as this is impending. Because oftentimes, for either 
legal or competitive reasons, some of the market participants 
aren't talking with each other, and especially an issue where 
there are so many moving parts from the production of ethanol 
to the transportation to the distribution. We'd like to play 
that role as an information agency.
    Hopefully it did perhaps stimulate some movement. We know 
that the economic incentives were there, ethanol prices were 
rising. So clearly the incentive for the refiners is to have 
adequate supplies for their customers. So it was a question of, 
is there going to be enough time to overcome some of these 
logistical challenges.
    Senator Jeffords. Since the release of your report, 
Colonial Pipelines' plans to phaseout MTBE from gasoline 
shipments have changed. On St. Patrick's Day, the Federal 
Energy Regulatory Commission denied their request to stop 
shipping these products. Have you examined this issue, and do 
you know its potential to alleviate supply problems?
    Mr. Caruso. Well, we have talked to the Colonial Pipeline 
people, and they will honor their regular contractual 
agreements to move the product as specified in the arrangements 
with the company. So we have looked at it. But it doesn't 
really alleviate the problems mentioned because, if the 
companies are essentially all moving out of MTBE, the only 
issue that was on the table for FERC was whether companies who 
wanted to continue shipping reformulated gasoline containing 
MTBE would still be able to do it. Colonial Pipeline officials 
have told us the answer is yes, in response to the FERC 
decision.
    Senator Jeffords. Will you commit to updating your report 
before early May, and including an actual price prediction?
    Mr. Caruso. Well, we certainly are following this very 
closely. I would be happy to make sure that we do have an 
updated report by May.
    The second thing is, on price, we do on a monthly basis 
make gasoline and other product price projections and the next 
one will be presented on April 11 at our Summer Fuels Outlook 
Conference in conjunction with the National Association of 
State Energy Officials, NASEO, here in Washington. So we will 
have a summer outlook projection which includes our latest 
expectations for meeting the MTBE phaseout on April 11.
    Senator Jeffords. Mr. Meyers, in your testimony you stated 
the EPA is now working on an implementation plan for future 
years of the renewable fuels standard. When do you expect to 
issue that plan?
    Mr. Meyers. It's our current intention, we have to go 
through normal process of a proposed rule, at the end of this 
summer or early fall, it would be our projection when we will 
have a proposed rule out.
    Senator Jeffords. Mr. Meyers, the new energy law allows 
unformulated gasoline in tanks that contain MTBE to be mixed 
with reformulated gas that does not, a practice known as 
commingling. EPA has yet to issue rules to implement this 
section of the law. Would this practice help supply situations 
this summer?
    Mr. Meyers. In actuality, that was contained in our direct 
final rule that we placed for removal of the oxygen standards. 
So we actually have, we included it in our direct final rule 
which removed the oxygen requirement and we specified, as the 
Act specified, the circumstances under which commingling could 
occur.
    Senator Jeffords. Thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Jeffords.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    Mr. Meyers, on the subject of the environment, can you 
speak to the expected effects on the environment and health of 
ethanol replacing the MTBE?
    Mr. Meyers. I can speak in terms of the air program.
    Senator Warner. Yes.
    Mr. Meyers. As you know, the effects of MTBE are multi-
media and they have water quality effects. In moving from MTBE 
to ethanol, the way our RFG program works is a series of 
performance specifications, plus some actual formulated 
requirements for the gasoline. So both MTBE based RFG and 
ethanol based RFG have to meet the same requirements. They will 
have to meet the benzene cap, they will have to----
    Senator Warner. I'm not getting what you're saying. Once 
again, more slowly. Both have? Go ahead, once again.
    Mr. Meyers. Both have to meet the same requirements.
    Senator Warner. Correct. But have you done an evaluation of 
which is least detrimental to the health?
    Mr. Meyers. From an air emissions standpoint, I don't 
believe we have any analysis. Again, we are dealing with a 
program that utilizes, it is a little bit complicated, but uses 
refiner baselines as a measurement for the gains of the 
program. So we'd measure the performance requirements against 
the gas that refiners actually use to produce, and it's a 
percentage. So both MTBE and ethanol will meet the same 
percentage air quality gains under the requirements that we 
have.
    Senator Warner. Is there any basis for assuming that 
ethanol would be better for the future in terms of the 
environment?
    Mr. Meyers. There are different emission profiles in terms 
of what would come out the tailpipe. But I don't believe from 
an air quality standpoint, if we are talking about non-
attainment, that we would have substantial differences between 
the performance.
    On that point, though, I would be happy to provide for the 
record anything that we do have. My knowledge may not be 
comprehensive of the analysis that we have. I would be happy to 
provide that.
    Senator Warner. Well, I thank you for your candor. I do 
believe, Mr. Chairman, it would be important for the record if 
you would canvass the Federal Government----
    Mr. Meyers. Of course, sir, I will.
    Senator Warner [continuing]. To determine what is out 
there. Because I have to assume that someone has run some 
fairly significant tests and evaluations on this subject.
    Mr. Meyers. Well, we have evaluated the impact of the RFG 
program and certainly think it's produced large environmental 
gains. After 1995, we studied its impact and previously we have 
testified as to the reductions in VOx, NOx and the air toxics 
that occur from the program.
    Your specific question as to the emission performance 
between ethanol and MTBE, that I'm not aware of a specific 
study, but I will check that and get back to the committee as 
soon as possible.
    Senator Warner. What about the water quality? Is someone at 
the EPA looking at that?
    Mr. Meyers. That falls under the Office of Water. Right 
now, there's an action level for MTBE between 20 and 40. The 
Office of Water has been looking at it in terms of the Safe 
Drinking Water Act and establishment of regulatory standards 
under the Safe Drinking Water Act.
    Senator Warner. Presumably they would be in favor of 
shifting to the ethanol? It seems to me somebody, we have to 
begin to reach some conclusions down here.
    Mr. Meyers. I need to stay within my office.
    Senator Warner. All right, you're being very careful and 
very accurate and very candid. Do what you can to bring that 
information before the committee.
    Mr. Meyers. Thank you.
    Senator Warner. Mr. Caruso, on the supply and demand thing, 
it's a complicated responsibility you have. Do you think that 
the EIA had any thoughts about the ability of imports to meet 
the demand?
    Mr. Caruso. Yes.
    Senator Warner. Nobody has a free lunch. What about the 
tariffs that are likely to be put on these imports and the 
effect of the tariffs?
    Mr. Caruso. One of the reasons ethanol imports have been 
down is that there is a high tariff--it's 54 cents a gallon 
plus the 2\1/2\ percent ad valorem. So that ethanol imports 
have been very low, as recently as even 2005. They are ramping 
up now in 2006. We already saw that at the end of 2005, imports 
of ethanol from Brazil were up over December 2004. We would 
expect that that would be part of the answer, because the price 
of ethanol has gone up as demand has increased. Therefore, even 
with a 54-cent-a-gallon tariff, it's economic to bring in 
ethanol.
    However, there is a limit as to how much ethanol is 
available on the foreign market.
    Senator Warner. Right. Maybe we ought to address the issue 
of tariffs. Clearly there's tremendous demand for the domestic 
supply, and maybe it doesn't need such protection as a tariff 
may afford. You're nodding your head.
    Mr. Caruso. Well, as an economist I would agree with you.
    Senator Warner. Beg your pardon?
    Mr. Caruso. As an economist, I certainly would agree with 
you. But obviously as the head of EIA, I can't take a position 
on the policy issues.
    Senator Warner. I appreciate that nod. Will the record 
indicate, Mr. Chairman, that he is in assent?
    [Laughter.]
    Senator Inhofe. The record will so indicate.
    [Laughter.]
    Senator Inhofe. Thank you, Senator Warner.
    Senator Boxer.
    Senator Boxer. Thank you very much, Mr. Chairman.
    Mr. Caruso, you make it sound very difficult for the oil 
companies to make this transition away from MTBE. So on that, 
you disagree with the sentence, again, I am going to read to 
you, Edward Murphy, American Petroleum Institute, said, 
``making up roughly 300,000 barrels a day of MTBE volumes will 
be producing gas at 8 million barrels a day over a 4-year-
period is a virtual walk in the park.''
    So I just wanted to note that the oil institute, the 
Petroleum Institute itself in testimony said it was no big deal 
to do this. Then you said in answer to Senator Jeffords' 
question, something I found very interesting, I wanted to probe 
you a little bit on it. You said that you learned from the oil 
companies, and this is true, because this is what they're 
saying, but I just wanted to ask you about it. That with no 
more oxygenate requirement, oil companies no longer have 
product liability coverage. Those were your words.
    Now, they never have had waiver of product liability. So 
what are you talking about? Are you talking about the fact that 
when they go to court to fight these cases, they say, ``Well, 
Your Honor, don't hold us liable, Congress made me do it?'' 
Isn't that what you mean?
    Mr. Caruso. That's what the companies have been saying.
    Senator Boxer. That's what they're saying.
    Mr. Caruso. Yes.
    Senator Boxer. But isn't it a fact that Congress has never 
given them a waiver of liability?
    Mr. Caruso. That's correct.
    Senator Boxer. Isn't it a fact that although they've had 
this liability on their shoulders, and believe me, I know about 
it, because they polluted Lake Tahoe, they destroyed 75 percent 
of the water supply in Santa Monica, CA, they went to court, we 
have discovery, we saw what they were writing to one another 
almost as jokes. The fact is during that whole time that they 
had liability, between now and that time, haven't they had 
record profits? So clearly this burden hasn't been such a 
burden, is that right?
    Mr. Caruso. Well, they see the burden being in the future--
without the oxygenate mandate, they wouldn't have a product, a 
legal argument, that is what they are telling me.
    Senator Boxer. But they've lost in court. They haven't ever 
won in court. So the fact of the matter is, I would like you to 
give them a little bit of a reality check. They have never had 
a liability waiver. They don't deserve it. The courts have 
found they have no excuse. All of a sudden now they're coming 
and crying again. I just love it. It's just extraordinary.
    Now, Mr. Meyers, did the Clean Air Act legally mandate the 
use of MTBE in gasoline?
    Mr. Meyers. The Clean Air Act contained the 2 percent 
oxygenate requirement.
    Senator Boxer. Did the Clean Air Act legally mandate the 
use of MTBE in gasoline, yes or no?
    Mr. Meyers. The Clean Air Act did not specifically 
reference MTBE. It required a 2 percent oxygenate requirement.
    Senator Boxer. Right. So there is, no mandate for MTBE ever 
was in the law?
    Mr. Meyers. The language of the Clean Air Act does not 
contain a reference to MTBE.
    Senator Boxer. Correct. So, yes or no, did the Clean Air 
Act legally mandate the use of MTBE in gasoline, yes or no?
    Mr. Meyers. The issue in your question is with respect to 
legally mandating----
    Senator Boxer. Can you answer yes or no? You've said it 
didn't, why can't you just say no?
    Mr. Meyers. I thought I had said that the Clean Air Act did 
not require the specific use of MTBE in the statutory terms.
    Senator Boxer. So there is no mandate for MTBE, is that 
correct?
    Mr. Meyers. It's not in the statute in terms of a specific 
legislative reference to MTBE.
    Senator Boxer. Thank you. Because you've just supported my 
argument and the argument that the court has found in favor of, 
and the fact that Mr. Caruso, the next time you see the oil 
companies, you might mention that Mr. Meyers, who certainly 
knows about this, says there has never been a mandate for MTBE 
from this Congress.
    I would ask to place into the record a document that dates 
back to 1995, Special Counsel Robert Meyers, who was the 
counsel to the House Energy and Commerce Committee, in which he 
said, ``In essence, since various fuels and fuel constituents 
compete for the RFG and alternative fuels market, an effort was 
made by Congress to avoid dictating any particular fuel 
choice.'' Now, that could be used in court.
    Senator Inhofe. Without objection, that will be included.
    [The referenced information follows on page 92.]
    Senator Boxer. Thank you.
    So let's get off this business of the poor oil companies 
were forced into MTBE when they clearly were not. It's 
important for us, if this issue of a liability waiver comes up 
again, let me just say now, that it isn't going to go anywhere 
on the Senate floor. It's going to go down.
    Mr. Meyers, the Houston Chronicle reported on March 24, 
2006 that Lyondell Chemical Company, a major MTBE producer, 
sent EPA a letter urging the Agency to extend a rule that 
Lyondell believes will help them avoid paying MTBE cleanup 
costs. Do you know about this letter?
    Mr. Meyers. I don't have personal knowledge of the letter. 
I would be happy to provide a response for the record.
    Senator Boxer. I would be delighted if you would please 
send me a copy of the letter and any response that you plan to 
make.
    I think, Mr. Chairman, that I will stop here. I just feel 
very, very strongly, that if this new bill that we passed is 
another excuse for the oil companies to try to get off the hook 
for poisoning so much of our Nation's water supply, it would be 
a travesty if this Congress went along with it. Thank you.
    Senator Inhofe. Thank you, Senator Boxer.
    Before you start, Senator Lautenberg, I will ask unanimous 
consent to submit for the record statements from the National 
Petrochemical and Refiners Association and the American 
Petroleum Institute. Without objection, those will be entered.
    [The referenced information follows on pages 80-91.]
    Senator Boxer. Mr. Chairman, I'm not going to object, but I 
want to clarify a matter with respect to putting these letters 
here. As you know, we wanted to have the oil companies and they 
were not invited here. I just want to make sure, on behalf of 
Senator Jeffords and myself----
    Senator Lautenberg. And me.
    Senator Boxer [continuing]. Senator Lautenberg, I want to 
make sure that these documents you are putting in the record 
are not regarded as testimony, but rather as additional written 
material offered to you, the chairman, in the form of a letter, 
and accepted into the record to inform members of the NPRA's 
point of view.
    Senator Jeffords and I want to make this clear, because we 
have some questions about the content of these letters. We 
would have liked to have asked the oil companies about them and 
we were not able to do so. But I will not object.
    Senator Inhofe. I would respond, that's always the case. 
They will be in as submitted letters.
    Senator Boxer. Thank you.
    Senator Inhofe. Senator Lautenberg.
    Senator Lautenberg. Thank you. Is it possible, if these 
letters are not particularly lengthy, to have the general 
context of these explained here or read here?
    Senator Inhofe. Well, why don't you go ahead with your 
time, and I will look at these and see if that would fit into 
this.
    Senator Lautenberg. I think it would be very helpful.
    Senator Inhofe. Thank you.
    Senator Lautenberg. Mr. Chairman, I'd like to ask Mr. 
Caruso a question about something that is in his testimony that 
I'd like to be more certain about. That is, it's page 6, he'll 
know as soon as I identify it. Where you talk about the cost 
for ethanol imports generally less attractive than domestic 
production, because imports are subjected to an ad valorem 
tariff of 2.5 percent, second duty of 54 cents a gallon, which 
offsets the 51-cent-per-gallon tax credit for blending 10 
percent ethanol into gasoline.
    Could you in quick form tell me exactly what the 51-cent-
per-gallon credit is for, why that derives in here? It's 
obviously an offset to the tariff. What happens with the 51-
cent-a-gallon credit? Who does that go to? What's the mission, 
what's the purpose of that offset?
    Mr. Caruso. With the permission of the Chairman, if I could 
ask the author of the report, Joanne Shore, to answer that 
question?
    Senator Inhofe. Without objection.
    Ms. Shore. Actually where it goes I'm not sure.
    Senator Inhofe. State your name and your title, please.
    Ms. Shore. Joanne Shore, Senior Analyst with the Energy 
Information Administration.
    Where it goes at this point I don't know, but there is a 
credit that's allowed, that the blenders are allowed to take. I 
believe it's 51 cents a gallon right now. The import tariff is 
roughly the same amount, so when that ethanol gets blended----
    Senator Lautenberg. It creates sort of a trust fund from 
which to take----
    Ms. Shore. Exactly.
    Senator Lautenberg. So is that designed to relieve the 
gasoline companies of some part of the cost for having to make 
this transfer to ethanol?
    Ms. Shore. No, I believe the 51 cents has always been there 
as a credit. The ethanol producers will be able to realize a 
higher price. Then the blender is able to take that credit down 
the road at that point where it is blended to be able to make 
it more competitive with alternative materials as it is 
blended.
    Senator Lautenberg. So it saves the companies some part of 
the cost of producing the product?
    Ms. Shore. Yes, it saves the blenders.
    Senator Lautenberg. Are the blenders separate and apart 
from the gasoline companies?
    Ms. Shore. They can be. Some companies do their own 
blending and there are many independent blenders out there as 
well.
    Senator Lautenberg. I see. So that if they didn't have this 
waiver, then they would have to pick up the costs? I just want 
to be sure, tax credit, sorry, they would have to pick up the 
cost out of their revenues, perhaps pass it on to the public or 
otherwise?
    Ms. Shore. Yes, or the ultimate price, then, of ethanol 
would drift accordingly to settle at a new price, whatever the 
market balance would bear at that point.
    Senator Lautenberg. Yes. I guess what I see is that we want 
to help the companies make a reasonable profit on their 
activities, like $36 billion. Anybody know whether Exxon has 
its own blending structure?
    Ms. Shore. Yes, they have both, in the sense that they sell 
product to others who do blending. They also would have some of 
their own blending. But the price that they pay at that point 
for the ethanol that comes in would effectively be, for 
example, 50 cents higher than the price of gasoline. Frequently 
ethanol prices, when the market is relatively well balanced, 
will be at the price of gasoline after the credit.
    Senator Lautenberg. There are offsetting amounts?
    Ms. Shore. Right.
    Senator Lautenberg. OK. I just wonder at what point they 
pitch in and say, OK, it costs us more to do a little more 
business. But we've got a pretty good business without that. So 
the profits are enormous and it's just amazing when we look at 
this how the gasoline companies perform. There was a $5 billion 
punitive award for the spill in Prince William Sound. It's 
never been paid, it's gone to court and they keep on, it's 
about 15 years now I guess, since that judgment was made. But 
they manage to stave off paying their share of responsibility. 
It's very interesting.
    Mr. Caruso, you said that you would be creating, or 
releasing a projection for the cost in the coming months, on 
April 11, was it?
    Mr. Caruso. Yes, Senator.
    Senator Lautenberg. Do you have any idea of the range of 
what the increased costs might be? Is it a nickel, is it a 
dollar?
    Mr. Caruso. Our current outlook is for about $2.50 average 
price of gasoline for the summer. I think that's about 12 cents 
higher than last summer per gallon.
    Senator Lautenberg. I thank you.
    Senator Inhofe. Thank you, Senator Lautenberg. We want to 
hear from Senator Thune, but before we do let me just, Senator 
Boxer, since you had mentioned several times that you wanted 
the oil companies to be present at this hearing, I've been 
advised that your staff made that clear and we said that we'd 
be happy to have them as your witnesses if you wanted to name 
them as witnesses. You declined to do so.
    Senator Boxer. Well, that's because you said we couldn't 
have any of our other witnesses.
    Senator Inhofe. Well, we have a limited number that is very 
consistent with the way we've done it in the past. If you 
wanted them here, you had the opportunity.
    Senator Thune.
    Senator Boxer. Mr. Chairman, I guess since you brought it 
up, I don't understand why you wouldn't have wanted them here.
    Senator Inhofe. I didn't say I didn't want them.
    Senator Boxer. I mean, this is about them. If you read 
their letter, by the way, they claim that we mandated MTBE and 
other falsity, right in there. By the way, they put out a press 
release about their letter to you.
    Senator Inhofe. Thank you, Senator Boxer.
    Senator Thune.
    Senator Thune. Thank you, Mr. Chairman. I will reserve most 
of questioning for the next panel. I thank you, by the way, for 
holding this hearing.
    I think this is a critical issue obviously to our economy. 
As we head into the summer season, dealing with gasoline costs 
in a State like South Dakota, where we are very agricultural 
intensive and tourism intensive, that has a profound impact on 
the economy. I think we need to be examining all the policies 
that we have in place that will impact adversely the cost of 
fuel oil in this country. I think that--I'm hoping we will get 
a chance to move another Energy bill this year that will help 
address some of those concerns as well.
    But this hearing is obviously very important in terms of 
what we are doing to take a very close look at this.
    I will reserve most of my questions for the next panel, but 
I do want to ask Mr. Caruso a question, if I might. That has to 
do with the supply and stock data that EIA publishes and the 
timing of that publication tends to track about 2 months 
behind. How do you determine the availability of ethanol in the 
marketplace with numbers that are so outdated once they're 
published?
    Mr. Caruso. You're correct, the actual final data on a 
monthly basis has about a 60-day lag, on the monthly data. We 
do collect on a weekly basis some blendstock information. So it 
gives us some idea of what the blending components that go into 
the reformulated gasoline are doing. So we have incomplete 
information on a weekly basis, but we do have to wait for that 
60 days.
    So one of the things we try to do--people like Joanne Shore 
and other experts in EIA--is to communicate with companies that 
are producing ethanol, with refiners and blenders to get the 
sense on a real-time basis of how things are going when we are 
in a situation that requires more close monitoring. We couldn't 
afford the resources to have this done on a regular basis, but 
now that we know there's an issue, for example, this 270-day 
phase-out of oxygenate, in this case MTBE, Joanne immediately 
started communicating with the participants in the marketplace. 
Are you going to be able to do this, what problems do you 
anticipate? That's what led to the analysis that I presented 
this morning.
    Senator Thune. It seems at least that not having real time 
data available would make it awfully difficult to track with 
any specificity what's happening right now. If you're getting 
information that is dated, it seems to me at least that closer 
coordination with the industry and to understand exactly, and I 
know you're doing that, sounds like you're doing that, 
communicating with the industry to figure out what their 
capacity is going forward, but if you have a 2-month lag in 
this day and age, I think it's going to be awfully difficult to 
predict with any reliability what prices or supplies or 
anything else are going to be.
    So I guess my follow-up question would be, what would it 
take to close that 2-month gap? What do we have to do to get to 
where this is, we're getting more of a real time assessment of 
where things are?
    Mr. Caruso. There was a provision within the Energy Policy 
Act of 2005 that we do a survey on a weekly basis of ethanol 
production in more detail. However, there was no budgetary--
excuse me, on a monthly basis. However, there was no budgetary 
authority that went along with that request.
    So we looked at what it would take, and we initially made 
an estimate that there would be about a $2 million cost of 
starting up a survey to allow us to collect that data on a 
monthly basis, and about $800,000 a year thereafter. But as of 
yet, this budgetary authority has not been made available.
    Senator Thune. Well, I guess in light of the fact that now 
with the phase-out of MTBE and that ethanol is becoming the 
additive of choice or perhaps necessity, and the importance of 
knowing on an I think more day-to-day basis rather than month-
to-month or 60-day- to 60-day-basis what the real situation is 
in the marketplace would suggest that the steps be taken. You 
do, my understanding is you do real time tracking of petroleum. 
Now the blends that are going to be required to be used in the 
future, it seems to me that you would want to use a similar 
type process, a more timely type process of keeping 
availability, supply, capacity of ethanol at your disposal as 
well. Because otherwise, I just think that the reliability of 
the data is really questionable, if you're talking about data 
that's 60 days old, and trying to make any predictions about 
capacity or supply, demand, price, anything going forward.
    Thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Thune.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    I apologize to the committee and to the witnesses that I 
haven't been able to be here to hear your testimony. This is an 
issue that I think people in the country are looking at. They 
want to know what's going to happen to the price of gas. We can 
talk about the specifics of MTBE and the liability issue, but 
at the end of the day, what Americans want to know is, so what 
am I going to be paying at the pump?
    I understand that a couple of the questions that I had 
prepared for you gentlemen have already been asked and 
answered. But do you have a simple answer for me in terms of 
what we can expect to be paying this summer?
    Mr. Caruso. Our latest outlook, which is our best judgment 
and assumes no disruptions, is about a $2.50 a gallon average 
price for gasoline.
    Senator Murkowski. So about 20 cents over what we're seeing 
here in this region right now? Is that about right?
    Mr. Caruso. Actually this week I think our numbers are just 
about $2.50, maybe slightly under that, on a national average 
basis. I mentioned in the testimony that the issue that we 
think is before us is the possibility that there could be some 
logistical dislocations in this transition and therefore on a 
regional basis you could have price volatility. We don't see 
that as likely to be a national issue. But clearly in places 
like Houston, Dallas, Fort Worth, and the East Coast, where 
they have not already phased out MTBE, you could get price 
volatility, which could go certainly above the national 
average.
    Senator Murkowski. If that assumption holds true, then, how 
long do you anticipate that these prices stay at these levels? 
When will it settle?
    Mr. Caruso. We think it's a short-term problem. That's the 
other point I mentioned. It's a temporary issue. We do think 
the ethanol producers are ramping up and will meet the demand 
increase. However, it takes time and we're very tight for the 
first half of 2006. But it's a summer driving season problem 
that we think we face, and we'll be presenting that in more 
detail at an April 11th Summer Fuels Outlook Conference.
    Senator Murkowski. We'll look forward to that.
    Let me ask you just in terms of the liability aspect of 
MTBE, do either one of you want to venture an opinion on 
whether the MTBE processing industry has any greater legal 
exposure now than it's faced since the 1990's for the water 
quality impact of the MTBE if it leaks into the groundwater? Is 
there any greater exposure now than we saw before?
    Mr. Meyers. I think the question is a good one, but would 
require a very studied legal analysis that I would not be 
prepared to offer.
    Senator Murkowski. Mr. Caruso, any comments on that?
    Mr. Caruso. I think that's a legal question I really have 
no competence to answer.
    Senator Murkowski. If we had a legal expert here, he would 
probably say, it's a legal complex question. Thank you, Mr. 
Chairman.
    Senator Inhofe. Thank you, Senator Murkowski.
    We thank the panel very much for their indulgence. I would 
ask the next panel to come forward, which would be Bill 
Douglass, CEO of the Douglass Distributing Company, on behalf 
of the National Association of Convenience Stores; Blakeman 
Early, American Lung Association; Bob Dinneen, president and 
CEO for the Renewable Fuels Association.
    Please take your seats. Gentlemen, thank you for your 
presence here. We are going to kind of watch the clock a little 
closer this time, because we are running out of time. We would 
like to have you confine your statements to 5 minutes, but your 
entire statement will be made a part of the record. I will 
definitely let you know when your time is up. The same will go 
for the timing of the questions that will be asked.
    We will start with you, Mr. Douglass.

 STATEMENT OF BILL DOUGLASS, CHIEF EXECUTIVE OFFICER, DOUGLASS 
                      DISTRIBUTING COMPANY

    Mr. Douglass. Good morning. My name is Bill Douglass, and I 
serve as the chief executive officer of Douglass Distributing 
in Sherman, TX. My company owns and operates 14 fuel outlets in 
the Dallas-Fort Worth area and supplies gasoline and diesel 
fuel to 165 additional retail outlets in the area under long-
term supply contracts.
    I appear before the committee representing the National 
Association of Convenience Stores, which we call NACS, and the 
Society of Independent Gasoline Marketers of America, which we 
call SIGMA. Together NACS and SIGMA members sell approximately 
80 percent of the gasoline and diesel fuel purchased by 
motorists in the United States each year.
    Over the past 3 months, I've witnessed such a blizzard of 
announcements in developments regarding gasoline production and 
distribution that even I, who study and participate in gasoline 
marketing every day, am uncertain as to what to expect over the 
next 6 months. This hearing is an attempt to sort through these 
announcements, rumors and questions.
    You've heard testimony this morning from Government experts 
regarding the facts and statistics associated with the 
transition from MTBE to ethanol. I will not duplicate their 
testimony. Instead, I will move beyond the statistics and 
examine my real world situation.
    First, the use of MTBE as a gasoline additive will decline 
in the future, whether rapidly as some have predicted this 
spring and summer, or more gradually. This decline is a direct 
result of Congress' failure to adopt liability reform 
provisions for MTBE as part of last year's Energy bill.
    I'm not seeking to get into the debate as to whether 
Congress should have adopted the MTBE Safe Harbor last year, 
but this committee and the Congress as a whole must understand 
the decisions made last year are having repercussions in the 
gasoline market this year.
    Second, ethanol is the most likely and immediate substitute 
for MTBE in RFG. EIA has estimated on average refiners lose 
approximately 5 percent of their production capacity when 
making RFG with ethanol, when compared to RFG with MTBE. This 
is a significant reduction in domestic gasoline production 
capacity that should be of a concern to policymakers, marketers 
and consumers.
    Third, in general the Nation's refiners are not positioned 
to produce substantial quantities of clear RFG, which is not 
blended with either ethanol or MTBE, which will be authorized 
for the first time in May. Fourth, it's clear that the domestic 
ethanol industry is doing its utmost to maximize of ethanol it 
will produce and sell this year. But it's uncertain whether 
these best efforts will be sufficient to meet the demand for 
ethanol in the next 6 months, as the Nation transitions away 
from MTBE.
    Fifth, boutique fuels continue to complicate the supply and 
distribution of gasoline. As noted in the EIA study, the Energy 
bill's cap on the number of boutique fuels does not cover State 
boutique renewable fuels mandates. Such mandates constrain the 
availability of ethanol in other areas of the Nation and limit 
the supply flexibility in the marketplace.
    Sixth, the bulk gasoline storage and terminal 
infrastructure in many parts of the Nation is not prepared for 
a transition from MTBE to ethanol. Finally, the transition from 
MTBE additized gasoline to ethanol additized gasoline will be 
problematic for motor fuel retailers like me. Retailers will be 
undertaking preparations to market gasoline blended with 
ethanol, at the same time they are preparing to switch from 
winter to summer gasoline blends.
    While many retailers have been selling ethanol blended 
fuels for years, there are others like myself that will be 
making the transition for the first time. I recently received a 
20-page document from one of my gasoline suppliers, explaining 
the steps I must take to prepare to sell ethanol-blended 
gasoline. Increasing my challenge is the fact that I do not 
have the lead time many of my colleagues in other parts of the 
Nation had to prepare for this conversion. This could be 
problematic, as there are many others in my situation.
    Unfortunately, there are few public policy options open to 
Congress to mitigate potential gasoline or ethanol supply 
shortages and price volatility in the short run. NACS and SIGMA 
propose that the action that would have the greatest 
significant positive effect on supply and the consumer prices 
in the next 6 months would be a temporary suspension of the 
tariff on imported ethanol. Such a move would help supplement 
the efforts of the domestic ethanol industry to satisfy the 
rapidly escalating demand without penalizing the consumers with 
a 54-cent-per-gallon tariff. This would be meaningful, sound 
public policy enacted for the good of the consumer.
    In the medium term----
    Senator Inhofe. Thank you, Mr. Douglass, your time has 
expired. Thank you very much.
    Mr. Early.

   STATEMENT OF A. BLAKEMAN EARLY, AMERICAN LUNG ASSOCIATION

    Mr. Early. Mr. Chairman and members of the committee, I 
appreciate the opportunity to appear today on behalf of the 
American Lung Association.
    The American Lung Association supports the removal of MTBE 
from gasoline. As you know, MTBE has been found to contaminate 
ground or surface water in nearly every State, and has rendered 
thousands of public and private drinking water sources 
unusable. Addressing the cleanup or replacement of these 
sources has been estimated to cost upwards of $25 billion. 
These statistics provide reason enough to eliminate MTBE from 
the Nation's fuel supply.
    But the American Lung Association is particularly 
interested in eliminating MTBE from reformulated gasoline 
because many areas with unhealthy levels of ozone have avoided 
adopting RFG for fear of contaminating local water supplies. 
Therefore, we see the recent trend of refiners choosing to 
eliminate MTBE from RFG as a welcome development, which may 
facilitate the option of RFG in more areas that need it. If so, 
the public will benefit from the reduced exposure to ozone and 
toxic air pollution.
    The elimination of the oxygen requirement in RFG in 
combination with the sulfur limit in all gasoline implemented 
as part of Tier II rules, and the limitation on boutique fuels 
adopted in EPACT should eliminate the proliferation of boutique 
fuels, while providing clean fuel choices to areas that need 
them. We believe that any additional limitations on States' 
ability to select clean fuels would have an adverse air quality 
impact and are unnecessary, given all the changes I just 
described.
    Refiners are eliminating MTBE from RFG this spring entirely 
voluntarily. The American Lung Association endorsed a ban on 
MTBE phased in over 4 years, a timeframe that was originally 
identified by the industry itself in testimony before this 
committee. The Congress chose not to adopt such a measure 
during its consideration of EPACT, but did remove the oxygen 
requirement. This enables each refiner to use as much or as 
little MTBE as it chooses.
    Now this spring, refiners are attempting to remove MTBE 
from RFG all at once, rather than pursuing a phased 
elimination. The current action to remove MTBE from the 
remaining RFG supply is voluntary and is not required to meet 
any law. We see no credible basis for finding that the use of 
MTBE in RFG in 2006 gives rise to special liability, given the 
nature of MTBE groundwater contamination and the difficulty of 
distinguishing when contamination occurred. Whatever liability 
refiners may be subject to will be based largely on past 
actions, not future actions.
    It has long been predicted that the removal of MTBE from 
RFG would spike a demand for ethanol. I provided testimony to 
this effect before this committee in June 2000. The fact that 
refiners are voluntarily and precipitously withdrawing MTBE 
from use, knowing that such action would cause a spike in RFG 
prices, provides testament to the indifference the refining 
industry has to the calls of consumers to restrain fuel prices.
    As you know, in EPACT the Congress provided EPA with the 
authority to temporarily waive a fuel additive or additive 
requirement under the Clean Air Act, in cases of an extreme or 
unusual fuel or fuel additive supply circumstance. The statute 
explicitly states that shortages that reasonably could have 
been foreseen or derive from a lack of prudent planning do not 
qualify. We believe the ethanol and fuel shortage we are 
discussing today was foreseeable and in fact, is exactly the 
result of a failure of prudent planning. The American Lung 
Association hopes no one will suggest the need for invoking the 
need for the EPACT waiver authority.
    Under EPACT, 9 months after the enactment, EPA is required 
to establish standards for each refiner and importer designed 
to maintain the level of toxic air pollutant reduction achieved 
on average during 2001 and 2002. This so-called anti-
backsliding provision was enacted to ensure that as refiners 
reduce the amount of MTBE they use in RFG, the level of toxic 
air pollution from the use of such fuel did not increase.
    The dramatic shift away from MTBE use occurring this spring 
well illustrates why this provision is needed. EPA recently 
announced it will not implement these provisions, but will 
defer these protections until the mobile source air toxics rule 
is implemented in 2011. This allows at least 5 years for 
refiners to increase toxic air pollution in RFG from past 
levels, the very backsliding the law requires EPA to prevent.
    We call on the EPA to issue backsliding rules as 
expeditiously as possible to prevent toxic air pollution 
increases in RFG over the next half decade.
    This concludes my remarks. Thank you.
    Senator Inhofe. Thank you.
    Mr. Dinneen.

    STATEMENT OF BOB DINNEEN, PRESIDENT AND CHIEF EXECUTIVE 
              OFFICER, RENEWABLE FUELS ASSOCIATION

    Mr. Dinneen. Good morning, Mr. Chairman, and thank you. 
This is an important and timely hearing and I am certainly 
pleased to be able to be here today to discuss with you all 
that the industry is doing in coordination with refiners, 
gasoline marketers and the fuel distribution network to make 
sure that the transition from MTBE to ethanol is indeed a 
success.
    As you know, Mr. Chairman, the ethanol industry is growing 
rapidly. In addition to the 97 ethanol biorefineries that 
produce more than 4.5 billion gallons of ethanol today from a 
billion and a half bushels of grain, there are 33 plants and 
several major expansions that will add another 2 billion 
gallons of ethanol production capacity very shortly.
    This remarkable growth can most certainly be attributed in 
no small part to passage of the Energy Policy Act of 2005, 
which included a renewable fuels standard that provided a 
clarion call to our industry and the financial community to 
grow with confidence. Mr. Chairman, I hope that you and the 
members of this committee are very proud of the role that you 
had in getting a renewable fuels standard passed as part of the 
Energy Policy Act. It has done exactly what it had been 
intended to do in terms of stimulating the production of 
ethanol and biodiesel. We certainly are very appreciative of 
the role that you had and others on the committee, like Senator 
Thune and Senator Obama and others, that worked so hard to get 
that passed.
    One of the consequences of the Energy bill, though, is that 
refiners have begun to hemorrhage MTBE from the marketplace. 
It's important to note, though, that no provision of EPACT or 
the Clean Air Act or any other congressional action has 
compelled such a rapid transition away from MTBE. This decision 
is the refiners' alone. I can assure you, though, that there 
will be sufficient ethanol supplies to meet this new demand.
    First, as noted, domestic ethanol supply is growing 
rapidly. We anticipate more than 500 million gallons of new 
capacity coming online before the end of the summer. Another 
900 million gallons will be completed by the end of the year. 
That reflects a 37 percent growth rate this year alone. That's 
a phenomenal pace, particularly given the rate of growth we 
have already seen over the past several years. Moreover, 
several ethanol producers and refiners have been building 
ethanol stocks in anticipation of this increased demand.
    Second, several refiners have contracted with Brazilian 
and/or Caribbean ethanol suppliers for product. Approximately 
130 million gallons were imported last year. We anticipate even 
higher imports this year. I would note parenthetically that as 
Senator Lautenberg was sort of getting to, the secondary tariff 
that is imposed on imported ethanol is repaid essentially as 
soon as the refiners get the tax incentive that's available. To 
remove the secondary tariff, all you're doing is then 
subsidizing already subsidized Brazilian ethanol to come into 
the marketplace.
    The marketplace is doing it fine already today. There will 
be increased imports. There is really no need for the U.S. 
taxpayer to pay Brazilian sugar growers and Brazilian ethanol 
producers, it is already subsidized to come into the 
marketplace.
    The other important point I would like to make is that 
there will be migration from existing conventional gasoline 
markets to areas of the country where ethanol will be needed to 
replace MTBE. Already many gasoline marketers and ethanol 
producers are arranging exchange agreements to make sure that 
that happens.
    Finally, it's important to note that the ethanol industry 
is indeed working very closely with our refiner customers, 
gasoline marketers, terminal operators and the fuel 
distribution network, to secure a successful transition. Over 
the past several years, the ethanol industry has worked hard to 
expand a virtual pipeline using rail, barge and truck traffic. 
As a result, we can now move product quickly to any area where 
it is needed. Many plants today have the ability to load unit 
trains of ethanol to ship to terminals in key markets.
    I give great credit to the refiners and gasoline marketers 
that are working with us to build that infrastructure. Working 
together, we can make the transition from MTBE to ethanol in 
these areas as successful as it was in California, New York and 
Connecticut.
    Mr. Chairman, you were wise to hold this hearing and hold 
everyone's feet to the fire. Clearly this transition presents 
challenges. But the refiners have chosen to remove MTBE from 
gasoline. They would not have done so if they didn't think they 
could successfully switch to ethanol. We are ready to work with 
them and this committee to ensure the continued supply of high 
quality clean burning gasoline to the motoring public.
    Thank you.
    Senator Inhofe. Thank you very much.
    We will confine our questions to 5 minutes and be rather 
rigid. First of all, your last statement there I thought was 
very good. There is a lot of discussion about whether or not an 
MTBE is actually mandated. In reality it is. I think that we, 
well, I have asked you this question, to Mr. Douglass and Mr. 
Dinneen, if you do away with the 2 percent oxygenate 
requirement, doesn't that expose them, if they continue to use 
MTBE, in terms of a court of law?
    Mr. Douglass. Mr. Chairman, my supplier has so indicated 
that that's their reason for withdrawing, the use of MTBE.
    Senator Inhofe. Do you agree with that, Mr. Dinneen?
    Mr. Dinneen. I'm not hampered by a law degree, so I 
wouldn't want to state with any degree of confidence, but I 
will tell you that the refiners themselves have stated for a 
long time that they could produce reformulated gasoline in the 
absence of oxygen and as was made pretty clear by the last 
panel, there is nothing in the Act that requires the addition 
of MTBE.
    Senator Inhofe. Thank you very much.
    Mr. Douglass, Mr. Dinneen, you both testified that a tight 
capacity of fuel production side, both in traditional refining 
and biorefineries, are a problem because they raise prices for 
you and for your consumers. That's the consumer that we're 
concerned about out there. I'm encouraged that both industries 
are increasing capacity as fast as possible, and that 
challenges do remain.
    I had two pieces of legislation, one is the Gas PRICE Act 
and the other was an amendment that we referred to as the 
Energy Price Reduction Act. I would ask the two of you if you 
are familiar with those two pieces of legislation that failed, 
and if that would have helped, would you have been supportive 
of those bills, to increase capacity?
    Mr. Douglass. Mr. Chairman yes, we are familiar with that. 
NACS and SIGMA both wrote and supported this committee last 
year when you proposed that Act, that those measures be 
incorporated in the bill.
    Senator Inhofe. I appreciate that. It is a supply and 
demand thing.
    Mr. Early, I would like to ask you about----
    Mr. Dinneen. Mr. Chairman, I'm sorry, did you want an 
answer from me?
    Senator Inhofe. I thought you were nodding in agreement.
    Mr. Dinneen. Staff really wanted to get me on the record.
    Senator Inhofe. Yes, please do. Real quick.
    Mr. Dinneen. As amended by Senator Thune, certainly we have 
also supported that bill. Clearly we believe getting additional 
refinery capacity online is extraordinarily important, and that 
includes biorefinery capacity.
    Senator Inhofe. I thought it was done very well. I'm still 
just pretty dismayed as to why it was defeated on a partisan 
vote. It just is--here's a way you could utilize some of the 
closed bases from the BRAC process. You could have allowed 
cities and communities to apply for EDA grants to help them 
attract refineries. So I regretted it did not pass.
    Mr. Early, I would like to ask you about a document you 
submitted for the record and your reasons for doing so. I 
understand the company which drafted the document, KOMEX, is a 
litigation support company hired by the trial lawyers. In 
addition, their work was thrown out of court by a California 
court as being too speculative and for double accounting of 
damages and other cases, and that their cost estimates for MTBE 
are reportedly 25 times the actual cost.
    I'd like to first of all ask you the question, what is your 
purpose for submitting this report on the record? You're the 
American Lung Association. Do they endorse this report? Is this 
something that they are requesting you to have as a part of the 
record? Are you working in conjunction with the trial lawyers 
on this?
    Mr. Early. The report, Mr. Chairman, was prepared by the 
American Water Works Association. I submitted it simply to 
support the----
    Senator Inhofe. Where's KOMEX come in, then?
    Mr. Early. I guess KOMEX was hired by the American Water 
Works Association. American Water Works Association needs to 
stand behind its report. I submitted the report in order to 
support the contention that there's upwards of a $25 billion 
potential cost. This is in the public domain, obviously, and 
can be examined.
    Senator Inhofe. The specific question is, KOMEX was used as 
the foundation of this report, isn't that correct?
    Mr. Early. Yes.
    Senator Inhofe. If you say no for the record, then I will 
submit something to show that it was.
    Mr. Early. No, I agree that Komex is cited.
    Senator Inhofe. The question I had asked you also was, is 
the American Lung Association supportive of the product of this 
case of Komex?
    Mr. Early. The American Lung Association takes the report 
on its face value. I'm not aware of the information that you 
just mentioned, that it's been challenged. We would certainly 
look at that.
    Senator Inhofe. On their own Web site, ``KOMEX is one of 
the leading environmental consulting companies in California. 
Since 1992, we have been assisting California attorneys in 
environmental related litigation by providing unparalleled 
technical, regulatory and data management expertise.'' That's 
what they say about themselves, and that's what you're using as 
a foundation for your report.
    My time has expired. Thank you very much.
    Senator Jeffords.
    Senator Jeffords. Mr. Early, who were the principal 
advocates for the removal of the 2 percent oxygenate standard? 
Is it fair to say that the repeal of the oxygenate mandate or 
the need to remove MTBE from gasoline due to either groundwater 
protection or liability concerns comes as a surprise to the oil 
industry? How long has the oil industry known it had a problem 
with MTBE?
    Mr. Early. Well, of course the oil industry has known it 
had a problem with MTBE from literally decades ago, they knew 
and did not disclose some of the properties of MTBE that caused 
it to contaminate groundwater. But really going back to the 
blue ribbon committee that Mr. Meyers mentioned, and on which 
the American Lung Association served the blue ribbon committee 
looking at oxygenates and gasoline, which recommended phasing 
out of the use of MTBE, the signal was very clear that that was 
going to happen.
    The industry has known obviously since EPACT was enacted 
last August that the oxygen requirement was going to be 
eliminated this May. They could have been planning to remove 
MTBE since last August, but all of a sudden, they rushed to do 
it just this spring. We think this is precipitous and 
unnecessary and simply punishes the consumer for a decision 
that they are making voluntarily.
    Senator Jeffords. As you stated in your written testimony, 
the new energy law does provide EPA the authority to 
temporarily waive a fuel or additive requirement under CAA in 
an extreme and unusual supply circumstance. Do you foresee any 
legitimate claim for a waiver under the current circumstances?
    Mr. Early. I do not. As my testimony indicated, any 
shortages that occur are a result really of bad planning that 
could have been avoided. They certainly don't qualify as any 
kind of extreme circumstance as occurred, for instance, with 
Hurricane Katrina, where the Agency legitimately waived 
requirements, in the case of a national need.
    Senator Jeffords. Mr. Dinneen, several representatives of 
the oil industry have recently stated that there will be enough 
ethanol to meet increased demands during the transition away 
from MTBE. This seems to be at odds with the findings of the 
EIA report.
    What do you think is the cause of this discrepancy?
    Mr. Dinneen. I think what the EIA did was take a snapshot 
in time a couple of months ago. I think at that time they were 
hearing some things that gave them cause for concern. I think 
your question earlier to Mr. Caruso about whether or not his 
report had any impact, I think his report may have had some 
impact. I think people may have taken a much more careful look 
at supply and demand balances. Clearly, as that occurred, 
people have understood that there is going to be enough ethanol 
supply and people have gotten busy and the marketplace is 
responding.
    I think if EIA were to redo their analysis today, they'd be 
a little bit more hopeful about what the situation is actually 
going to be. I think there is an increasing recognition that 
the marketers, the refiners, the ethanol industry are working 
awfully hard to make sure that there aren't any consumer 
impacts.
    Senator Jeffords. Some in the oil industry seem to be 
suggesting that EPA should issue a waiver of reformulated 
gasoline requirements in light of EIA's February report. I am 
concerned that though we have, say we want cleaner gasoline, if 
we keep waiving the requirements to make it, at some point we 
affect the market's decisions about completing a transition 
getting MTBE out of gas and finding substitutes, like ethanol.
    Have the waivers issued after Hurricane Katrina or the 
prospects of future waivers affected plans for ethanol plant 
construction?
    Mr. Dinneen. Senator, we are moving forward in anticipation 
of the demand that we know is going to be there. I do not 
believe that any waivers will be necessary or will be granted. 
I'm confident the marketplace is going to respond and have the 
product where it needs to be.
    Senator Jeffords. Thank you. Thank you, Mr. Chairman.
    Senator Inhofe. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    To you, Mr. Douglass, all these things you know, but I'd 
like to recite them for the record and others who might be 
following it. You can't transplant or transport the ethanol in 
a pipeline, correct?
    Mr. Douglass. That's correct.
    Senator Warner. You have to ship it in a truck?
    Mr. Douglass. Yes, sir, or a tank car or barge.
    Senator Warner. Train or likewise?
    Mr. Douglass. Yes, sir.
    Senator Warner. Furthermore, it has to be blended with the 
gas at the wholesale terminals, correct?
    Mr. Douglass. Correct.
    Senator Warner. In your written testimony, you note storage 
capacity at the terminals is already stretched to the limit, so 
this is another choke point?
    Mr. Douglass. Yes, sir.
    Senator Warner. Especially in Texas and the Mid-Atlantic 
regions. In your home State and my home State, there seems to 
be, that's Virginia, there seems to be a significant problem on 
the horizon because of this lack of our own infrastructure. 
What are you and other distributors and marketers doing to 
overcome these hurdles?
    Mr. Douglass. You understand our interest in supply, and in 
supply at a price the consumer will pay. We have moved in our 
particular case to start cleaning our tanks and preparing very 
rapidly for the introduction of ethanol. But in the process of 
doing that, we find that there are not enough contractors, 
because your requirements are to flush out your tanks. The 
second thing is that our suppliers are forcing us to different 
terminals, because they don't have enough storage in their base 
units in the Dallas-Fort Worth area. So we're having to hire 
people and get additional trucks in order to make those longer 
runs.
    Senator Warner. Well, that's the best you can do. But I 
just think it's important for the American public to be aware 
of this thing and the difficulty of this proposed transition. 
Thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Warner.
    Senator Boxer.
    Senator Boxer. Thank you, Mr. Chairman.
    Just for the record, I want it to be clear that this 
committee voted in a bipartisan way against that special deal 
for the refineries. It was a bipartisan vote that brought it 
down. It was about grants to refineries, it was about giving 
refineries access to Federal lands and at a time when they're 
making record profits. I feel like sometimes----
    Senator Inhofe. For clarification of the record, without 
taking your time, it was, all the Democrats plus Senator 
Chafee.
    Senator Boxer. Yes, I would call that bipartisan.
    Senator Inhofe. That's fine.
    Senator Boxer. That's all we need, is one of you----
    [Laughter.]
    Senator Boxer. We have it. OK, glad for that clarification.
    Mr. Douglass, you are the second witness to make the case 
that there should be a liability waiver for the oil companies 
for MTBE and therefore, I think it's very important for me to 
put a few things on the record, because I think that's what is 
coming at us maybe, unless we can deter it. So in this whole 
issue I always ask myself, why should the taxpayers have to 
step up to the plate and pay for the mistakes of the oil 
companies? They didn't have to choose MTBE. We've had a Bush 
administration witness say clearly today there was no mandate 
from the Congress.
    So since there was no mandate and since this was a free 
choice, as a matter of fact, I would ask unanimous consent to 
place into the record a document from discovery on a court case 
in South Lake Tahoe, in which the executives were bandying 
about with a sense of humor what MTBE stands for. One of the 
things they suggested in this kind of joke-filled presentation 
was Menace Threatening our Bountiful Environment, MTBE. That's 
what it could stand for. Or Most Things Biodegrade Easier. Or 
Money To Be Extracted.
    This is the truth, folks, about what was going on. So there 
was a settlement in this case, because the drinking water, 
South Lake Tahoe, was so tainted that they had to sue, as did 
the city of Santa Monica. Now, the jury in that case found 
clear and convincing evidence that defendant Shell Oil acted 
with malice in selling gasoline containing MTBE. So you bet 
your bottom dollar I am going to fight against giving folks who 
knew better protection in court, when they destroyed drinking 
water supplies, when there was never any mandate. That was 
clearly stated here today.
    Now, Mr. Douglass, in your testimony, you said that you 
were very worried about price increases because of the 
transition.
    Mr. Douglass. Yes.
    Senator Boxer. But I want to ask you this. You have here 
put out an eight point card that you said could be factors that 
could affect the petroleum markets. This is your tool kit from 
your organization. You list eight reasons. You do not list the 
transition to MTBE. And I wondered, if it's such an important 
part of your testimony, why it's not even listed in a group of 
eight reasons?
    Mr. Douglass. The transition to MTBE, as you probably know, 
our concern is primarily supply. We are not particularly 
concerned about the legalities of the issues in this thing, but 
its supply at retail. We are focused primarily on getting 
sufficient supplies. I hope Mr. Dinneen is correct that there 
will be sufficient supplies.
    Senator Boxer. Well, yes, I think he had some good news for 
you, very good news for you.
    Mr. Douglass. Excuse me, Senator, but the only difference 
we have here is the price of ethanol has doubled in the past 
year and we have not yet had the ethanol put into the fuel. We 
will as of April 1. But suffice to say when it doubles, we have 
a concern, and our price at Dallas-Fort Worth is already in 
excess of what----
    Senator Boxer. Well, sir, if I might, I asked you a very 
simple question. Here you put out a tool kit. Here's a look at 
some of the factors that will affect what consumers pay at the 
pump in 2006: elevated price of crude, impact of speculation, 
spring transition to summer blends, and it goes on. No mention 
of MTBE.
    My point is, it seems to me that this hearing, which my 
good Chairman called and he has deep feelings on this, and I 
respect his feelings on this, we just disagree on this, you 
seem to be creating kind of what could be a false crisis here. 
You know, I know what suffering from high gas prices means, 
because believe me, California has been the leader. I have done 
many things in an attempt to shed light on that.
    But MTBE transition wasn't listed on your list as one of 
those causes. I wanted to make that point, as well as how much 
I would fight a waiver on liability for MTBE. Thank you.
    Senator Inhofe. Thank you, Senator Boxer.
    Senator Thune.
    Senator Thune. Thank you, Mr. Chairman. I do think that gas 
prices where they are today, and if they do end up at the range 
that some suspect they will before we get through the summer 
season is, creates an economic crisis, I think in a State like 
South Dakota, where we rely heavily, we have a lot of very 
fuel-intensive industries.
    I want to follow up if I might with Mr. Dinneen. There's 
been a lot of discussion today about what is driving up the 
price of a gallon of gasoline. It seems to me at least that 
there are a lot of factors associated with that, and I would 
come back to a point that was made earlier and that is that the 
bill that was reported out of this committee did allow for a 4-
year phase-out of MTBE that would have smoothed the transition 
as ethanol production was ramping up. I think that was the 
expectation that we would have a bill that would accomplish 
that and enable us to get to a point in terms of the capacity 
that this would be a very, hopefully much smoother transition. 
As it is, we're being asked to fill the demand much more 
quickly I think than had been anticipated.
    But just a very simple question, Mr. Dinneen, do you 
believe that ethanol is driving up the price of gasoline today?
    Mr. Dinneen. No, Senator, I don't. There are lots of 
reasons why gasoline prices are going up. It has to do with 
crude oil prices, it has to do with the transition to summer 
grade gasoline, it has to do with the rising demand as we move 
toward the summer season. Ethanol is a very small component of 
the motor fuel market. Ethanol prices are indeed going up, they 
are. It's still cheaper than MTBE was a year ago, however. 
Those prices are going to come down.
    More importantly, what's being looked at is the spot market 
prices for ethanol. Eighty-five percent of the ethanol that's 
sold is sold under long-term contracts. Contract prices 
typically are much, much lower. What's happening is, those 
companies that planned for the transition to MTBE and 
contracted their ethanol are set. They're looking at a pretty 
decent price. Ethanol, as it has in the past, is likely to 
lower their gasoline costs.
    For those companies that didn't anticipate such a rapid 
transition to ethanol away from MTBE, and they're having to 
scramble to find product on the spot market or have to go to 
the import market or have to look to migrate product from the 
existing conventional gasoline market, those prices are going 
to be higher. That's just a fact of life. It's going to be a 
short-term situation even for them, however. I think overall, 
ethanol is going to continue to help to lower consumer gasoline 
prices as it has throughout its history.
    Senator Thune. Well, I would make an observation about 
that, because I think we use about 140 billion gallons of 
gasoline fuel in the country today. We are right now producing 
about 4\1/2\, slightly higher than that, billions, billion 
gallons of ethanol. It seems to me at least that given that 
proportion that the price of crude obviously is driving a lot 
more than then price of ethanol the cost of gasoline in this 
country.
    But that being said, some in the past have suggested, in 
fact it has been intimated today that the ethanol industry is 
highly concentrated, that a very few companies are in a 
position to manipulate prices. Testimony today has suggested 
that the ethanol industry ought to be investigated because of 
rising ethanol prices.
    How do you respond to that?
    Mr. Dinneen. Senator, this committee last year had included 
a provision in the Energy bill that required the FTC to look at 
that very issue. The FTC released its report in December and 
found that the ethanol industry is not at all concentrated. 
Indeed, that reflects what we have known all along with as many 
ethanol companies that are coming into the business today and 
our industry is highly competitive and will remain so.
    Senator Thune. I appreciate it. I know my experience with 
the industry too is, you have a number of companies that are 
involved in production, obviously a lot of investment by 
individuals like farmers, many of them cooperatively owned. It 
seems to me at least an industry that has tremendous up side 
potential in terms of addressing the energy needs we have in 
this country. We are in the short term because of the phase-
out, because of the oxygenate standard, in a position where we 
need to have more ethanol sooner. I know that folks are working 
very hard to meet the demand out there, and I fully expect that 
they will be able to do that.
    So I thank you, Mr. Chairman and yield back the balance of 
my time.
    Senator Inhofe. Thank you, Senator Thune.
    Senator Obama.
    Senator Obama. Thank you very much, Mr. Chairman.
    I apologize, I missed the first panel, so some of this may 
be going over new ground. I just want to make clear that I 
understand the nature of the debate that's taking place.
    As I understand it, essentially, as a consequence of 
suppliers eliminating MTBE quicker than I think many 
anticipated, there's now going to be an uptake in demand for 
ethanol as an additive. Your argument, Mr. Douglass, as I best 
understand it, is that because of some of the distribution 
issues involved with ethanol that that may contribute to a 
modest boost in gas prices this summer. Is that basically the 
argument?
    Mr. Douglass. Yes, sir.
    Senator Obama. OK. The assumption that I'm hearing from Mr. 
Dinneen is that although you may see a little, a few bumps in 
the road, that overall this is a process that ethanol producers 
will be able to deal with adequately, that there may be a few 
difficulties in terms of making sure supplies are sufficient, 
but that over the course of 2, 3, 4, 5 years, this is not going 
to be a significant problem. Am I correct about that?
    Mr. Dinneen. Senator, I would say 2, 3, 4, 5 months.
    Senator Obama. OK.
    Mr. Douglass. The marketplace is responding pretty 
effectively.
    Senator Obama. So as far as you can tell, you would expect 
that to the best of your knowledge, this is not going to be a 
major contributor to a spike in oil, gasoline prices at the 
pump this summer? That's your assessment?
    Mr. Douglass. Absolutely not, sir.
    Senator Obama. OK. I guess I don't have a lot of questions, 
I would just make a simple point. MTBE appears to have the 
potential of causing health problems. Congress did not ban the 
use of MTBE, it simply refused to protect MTBE suppliers from 
potential liability. They made a decision that they did not 
want to expose themselves to that liability and hence 
eliminated the use of this additive. It was a market decision.
    I don't see any reason why we would reverse our refusal to 
protect them from liability if in fact MTBE causes a serious 
health concern. Now, if it doesn't, presumably they will win in 
court. If it does, then it's something that we should not want 
out there affecting our kids.
    Ethanol seems entirely extraneous to that debate. I think 
that there is a legitimate concern as to whether we have the 
distribution mechanisms in place to get ethanol to market and 
people like myself and Senator Thune have been working 
diligently to make sure that happens. My expectation and my 
hope is that in the coming months and the coming years, you're 
going to see the ethanol market become extraordinarily robust.
    I think that's a good thing. I think we all should want to 
be encouraging biofuels as a means of weaning ourselves off 
dependence on Middle Eastern oil. I think there are national 
security, economic as well as environmental reasons for us 
hoping for that future.
    So I would just end by saying that although none of us want 
to see additional costs at the pump, and I recognize, Mr. 
Douglass, from your perspective, you don't want a bunch of 
irate customers who are complaining and thinking that you're 
the cause of it. I will tell you that this is not, from my 
perspective, at least, based on testimony here, there is not 
much of a relation between the decline in MTBE use and prices 
at the pump, at least not compared to potential disruptions in 
supply in Nigeria or Venezuela or Iran and the world spot 
market.
    So that's my assessment, Mr. Chairman. I would yield back 
the remainder of my time.
    Senator Inhofe. Thank you, Senator Obama. My staff advises 
me, Mr. Early, that I didn't give you a chance to answer the 
question. Since I think you would like to think it over a 
little bit first, you can do it for the record in writing. The 
question was, does the American Lung Association embrace the 
methodologies of the trial lawyers support group, KOMEX, which 
was part of the foundation of your report. You can just submit 
that in writing.
    I thank all the witnesses for coming, and we're adjourned.
    [Whereupon, at 11:32 a.m., the committee was adjourned.]
    [Additional statements submitted for the record follow:]

      Statement of Hon. James M. Jeffords, U.S. Senator from the 
                            State of Vermont

    Mr. Chairman, thank you for holding this hearing. We will hear 
testimony today on the effects of eliminating MTBE as a gasoline 
additive. I hope we will look carefully at this issue.
    I do not believe that the elimination of MTBE will have a 
significant impact on the gasoline market. I do believe it is the right 
thing to do for the environment.
    MTBE is an additive that helps gasoline burn more cleanly. It has 
been used since 1979. But we now know that MTBE is also a groundwater 
contaminant. Low levels make water undrinkable due to offensive taste 
and odor. High levels are potentially cancer-causing in humans. 
Although the Clean Air Act does require the use of re-formulated 
gasoline in areas with unhealthy levels of air pollution, it does not 
specify that MTBE must be used. Refiners have the ability to use other 
additives to clean up their gasoline, and many are using ethanol and 
other petroleum-derived compounds.
    The Energy Information Administration issued a report in February 
about the effect of our new energy law and market forces on the use of 
MTBE. Our hearing is in response to this report. But the report is only 
one piece of information. It is not really a price prediction. It is a 
snapshot of market conditions, and it is now more than a month old.
    My real concern is that we get a better understanding of how 
markets have responded to this report. Actions to eliminate MTBE from 
the marketplace are certainly not new. Twenty-five States now have full 
or partial bans on MTBE. The Environmental Protection Agency 
recommended that MTBE be banned in the late 1990s.
    It is my view that we should have acted long ago to swiftly remove 
MTBE from gasoline. Instead, this committee responded with legislation 
to phase out MTBE over 4 years. Unfortunately, this phase-out was not 
included in the Energy bill that became law last August. That was one 
of the reasons I voted against it.
    I say this to highlight the fact that we routinely try to implement 
our environmental laws in a deliberate and measured way. The Clean Air 
Act's compliant motor fuels 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. The oil industry has had plenty of time to phase out MTBE and 
has resisted doing so. But suddenly, after years of foot-dragging, it 
has decided to stop using MTBE in gasoline in early May, in an abrupt 
and potentially disruptive manner. The industry is now faced with a 
crisis of its own making, and I fear it will use this as an excuse to 
hike prices at the pump.
    I am sorry that there are no witnesses at this hearing today to 
represent the oil industry so that we could better understand why they 
are responding to the new energy law in this way. In the future, 
particularly as we examine issues related to the new energy law's fuels 
provisions, we should have them here.
    Over the past year, we have seen record-breaking gas prices, the 
national average exceeding $3 a gallon after Hurricane Katrina. This 
comes, perhaps not surprisingly, as oil companies continue to enjoy 
record profits. Exxon-Mobil announced a record quarterly profit of 
$10.7 billion in the fourth quarter of 2005. Its annual profits 
increased to $36 billion, up 43 percent from 2004. Now, we are being 
told that the elimination of MTBE will mean even higher prices and 
undoubtedly more profits. I believe what we should really be examining 
today is why these oil companies are amassing record profits while 
Americans pay record prices for gas. It is time for answers.
    During this hearing, I will be listening closely for any 
documented, real evidence to show that switching away from MTBE is 
contributing to increases in gasoline prices in a significant way. What 
we do know is that our country still has much to do to improve air and 
water quality, and it is this committee's first and foremost 
responsibility to assure that the Nation's laws are protective of 
public health and the environment.
    Thank you again, Mr. Chairman for holding this hearing. I look 
forward to hearing from the witnesses.

                               __________
Statement of Hon. Lisa Murkowski, U.S. Senator from the State of Alaska

    Thank you Mr. Chairman for holding this hearing on the problems we 
may well be facing on the East Coast and in parts of the South later 
this spring and summer because of the rapid discontinuation of use of 
the additive MTBE in gasoline.
    Coming from a cold-weather state like Alaska, MTBE was certainly 
never popular. While it is easier to transport and cheaper to blend in 
gasoline than ethanol; in the extreme cold, MTBE fumes caused skin 
rashes. To say my Fairbanks constituents do not miss MTBE is an 
understatement.
    But reading the testimony before us this morning, East Coast, 
Northeast and Texas motorists may well miss MTBE greatly since the 
phase out of MTBE appears to be coming before the Ethanol industry, and 
the refinery industry, can be prepared to fully utilize ethanol in 
reformulated gasoline.
    The predictions of ethanol shortages to put into gasoline and 
regional fuel shortages resulting from the blending characteristics of 
ethanol itself paint a pretty unpleasant forecast. A cloudy forecast of 
rising prices in the Northeast, almost guarantees that Congress is 
going to be hearing thunderous complaints from motorists before 
summer's end. Given what may be happening to fuel prices already 
because of the costs of producing ultra-clean diesel, the pressures of 
global demand increases and any supply disruptions that result, mean it 
is going to be raining down complaints on Congress for the price of 
gasoline and diesel this summer.
    I hope to hear more suggestions to mitigate fuel price problems 
during this hearing. The suggestion that we ask the Finance Committee 
to temporarily waive the import tariff on ethanol to allow foreign 
imports probably from Brazil to lessen the supply shortage was 
something. I hope the hearing will produce even more ideas from the 
witnesses.
    Greater reliance on ethanol will be good for our farmers and our 
energy security in the future, but it may raise a bumper crop of 
complaints this summer if we can't relieve the additive shortages that 
the rapid phase out of MTBE is about to cause. I await the testimony, 
thank you.

                               __________
Statement of Hon. Barack Obama, U.S. Senator from the State of Illinois

    Mr. Chairman, thank you for holding this timely hearing today.
    We're here to examine the costs of eliminating MTBE as a fuel 
additive. But in examining these costs, we need to look at more than 
just the price that consumers pay at the pump. We need to look at the 
health impact of MTBE as a carcinogen and its effect on drinking water. 
And we need to look at the costs of the alternative additive, namely, 
ethanol.
    Certainly, the production of ethanol isn't where it should be. But 
lawmakers on both sides of the aisle are working to change that. Last 
year, I was pleased to work with a number of colleagues on this 
committee to create a renewable fuel standard. And this year, I have 
introduced comprehensive legislation with Senator Lugar to further 
stimulate the production of biofuels.
    The challenge we face with ethanol--and biofuels in general--is 
getting them out of the labs, out of the farms, and onto the wider 
commercial market. This is an issue that politicians from both parties 
clamor about when gas prices are the headline of the month, only to 
fall back into inaction once things calm down.
    So, for me, the answer to insufficient ethanol supplies isn't to 
delay the switchover from MTBE; the answer is to pursue policies for 
greater expansion of ethanol, and to strengthen the infrastructure to 
transport it.
    In his State of the Union address, President Bush told us that it 
was time for America to get serious about its addiction to foreign oil. 
A day or so later, Energy Secretary Bodman assured the world that the 
President didn't mean it literally. Why? Well, apparently, the Saudi 
government wasn't too happy with the President's statement. To me, that 
level of foreign influence over our domestic affairs is the exact 
reason why we need to do more to increase our production of renewable 
fuels.
    And, even if there would be some minimal price increases from 
replacing MTBE with ethanol--and I know this assumption is disputed by 
the witnesses--we shouldn't lose sight of the larger reason for high 
gasoline prices--the tightfisted control that a handful of foreign 
governments have over the world's oil supply.
    Every single hour of every single day, we spend $18 million on 
foreign oil. It doesn't matter if these countries are budding 
democracies, despotic regimes, or havens for the madrassas that plant 
the seeds of terror in young minds--they get our money because we need 
their oil. We have to start changing this now, and the way to do to 
that is to encourage greater development of home-grown fuels.
    I look forward to hearing today's witnesses, and I thank the Chair.

                               __________
     Statement of Hon. Joseph I. Lieberman, U.S. Senator from the 
                          State of Connecticut

    Thank you Mr. Chairman for calling this hearing to review 
Department of Energy warnings that the oil industry's abrupt decision 
to switch from MTBE to ethanol as an oxygenate or octane enhancer could 
lead another summer of gasoline shortages and high prices.
    I support the goal of phasing out MTBE--or methyl tertiary butyl 
ether--in favor of ethanol. In fact, the bipartisan Vehicle and Fuel 
Choices for American Security Act I have sponsored, along with Sen. 
Brownback and 10 other Senators, encourages the development ethanol and 
other renewable fuels as a way of lowering our dependence on foreign 
oil.
    My home state of Connecticut is one of seven states that have 
already banned the use of MTBE as a gasoline additive because of the 
dangers it poses to public health and environment as a possible 
carcinogen leaking into the ground water.
    But I fear that the oil industry--already drowning in record 
profits--will use the sudden switch from MTBE to ethanol as a backdoor 
means of raising prices if the ethanol industry cannot deliver the 
quantities needed, as the Energy Information Administration thinks 
likely, according to its recent report.
    The oil industry says it was forced to switch from MTBE to ethanol 
because Congress did not provide a waiver of liability from damage 
caused by MTBE when it dropped the oxygenate requirement in the 2005 
Energy Policy Act. Unfortunately, we do not have a representative of 
the oil industry at this hearing today, so we can not explore more 
fully how they would defend their decisions.
    As we consider the actions of the oil industry, we should remember 
several points. First, the industry chose to use MTBE as an oxygenate 
to make gasoline burn cleaner in heavily polluted areas. MTBE was the 
industry's choice, not a Congressional mandate, and there is no reason 
to release the industry from liability for a choice it made.
    As stated succinctly by the representative of the Renewable Fuels 
Association today, ``Refiners are not compelled to use MTBE in 
[Reformulated Gasoline], nor are they compelled to use ethanol once the 
oxygenate requirement is eliminated. The decision to stop using MTBE is 
the refiners' alone.''
    The industry knew the day would come that it would have to phase 
out MTBE and has had plenty of time to plan for the transition and make 
sure there were adequate supplies of the ethanol or another 
alternative.
    There is no excuse for unnecessary shortages and discretionary 
price increases. That, if anything, should be the focus of 
Congressional investigation. Any resulting price spikes and higher 
profits should be taxed as an undeserved windfall.
    Legislation I introduced in December year would impose an excise 
tax on oil companies for 50 percent of their windfall profits. This 
one-time tax would provide a one-time payment to partially offset 
increased home heating and energy costs, as well as a portion of 
gasoline cost increases.
    Thank you Mr. Chairman.

                               __________
      Statement of Guy Caruso, Administrator, Energy Information 
               Administration, U.S. Department of Energy

    Mr. Chairman, and members of the committee, I am pleased to be with 
you today to testify on the effects of the removal of methyl tertiary-
butyl ether (MTBE) from gasoline.
    The Energy Information Administration (EIA) is an independent 
statistical and analytical agency within the Department of Energy. We 
are charged with providing objective, timely, and relevant data, 
analysis, and projections for the use of the Congress, the 
Administration, and the public. We do not take positions on policy 
issues, but we do produce data, analysis, and forecasts that are meant 
to assist policymakers in their energy policy deliberations. Because we 
have an element of statutory independence with respect to our analyses, 
our views are strictly those of EIA and should not be construed as 
representing those of the Department of Energy or the Administration.
    I have been asked to focus my testimony on a recent analysis 
entitled, ``Eliminating MTBE in Gasoline in 2006,'' which EIA issued on 
February 22, 2006. A copy of that analysis is attached and provides the 
substance of my written testimony.
    Although EIA's analysis is now approximately a month old, we feel 
that it still provides a timely and pertinent description of our 
perspective on the market situation with regard to the widespread 
removal of MTBE from reformulated gasoline and the significantly 
increased use of ethanol that is likely to occur as a result. I will be 
providing an update of market conditions, based on information 
available in the past few days, in my oral remarks.
    Thank you for your consideration of the following analysis. I look 
forward to answering any questions you may have.

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  Response by Guy Caruso to an Additional Question from Senator Thune
    Question. I want to thank you for participating in our recent 
hearing regarding the impact refiners' decision to eliminate methyl 
tertiary butyl ether (MTBE) will have on U.S. gas markets and prices. 
As refiners switch to ethanol from MTBE, I wanted to follow up with you 
concerning a question I asked during our hearing with regard to the 
Energy Information Agency's policy regarding the reporting of oxygenate 
data.
    Given the growing importance ethanol is playing in America's motor 
fuels market, I am concerned by the fact EIA's monthly oxygenate 
reports represent data that is at least 60 days old. In this day and 
age, EIA should be able to compile and report the data with the same 
frequency with which petroleum data is reported. Given how closely both 
markets are tied to each other, a more recent and accurate accounting 
of what is taking place in the ethanol industry would be of tremendous 
benefit to both petroleum companies and ethanol producers.
    During your testimony you cited budgetary restraints as the main 
reason for the lack of real time reporting of oxygenate data. In 
particular, you estimated it would take $2 million to get such a 
reporting system up and running and $800,000 a year thereafter to 
maintain it.
    Given that EIA already has staff committed to publishing oxygenate 
data and much of the data is reported electronically, it would seem 
that more timely reporting could be done in coordination with EIA's 
Weekly Petroleum Status Report within existing budget authority. If 
that is not the case, I am requesting a detailed accounting on what the 
additional $2 million and $800,000 annually thereafter would be spent. 
It would seem to me that such an adjustment would not be a monumental 
task for EIA to overcome.
    I firmly believe that the petroleum industry and the ethanol 
industry should be kept current on production and supply data 
concerning their products. Such timely information would go a long way 
in reducing price volatility and provide the government and private 
companies more accurate information on which to base their short and 
long term forecasts.
    I want to formally express my appreciation for the work EIA does 
and assure that I am committed to working with you and providing the 
resources required to provide more current and relevant data concerning 
the oxygenate market.
    Response. EIA works within a limited budget, prioritizing needed 
investments. While EIA has undertaken activities to improve efficiency 
(e.g., increased collection of information using the Internet), the 
efficiency savings have not completely offset additional resources 
required to satisfy the increasing information demands on EIA. As a 
result EIA identified selected surveys and programs that must be 
eliminated. For example, after collection of data for July 2006, EIA 
will discontinue two petroleum surveys, Forms EIA-182 and EIA-856 
(Federal Register/Vol. 71, No. 56/Thursday, March 23, 2006/Notices).
    We agree that collecting weekly ethanol data would be beneficial, 
however there are higher priority activities that we are funding. As 
indicated above and in our FY 2006 budget documents, we are not able to 
maintain our full petroleum data collection program, much less add to 
our forms and systems at this time.
    Regarding your specific question on monthly ethanol data collection 
costs, we need to clarify a misunderstanding. During the hearing, the 
$2 million one-time cost estimate and associated ongoing costs 
mentioned were budgetary requirements to comply with Section 1508 of 
the Energy Policy Act of 2005. This section directs EIA to collect 
various renewable fuel data on a monthly basis. Data for a given month 
are published about 2 months after the month ends to allow time for 
companies to assemble the data and submit it to EIA and for EIA to 
process the data. Attached is a brief explanation of that requirement, 
and a breakdown of resources.
    This attachment and its accompanying table illustrate the cost 
issues associated with our data collection efforts. Data survey work 
goes beyond simply gathering some forms and adding up the data. It must 
comply with the Information Quality Guidelines of the Office of 
Management and Budget, the Department of Energy, and the Energy 
Information Administration. These Guidelines are designed to ensure the 
quality (i.e., objectivity, utility, and integrity) of information. The 
validation, statistical analysis, system design/changes, integration 
into existing production systems and so forth are where much of the 
cost lies.
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[GRAPHIC] [TIFF OMITTED] T2273.061

 Statement of Robert Meyers, Associate Assistant Administrator, Office 
       of Air and Radiation, U.S. Environmental Protection Agency
    Mr. Chairman, and members of the committee, I appreciate the 
opportunity to come before you today to testify regarding ``The Impact 
of Elimination of MTBE.'' My testimony will address how recent 
amendments to fuel quality regulations and ongoing implementation of 
the Energy Policy Act of 2005 affect existing U.S. fuel programs, in 
particular the Reformulated Gasoline Program (RFG), which has 
historically utilized large quantities of methyl tertiary butyl ether 
(MTBE) in order to meet requirements imposed by the 1990 Clean Air Act 
Amendments.
    As the Associate Assistant Administrator for the Agency's Office of 
Air and Radiation, my responsibilities include supporting the Assistant 
Administrator on all air-related activities of the Environmental 
Protection Agency (EPA or Agency), including programs addressing 
industrial and vehicle pollution, acid rain, stratospheric ozone 
depletion, radiation protection, indoor air quality and global climate 
change. I am pleased to be here representing my colleagues at EPA who 
are responsible for implementing the various laws and provisions that 
protect our Nation's air quality. An important element of this task is 
the successful development and implementation of programs affecting our 
Nation's fuel supply.
    Following passage of the Clean Air Act Amendments of 1990, EPA was 
tasked with developing and implementing new motor vehicle emissions and 
motor vehicle fuel quality programs to reduce harmful evaporative and 
exhaust emissions that negatively impact our Nation's environment and 
public health. Among many other new provisions, the Clean Air Act 
required the implementation of several new fuel quality programs with 
prescribed fuel parameters that supported attaining our Nation's clean 
air standards. The Agency developed specific controls on fuel component 
parameters, such as seasonal controls on Reid vapor pressure and the 
RFG oxygenate requirements. Where available under applicable 
legislative provisions, the Agency also utilized a performance based 
approach to afford fuel producers greater flexibility in bringing these 
new cleaner fuels to market.
    In 1992, the Wintertime Oxygenated Fuels Program was implemented, 
requiring more than thirty areas exceeding air quality standards for 
carbon monoxide to use oxygenated fuels. This program, as specified in 
the 1990 Clean Air Act Amendments, required gasoline to contain 2.7 
weight percent oxygen and the program has been instrumental in bringing 
many of these areas into attainment of the national standard for this 
pollutant. Both MTBE and ethanol were the primary products used to meet 
these new quality standards.
    Subsequently, following successful regulatory negotiations with the 
oil industry stakeholders, oxygenate producers, states, and other 
interested parties, another landmark fuel quality program was 
implemented the RFG program. The 1990 Clean Air Act Amendments 
specifically required RFG to contain on average 2.0 weight percent 
oxygen and established a two phase program designed to reduce vehicle 
emissions that cause or contribute to ozone (smog) and toxic pollution 
in our cities. The first phase of the RFG program introduced cleaner 
gasoline in January 1995, followed by the more protective Phase 2 in 
January 2000. This program was required in the ten metropolitan areas 
with the most serious air pollution levels. Although not required to 
participate, some areas in the Northeast, Kentucky, Texas, and Missouri 
elected to join, or ``opt-in'' to the RFG program as a cost-effective 
measure to help combat air pollution problems. Today, roughly 35 
percent of this country's gasoline consumption is cleaner-burning 
reformulated gasoline. The RFG program has also often been referred to 
as one of the most successful air quality programs implemented. As in 
the Wintertime Oxygenated Fuels Program, MTBE and ethanol were again 
the primary products used to meet these new quality standards.
    For more than a decade prior to the implementation of these fuel 
quality programs, refiners worldwide had been using MTBE, an oxygenated 
hydrocarbon derived from methanol and petroleum, to augment gasoline 
supplies and provide a source of octane. Ethanol was also used in the 
Nation's fuel supply for several decades. With the implementation of 
the RFG and the Wintertime Oxygenated Fuels Program, however, the use 
of fuel oxygenates, almost exclusively MTBE and ethanol, increased 
dramatically. In meeting RFG requirements and other state-specific 
requirements, ethanol was primarily utilized in the Midwest. MTBE is 
primarily used elsewhere, including large areas of the Northeast, the 
State of California, and metropolitan Philadelphia, Baltimore and 
Washington.
    Over the last 6 to 7 years, however, concerns have arisen with 
respect to groundwater contamination from leaking underground storage 
tanks having gasoline containing MTBE. These concerns prompted some 
states to ban the use of MTBE in gasoline, including large gasoline 
markets such as California, New York, and Connecticut. This resulted in 
a significant reduction in the use of MTBE and a corresponding increase 
in the use of ethanol in these areas.
                     the energy policy act of 2005
    The Energy Policy Act of 2005 (Act) made several alterations to the 
RFG program, including removal of the 2 percent oxygenate mandate for 
RFG. In response to the law's enactment in August of last year, EPA 
promulgated a direct final rule to amend the RFG regulations in order 
to eliminate regulatory standards requiring the use of oxygenates in 
RFG. The direct final rule provides that these regulatory standards 
will no longer apply nationwide, outside of California, as of May of 
this year. Within California, the RFG oxygenate regulatory standards 
will no longer apply as of April of this year. The rule also serves to 
implement provisions of the Energy Policy Act respecting the 
commingling of ethanol-blended and non-ethanol blended reformulated 
gasoline.
    The Energy Policy Act of 2005 also set forth a new national 
renewable fuels program that established renewable fuel volume 
standards beginning in 2006. The renewable fuel standard, or RFS, 
requires an increasing volume of renewable fuel to be utilized in the 
continental United States starting in 2006. In order to implement this 
requirement, EPA published a direct final rule in December 2005. This 
``default'' rule for RFS compliance applies only in 2006.
    Under the RFS default rule, refiners, importers, and gasoline 
blenders will collectively be held responsible to meet a 2.78 percent 
nationwide renewable volume standard. This equates to approximately 4.0 
billion gallons toward which both ethanol and biodiesel can count. The 
Energy Policy Act specified 4.0 billion gallons as the RFS level for 
2006. This level increases year by year through 2012 under a specific 
statutory schedule and increases afterwards according other statutory 
provisions. If the 2.78 percent volume standard is not met, the default 
rule specifies that this deficit would carry over to the RFS 
requirement for 2007. However, based on data demonstrating ethanol use 
in 2005, and stakeholder projections for 2006, it is expected that far 
greater than 4.0 billion gallons of renewable fuels will be used in 
2006 in the United States.
    As the Agency continues to address other provisions of the Energy 
Policy Act which have the potential to impact the US gasoline market, 
we are paying close attention to the specific directions set forth in 
the Act in designing future programs and making required revisions to 
existing ones. Recognizing that fuel oxygenates, such as MTBE and 
ethanol, have played a significant role in these programs and are a 
significant volume portion of the overall US gasoline market, the 
Agency will continue to strive to maintain and advance the air quality 
protection gains through these programs, while minimizing potential 
market impacts when possible.
    Looking forward, it is the Agency's understanding that as a result 
of changes made by the Energy Policy Act of 2005, in particular the 
removal of the RFG oxygenate requirement, MTBE use in the RFG program 
will decline significantly. Some fuel providers are already 
transitioning away from using MTBE with most moving to blend ethanol in 
their RFG products. It is not anticipated that large volumes of non-
oxygenated RFG will be in the RFG market areas.
    In order to accomplish this change in the RFG market, fuel 
producers will produce reformulated gasoline blendstock for oxygenate 
blending (RBOB) that, compared with MTBE RFG, may require adjustments 
to lower the Reid vapor pressure of the RBOB in order to accommodate 
ethanol blending. In addition, some stakeholders have indicated that 
the removal of MTBE from the RFG pool may also result in some refiners 
using ethanol in order to meet the RFG toxics requirements.
    Altogether then, RFG is likely to absorb a significant percentage 
of ethanol utilization in this country. The Northeast market alone, 
with areas in New Jersey, Pennsylvania, Delaware, Maryland, the 
District of Columbia, Northern Virginia, Richmond and Norfolk, may 
undergo a substantial conversion to ethanol RFG. The Houston and Dallas 
markets are already experiencing a change over to ethanol RFG.
    While EPA would defer to the Energy Information Administration to 
make assessments concerning overall impact of this conversion on fuel 
price and supply, it is likely that without a minimum oxygenate 
standard in place, traditional market supply, demand and economic 
behavior will have a greater role in determining the production and 
blending of compliant RFG. With the removal of the RFG oxygenate 
standard, refiners will have greater flexibility as to when and where 
to blend ethanol or other oxygenates. As a result, refinery volumes may 
be affected since using ethanol to support volume replacement is not a 
one to one equivalent with MTBE blended RFG.
    Depending on decisions made in the private marketplace, there are 
also potential upstream distribution impacts that may occur as a result 
of conversion from MTBE to ethanol-based RFG. Responses may involve 
designated tanks, tank management practices and terminal blending 
equipment. Retail facilities may also need to prepare for any switch to 
ethanol blended fuels, by emptying and cleaning their storage tanks and 
removing any water.
    There are also several other provisions of the Energy Policy Act 
which will affect the fuel supply and potentially affect or mitigate 
supply issues. For example, unification of RFG northern and southern 
volatile organic compound (VOC) controls, as required by section 
1504(c) of the Act, will allow RFG product to move to markets more 
freely. Further, the development of a boutique fuels limitation 
required under section 1541 of the Act will affect EPA's future 
consideration of state requests for fuel controls or prohibitions.
    EPA also recently proposed the Mobile Source Air Toxics (MSAT) 
rule. Pursuant to section 1504(b) of the Energy Policy Act of 2005, EPA 
must adjust the toxics emissions baselines for reformulated gasoline to 
reflect 2001-2002 fuel qualities. However, this section also provides 
that this action becomes unnecessary if EPA takes action which results 
in greater overall reductions of toxics emissions from vehicles in 
areas with reformulated gasoline. As proposed, EPA believes that the 
MSAT rule would result in greater reductions than would be achieved 
through adjusting the baselines under section 1504(b). Accordingly, if 
the EPA were to finalize an MSAT rule meeting the directives of this 
section, the need for readjusting baselines for reformulated gasolines 
would be obviated.
    EPA will also be taking action this year to propose a rulemaking to 
implement the RFS for 2007 and subsequent years. While this proposal is 
still under development, EPA is cognizant of the need to propose an RFS 
implementation plan that maximizes existing fuel production and 
distribution market dynamics and minimizes impacts on production, 
supply, distribution and price. In general, the proposed rulemaking 
will define who the liable parties are for the RFS, establish a credit 
trading program, assign appropriate credits for additional renewable 
fuel products and establish compliance assurance provisions.
    Altogether, through a combination of removal of the RFG oxygenate 
standard and implementation of the new renewable fuels requirement, 
ethanol use in the U.S. will undoubtedly increase and MTBE use will 
likely decrease by a substantial margin. The precise impact of these 
events will depend on many different factors, including the reaction of 
the private marketplace to the elimination of previous regulatory 
requirements. As indicated above, EPA is committed to helping ensure a 
successful transition to greater use of renewable fuels and will work 
with other federal agencies and departments on issues affecting fuel 
supply and distribution.
    Again, I want to thank you, Mr. Chairman and the members of the 
committee for your attention to this important issue. This concludes my 
prepared statement. I would be happy to answer any questions that you 
may have.
                                 ______
                                 
        Responses by Robert Meyers to Additional Questions from 
                             Senator Inhofe

    Question 1. Mr. Meyers, when you were before the committee, you 
were asked if MTBE had not been available as an option at the outset, 
would that fact have made the Federal fuel oxygen standard practically 
impossible to implement. In part, you responded by directing the 
committee to the findings of the September 16, 1999 report of the EPA 
MTBE Blue Ribbon Panel created under a Charter from the EPA Clean Air 
Act Advisory Committee. Upon review of that report, the committee finds 
that the report states that the ``infrastructure to support such 
[ethanol] blending on a wide scale does not currently exist'' (p. 65) 
and that, ``The likely oxygenate replacement for MTBE is ethanol. 
Current and near future ethanol production (i.e., on-line in less than 
2 years), however, is not adequate to meet the volume of oxygenate 
required nationally.'' (p.72).
    Based upon this analysis, is it reasonable to conclude that 
implementation of the Federal mandate would not have been possible if 
MTBE had been unavailable at the time the program was required to go 
into effect?
    Response. My testimony before the committee included reference to 
both the Blue Ribbon Commission Report as well as efforts by EPA in 
1994 to promulgate a Renewable Oxygenate Requirement (ROR) for the 
Reformulated Gasoline (RFG) program. Regarding the latter, this 
reference was made since the effort to promulgate a ROR predated the 
first phase of the RFG program, which began in January 1995. Therefore, 
the EPA rulemaking record for the ROR reflected conditions that existed 
after congressional enactment of the RFG program, but before its 
initial implementation.
    In the development of the ROR, EPA conducted extensive analysis of 
the then-current ethanol supply and demand. Table 1-3 of the Regulatory 
Impact Statement for the ROR summarized the ethanol supply/demand 
situation and indicated that there was a potential shortfall (or 
displacement from existing markets already using ethanol) of 320 
million gallons just to satisfy a requirement that 30 percent of RFG 
contain renewable oxygenates in 1995. The RIA further indicated that, 
even if implementation of the 30 percent ROR was delayed until 1996, 
there would be a potential shortfall (or displacement) of 160 million 
gallons of ethanol.
    The RIA for the ROR additionally indicated that ``in the early 
years of the program the renewable oxygenate requirement is expected to 
be met primarily with ethanol blended into winter RFG.'' This analysis 
flowed from assessments that renewable oxygenates, like ETBE, would not 
be expected to provide a significant contribution to the renewable 
requirement in 1995, although more capacity for ETBE could come on line 
in 1996. Table 11-2, contained in page 59 of the RIA, addressed total 
fossil energy consumption under a 30 percent renewable oxygenate 
requirement. The table addressed both a situation where the entire 30 
percent ROR was satisfied by utilization of ethanol in the wintertime 
and a situation where the requirement was satisfied by ethanol in the 
winter and ETBE in the summer. With respect to the portion of RFG not 
affected by the ROR--the other 70 percent of the oxygenate 
requirement--DOE's analysis assumed that this RFG would contain MTBE. 
While this RIA did not directly address the implementation of the RFG 
program that ultimately unfolded (i.e., since the ROR was later 
overturned in the courts) it does represent a contemporaneous 
assessment of conditions in the renewable oxygenate market. Based on 
this analysis, it is logical to conclude that MTBE was expected to be 
used in the RFG program in substantial quantities.
    As your question also indicates, several years after the initial 
implementation of the RFG program, the Blue Ribbon Panel Report 
indicated that ethanol alone could not fully satisfy meeting the 
oxygenate requirements for the Federal Reformulated Gasoline Program. 
As your citations to the report indicate, the Blue Ribbon Panel report 
concluded that a lack of infrastructure existed, as of 1999, to support 
full replacement of MTBE with ethanol blending in the short term.
    As you know, other oxygenate additives apart from MTBE and 
ethanol--such as tertiary amyl methyl ether (TAME), diisopropyl ether 
(DIPE), and ethyl tertiary butyl ether (ETBE)--have been developed for 
many years and have been available during the entire course of the RFG 
program. EPA's Final Regulatory Impact Analysis for Reformulated 
Gasoline (December 1993), however, indicated that, at that time, 
technological and economic uncertainties existed regarding ETBE and 
that ETBE was not cost-competitive with MTBE and ethanol (page 295 of 
RIA--EPA420-R-93-017). The analysis indicated that ETBE had not been 
widely used in the market to date (page 28 of RIA). EPA's analysis in 
this regard is consistent with other market data concerning oxygenate 
production. Information produced by the Energy Information 
Administration in 1995 (Short-Term Energy Outlook Annual Supplement 
1995) indicated a sizable growth in MTBE production capacity between 
1991 and 1995 and a more modest increase ethanol production capacity. 
Corresponding figures for TAME and ETBE production capacity indicated 
that such capacity combined constituted less than 10 percent of MTBE 
capacity. I have attached a table containing this information that was 
published as part of another EIA publication (Oxygenate Supply/Demand 
Balances in the Short-Term Integrated Forecasting Model, March 6, 
1998). Overall, MTBE was the primary oxygenate utilized to blend into 
RFG to meet the 2 weight percent oxygenate requirement mandated by the 
RFG program. MTBE is high in octane, has favorable distillation 
properties, and can be blended and shipped through pipelines. These 
attributes, along with economic valuations of the product, were highly 
favorable in meeting the RFG oxygenate requirement.

    Question 2. Mr. Meyers, in implementing the RFS, how will EPA guard 
against supply disruptions and price impacts?
    Response. As you know, EPA is in the process of developing a 
proposal to implement the Renewable Fuel Standard (RFS) which was 
established by the Energy Policy Act of 2005. While EPA is still in the 
pre-proposal stage for this rulemaking, it would be the Agency's 
general intent to design a program that allows renewable fuel blending 
when, where and how it makes the most sense.
    The RFS Program as prescribed by the Energy Policy Act of 2005 
(EPAct) allows industry flexibility in meeting the new standards. EPA 
considers that the legislative flexibility is intended to mitigate, to 
the extent possible, adding any additional market constraints that 
could cause or contribute to supply or price volatility. That is, the 
RFS program does not require every gallon of gasoline to contain a 
renewable fuel component. Therefore, industry can choose how best to 
comply based on a number of factors affecting supply, demand and 
blending economics including: seasonal (with some limitations) and 
geographic system optimization, and the purchasing and trading of 
excess blending credits. This flexibility supports greater market 
fluidity thus enabling a more expeditious response to unusual supply, 
demand and other unique situations that could adversely impact product 
availability and price.
    Additionally, in accordance with other provisions contained in the 
EPAct, EPA has proposed removal of the oxygenate standard in the RFG 
program areas. Removal of this standard allows stakeholders greater 
flexibility in when, where and how they blend renewable fuel 
components. EPAct additionally granted EPA authority to waive fuel 
quality program requirements. EPA exercised such authority in 2005, 
when it became aware of potential fuel supply issues resulting from the 
fallout of the Hurricanes in the gulf region. In this effort, EPA 
worked closely with other private and government stakeholders and 
responded quickly providing necessary short term relief, allowing the 
markets to adjust rapidly. This provision provides EPA with continuing 
legal authority to address fuel supply disruptions which occur as a 
result of conditions specified in the waiver authority.
    Finally, it is notable that over the last several years EPA has 
implemented a number of actions and programs that significantly ease 
potential supply constraints that may have occurred as a result of 
clean fuel requirements such as the on-road and off-road diesel sulfur 
requirements. Programs such as market-based trading systems, geographic 
phase in allowances, baseline adjustments, short term testing tolerance 
modifications, as well as others, have provided the fuel supply and 
distribution industry increased flexibility to comply with the rules 
more cost-effectively, and in some cases, to increase production, thus 
providing for a more reliable supply of fuel. These have all 
contributed to ensuring smooth distribution and thus price stability 
while maintaining the significant environmental benefits these programs 
were designed to achieve.
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       Statement of A. Blakeman Early, American Lung Association
    Mr. Chairman and members of the committee, I appreciate the 
opportunity to appear today on behalf of the American Lung Association 
to discuss the impact of eliminating MTBE from gasoline.

    THE AMERICAN LUNG ASSOCIATION SUPPORTS THE REMOVAL OF MTBE FROM 
                                GASOLINE

    As you know MTBE has been found to contaminate ground or surface 
water in nearly every state. MTBE has rendered thousands of public and 
private drinking water sources unusable. Addressing the clean up or 
replacement of these sources has been estimated in a study by the 
American Water Works Association to cost upwards of $25 billion 
dollars. These statistics, which may not include all MTBE contamination 
costs, provide reason enough to eliminate MTBE from the Nation's fuel 
supply. I have attached a summary of the AWWA report to my testimony.
    The American Lung Association is particularly interested in 
eliminating MTBE from reformulated gasoline (RFG) because the fear of 
MTBE contamination has reduced the public acceptance of RFG as a tool 
in fighting air pollution. Many areas with unhealthy levels of ozone 
have avoided adopting RFG for fear of contaminating local water 
supplies. Therefore, we see the recent trend of refiners choosing to 
eliminate MTBE from RFG as a welcome development which may facilitate 
the adoption of RFG in more areas that need it. If so, the public will 
benefit from reduced exposure to ozone and toxic air pollutants. The 
elimination of the oxygen requirement in RFG, in combination with the 
sulfur limit in all gasoline implemented as part of the Tier II rules, 
and the limitations on boutique fuels adopted in the Environmental 
Policy Act of 2005 (EPACT) should eliminate the proliferation of 
boutique fuels while providing clean fuels choices to areas that need 
them. We believe that any additional limitations on states' ability to 
select clean fuels would have adverse air quality impacts and are 
unnecessary given all the changes I just described.
refiners are eliminating mtbe from rfg this spring entirely voluntarily
    The American Lung Association endorsed a ban of MTBE in fuel phased 
in over 4 years. This time frame was originally identified by the 
refining industry as the necessary phase out period in testimony before 
this committee. The Congress chose not to adopt such a measure during 
its consideration of EPACT. Congress did remove the oxygen requirement 
from RFG, enabling each refiner to use as much or as little MTBE as it 
chose.
    Now this spring, refiners are attempting to remove MTBE from RFG 
all at once rather than pursuing a phased elimination. Although MTBE is 
already banned for use in fuel in over 20 States, the current action to 
remove MTBE from the remaining RFG supply is voluntary, is not required 
to meet any law. We see no credible basis for finding that the use of 
MTBE in RFG in 2006 gives rise to special liability given the nature of 
MTBE groundwater contamination and the difficulty of distinguishing 
when contamination occurred. Whatever liability refiners may be subject 
to will be based largely on past actions. The nature of that liability 
is well described in testimony by Erik D. Olson of the Natural 
Resources Defense Council before the House Energy and Commerce 
Committee (see http://energycommerce.house.gov/108/Hearings/
03132003hearing818/Olson1367.htm).
    It has long been predicted that removal of MTBE from RFG would 
spike a demand for ethanol. I provided testimony before this committee 
in June 2000 that the removal of MTBE would create a demand of 3.8 
billion gallons a year just to provide octane in RFG. My testimony was 
based on information obtained from the refining industry itself. In 
fact ethanol is apparently being used today in amounts greater than 
needed to provide octane in order to help refiners meet air toxics 
reduction requirements.
    The fact that refiners are voluntarily and precipitously 
withdrawing MTBE from use knowing that such action would cause a spike 
in RFG prices provides testament to the indifference the industry has 
to the calls of consumers to restrain fuel prices.

 SHORTAGES CREATED THROUGH VOLUNTARY OIL INDUSTRY DECISIONS ARE NOT A 
                  BASIS FOR WAIVING FUEL REQUIREMENTS

    As you know, in the Energy Policy Act of 2005 (EPACT) the Congress 
provided EPA with the authority to temporarily waive a fuel or additive 
requirement under the Clean Air Act in cases of an ``extreme and 
unusual fuel or fuel additive supply circumstance'' (Section 1541(a)). 
The statute explicitly states that shortages that reasonably could have 
been foreseen or derive from a lack of prudent planning do not qualify 
for such waiver.
    We believe the ethanol and fuel shortage we are discussing today 
was foreseeable and in fact is exactly the result of a failure of 
prudent planning. The American Lung Association hopes no one will 
suggest the need for invoking the EPACT waiver authority.

   SHORTAGES IN ETHANOL CAUSE THE SAME PRICE VOLATILITY AS GASOLINE 
                               SHORTAGES

    The wholesale or ``rack'' price of ethanol is well over a dollar 
more than it was a year ago. It should come as no surprise that ethanol 
producers will charge as much as they can get on the market. However, 
it is worth noting that when ethanol demand has surged in the past as 
with the phase out of MTBE in California and in the New York/
Connecticut RFG markets, the ethanol industry has responded to such 
demand and provided the needed ethanol with modest impact on overall 
RFG price. We operate on the assumption that the ethanol industry will 
respond similarly in the case of the current shortage over the longer 
term. However, we believe the Department of Energy should be more 
proactive in alleviating ethanol shortages by encouraging alternative 
sources of ethanol supply from off-shore sources such as the Caribbean 
Basin and Brazil. Given that the expected shortage in ethanol supply 
this spring is occurring in the Mid-Atlantic and Texas, it should not 
be difficult to facilitate the location and shipment of foreign sources 
of ethanol to Hampton, Virginia and Houston, Texas to help meet 
unexpected demand.

    EPA MUST ACT NOW TO MEET ANTI-BACKSLIDING REQUIREMENTS TO CURB 
                          TOXIC AIR POLLUTANTS

    Under EPACT, 9 months after enactment EPA is required to establish 
standard for each refiner and importer designed to maintain the level 
of toxic air pollutant reduction achieved on average during 2001 and 
2002. (Section 1506(b)). This so-called ``anti-backsliding'' provision 
was enacted to ensure that as refiners reduced the amount of MTBE they 
used in RFG, the level of toxic air pollution from the use of such fuel 
did not increase. The dramatic shift away from MTBE use occurring this 
spring well illustrates why this provision is needed. Yet to my 
knowledge EPA has not instituted any effort to assemble the regulatory 
information or propose the anti-backsliding requirements required by 
the law. We call on EPA to move expeditiously in light of the current 
circumstances.
    Again, I appreciate the opportunity to appear before the committee 
on behalf of the American Lung Association.
                                 ______
                                 
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     Statement of Bill Douglass, Chief Executive Officer, Douglass 
    Distributing Company, Representing the National Association of 
Convenience Stores and the Society of Independent Gasoline Marketers of 
                                America

    Good morning, Mr. Chairman, Ranking Minority Member Jeffords, and 
members of the committee. My name is Bill Douglass. I serve as the 
chief executive officer of Douglass Distributing Company in Sherman, 
TX. My company owns and operates 14 motor fuel outlets in the Dallas-
Fort Worth area and supplies gasoline and diesel fuel to 165 additional 
retail outlets in that area under long-term supply contracts.
    Thank you, Mr. Chairman, for calling this important hearing this 
morning. I appear before the committee representing the National 
Association of Convenience Stores (NACS) and the Society of Independent 
Gasoline Marketers of America (SIGMA). I am the former chairman of 
NACS' Board of Directors and my company also is an active member of 
SIGMA. Together, NACS and SIGMA members sell approximately 80 percent 
of the gasoline and diesel fuel purchased by motorists in the United 
States each year. NACS and SIGMA appreciate the opportunity to present 
testimony this morning on an issue of great importance to our industry 
and to the entire Nation--the current turmoil and uncertainty in the 
nation's gasoline markets and the opportunity this uncertainty has to 
translate into supply shortages and price volatility during the spring 
and summer of 2006.
    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 143.5 billion gallons of 
motor fuel in 2005 and employs 1.5 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 2005. SIGMA 
members supply more than 35,000 retail outlets across the Nation and 
employ more than 350,000 workers nationwide.
    Over the past 3 months, I have witnessed such a blizzard of 
announcements and developments regarding gasoline production and 
distribution this Spring and Summer that even I, who study and 
participate in gasoline marketing every day, am uncertain what to 
expect over the next 6 months. It would not surprise me if the members 
of this committee, who wrestle daily with many issues of national 
importance far removed from motor fuel issues, are not sure what to 
make of these developments either. This hearing represents an attempt 
to sort through these announcements, rumors, and questions.
    NACS and SIGMA believe it is a timely examination and we welcome 
this committee's interest.
    As an initial matter, I would like to review briefly what we know, 
rather than what we don't know:
     Methyl tertiary butyl ether (MTBE) has been used as an 
octane enhancer in gasoline since the 1970's when lead was removed from 
gasoline. Only in the 1990's did its use as an oxygenate in gasoline 
become common. As a result, when MTBE is removed from gasoline, not 
only does the Nation's gasoline pool lose substantial volume which must 
be replaced by other products, but the octane MTBE adds to gasoline 
must be replaced by other products to assure that fuel performance is 
not degraded.
     In late 2005 and early 2006, several of the nation's 
pipeline systems, which transport gasoline from the major Gulf Coast 
refining complexes up the East Coast and through the Mid-West, 
announced that they would stop accepting shipments of reformulated 
gasoline (RFG) containing the oxygenate and octane additive methyl 
tertiary butyl ether (MTBE).
     During the same time period, several major integrated oil 
refiners announced that they would transition away from blending MTBE 
into RFG and conventional gasoline early in 2006 due to the pipeline 
actions and ongoing concerns regarding potential liability resulting 
from contamination of groundwater by MTBE.
     In late February, the Environmental Protection Agency 
(EPA) issued a final rule, required by the Energy Policy Act of 2005 
(EPAct 2005), to remove the RFG oxygen mandate as of May 8, 2006, 
thereby permitting non-oxygenated RFG, or clear RFG, to be sold as RFG 
as long as it met EPA clean fuel standards.
     Also in late February, the Department of Energy's Energy 
Information Administration (EIA) released a report entitled 
``Eliminating MTBE in Gasoline in 2006'' which raised concerns about 
shortages in both domestic gasoline and ethanol production capacity in 
the coming months if such a transition away from MTBE RFG is pursued 
and concluded that ``the complexity of the transition away from MTBE-
blended RFG may give rise to local imbalances between supply and demand 
and associated price surges during the change.''
     Earlier this month, the Renewable Fuels Association, the 
trade association representing domestic ethanol producers, responded to 
what it perceived to be inaccuracies in the EIA report, stating ``. . . 
we have worked diligently with our customers--the Nation's gasoline 
refiners--to ensure that any consumer impact . . . will be temporary.''
     Most recently, the Federal Energy Regulatory Commission 
(FERC) denied a
    request from Colonial Pipeline Company, which operates one of two 
major petroleum pipelines serving the East Coast, to amend immediately 
its tariff schedule to delete MTBE RFG from the list of products it 
will accept on its pipeline after objections from several MTBE 
manufacturers.
    As you may note, none of these announcements and developments 
involved gasoline retailers directly. There is a simple reason for this 
fact. Independent gasoline marketers do not make gasoline or ethanol, 
we do not own pipelines, and we do not have access to the type of data 
necessary to produce a report as authoritative as that released by EIA. 
Instead, we purchase gasoline at wholesale and sell it to motorists at 
retail. All of these activities have. been taking place, so to speak, 
``far above our pay grade'' and their exact effect on independent 
gasoline marketers and consumers will be known only as events develop 
over the next 6 months.
    From all of these recent developments, gasoline marketers, and the 
members of this committee, can glean several important facts (rather 
than arguments).
    First, use of MTBE as a gasoline additive will decline in the 
future, whether precipitously as some have predicted this Spring and 
Summer, or more gradually. This decline is a direct result of Congress' 
failure to adopt liability reform provisions for MTBE as part of the 
Energy Policy Act of 2005. Without such liability reform, refiners, 
pipelines, and marketers are disinclined to extend their potential 
liability for use of this product in the future. I am not seeking to 
get into a debate as to whether Congress should have adopted the so-
called MTBE safe harbor last year. That debate is over.
    must understand that the decisions you Rather, this committee, and 
Congress as a whole, made, or chose not to make, last year, are having 
repercussions in the gasoline markets this year. Those repercussions 
were entirely predictable. Many in Congress wanted to ban MTBE outright 
and immediately. NACS and SIGMA supported a gradual phase down of MTBE 
use over a number of years. Reality will fall somewhere between these 
two positions. MTBE use will be reduced in the future. The focus of 
this hearing, however, should be on the effect this reduction will have 
on domestic gasoline supplies and prices.
    Second, ethanol blended with gasoline is the most likely and 
immediate substitute for MTBE in RFG. Ethanol contains some of the same 
characteristics that have made MTBE an attractive blending component in 
the past--high octane content and a blend rate that dilutes other 
gasoline properties. However, the use of ethanol in RFG also increases 
volatility (thereby increasing VOC emissions, which lead to ozone 
formation) and ethanol contains higher levels of toxics than MTBE--
substances controlled under EPA's mobile source air toxics program. To 
prepare for blending ethanol with RFG and the resulting volatility 
surge, refiners must take certain components out of gasoline intended 
for ethanol blending, reducing the gasoline yield from a barrel of 
crude oil. EIA has estimated that on average refiners lose 
approximately 5 percent of their production capacity when making RFG 
for ethanol blending when compared to RFG for MTBE blending. This is a 
significant reduction in domestic gasoline production capacity that 
should be of concern to policymakers, marketers, and consumers.
    Third, in general the Nation's refiners are not positioned to 
produce substantial quantities of clear RFG--RFG that is not blended 
with either ethanol or MTBE. Since the RFG program started in 1995, it 
has been unlawful for a refiner to produce such clear RFG. In fact, it 
will not be lawful to produce clear RFG until May 8, 2006--nine months 
after the President signed EPAct 2005 into law. It should not be 
surprising that the nation's refiners have not been able, during the 
short period between EPAct's enactment and now, to dramatically alter 
their production capabilities to produce clear RFG. While undoubtedly 
many refinery modifications projects are in the works to produce clear 
RFG from many domestic refineries, the timetable simply has been too 
short to expect these modifications to be completed before this Spring.
    Fourth, it is clear that the domestic ethanol production industry 
is doing its utmost to maximize the amount of ethanol it will produce 
and sell this year. Given that prices for ethanol scheduled to be 
delivered in May and June in recent weeks have fluctuated between $2.40 
and $3 per gallon, they have every incentive to make every gallon of 
ethanol they can. Depending on the producer, ethanol costs between $1 
and $1.50 per gallon to make, not taking into account the production 
tax credits that these producers laws. That means their margins are 
somewhere over $1. per gallon--a margin that I as a gasoline marketer 
could never hope to achieve and one that makes the ``crack spreads'' of 
the Nation's integrated refiners look like an amateurish attempt to 
turn a profit.
    The question is not whether the domestic ethanol industry is doing 
its best to maximize production, but whether these best efforts will be 
sufficient to meet the demand for ethanol in the next 6 months as the 
Nation transitions away from MTBE as a fuel additive. Depending on the 
assumptions one makes as to the pace and extent of MTBE de-selection as 
a blending component, as EIA's report accurately points out, the 
domestic ethanol industry's best efforts may fall far short of 
supplying the amount of ethanol required to meet the demand of refiners 
and marketers. If this is the case, the primary source of additional 
ethanol supply will be from foreign countries, including enjoy under 
many State and Federal Jamaica, Mexico, and Brazil. As EIA's report 
also notes, however, much of this foreign ethanol is subject to a $0.53 
per gallon duty unless it has been processed in certain Caribbean Basin 
Initiative (CBI) countries. Thus, the option to look toward foreign 
ethanol to fill the shortfall in domestic production is limited by this 
tariff--unless domestic ethanol prices rise to such high levels that 
importers are able to pay the huge per gallon duty and still offer 
competitively priced ethanol to refiners and marketers. If such ethanol 
price spikes occur over the next 6 months, it will be interesting to 
see if the producers of ethanol will be called before congressional 
committees or placed under Federal investigation for collusion and 
price gouging and for visiting on motorists hundreds of millions of 
dollars of increased prices at the gasoline pump.
    Fifth, the continuing role of boutique fuels in complicating the 
supply and distribution of gasoline in 2006 must not be ignored. While 
it is true that Congress took effective steps in EPAct to cap the 
number of boutique fuels across the Nation, to date this cap has not 
had the desired effect of reducing the number of unique gasoline and 
diesel fuel blends across the Nation and restoring fungibility to the 
motor fuel supply and distribution industries. Thus, the problem of 
boutique fuels and the price volatility they cause during short supply 
situations remains.
    Of greater immediate importance relative to this issue, as noted in 
the EIA study, is the lack of Federal legislative action to limit State 
boutique renewable fuel mandates. EIA noted that State ethanol 
mandates, such as the one currently in place in Minnesota and those 
under consideration or being implemented for ethanol in other States, 
constrain the ability of ethanol producers to respond to ethanol demand 
in other areas of the Nation. Congress enacted the Renewable Fuel 
Standard (RFS) as part of EPAct last year to assure a minimum demand 
for ethanol and bio-diesel in the coming years. At the same time, 
however, Congress built into the RFS certain flexibilities to assure 
that renewable fuels would be used efficiently and economically under 
the RFS and would not be concentrated in any particular area of the 
Nation. These State boutique renewable fuel mandates directly undercut 
the EPAct RFS flexibility by preventing renewable fuels, including 
ethanol, from moving to the areas of highest demand. NACS and SIGMA 
believe that this committee and others must look into the role these 
boutique renewable fuel mandates play in decreasing the fungibility of 
product and increasing wholesale and retail price volatility for 
consumers--much the way Congress looked into the negative effect of 
State boutique gasoline and diesel fuel blends on these factors under 
EPAct. If State boutique renewable fuels mandates are allowed to 
proliferate unchecked, then all of the work Congress put into restoring 
fungibility in the gasoline and diesel fuel markets will ultimately go 
for naught.
    Sixth, the bulk gasoline storage and terminaling infrastructure in 
many parts of the Nation is not prepared for a transition from MTBE to 
ethanol. Because ethanol generally cannot be transported via pipelines, 
it must be trucked, barged, or shipped via rail to wholesale gasoline 
terminals for blending into gasoline. These terminals' storage capacity 
for different gasoline and diesel fuels already is stretched to the 
limit. Many terminals in the mid-Atlantic States and Texas, where the 
potential effect of the transition from MTBE to ethanol will be the 
greatest, simply do not have an ``extra'' storage tank in which to 
store ethanol. And it is not likely that they will be able to obtain 
the permits and build additional storage capacity in a two or 3 month 
timeframe. As a result, gasoline suppliers and marketers seeking to 
blend ethanol into gasoline this Spring--assuming they can locate the 
ethanol at a reasonable price--will be forced to scramble to find 
storage for this ethanol at bulk terminals or will locate separate and 
at times distant ethanol storage facilities at which they will blend 
ethanol with gasoline. These bulk storage infrastructure constraints 
will result in an added level of complexity in an already stressed 
gasoline supply distribution system.
    Seventh, this transition away from MTBE comes during the yearly 
transition from winter to summer gasoline--a transition that has in 
past years repeatedly resulted in supply shortages and wholesale and 
retail price spikes. In 2006, not only must terminals and retailers 
complete the switch from winter to summer gasoline, but they must also 
switch from MTBE RFG to ethanol RFG. This transition to ethanol will 
require terminals and retailers to draw down their gasoline inventories 
aggressively to complete the transition as quickly as possible and to 
avoid offering gasoline that does not comply with EPA's clean gasoline 
programs. And as with any commodity, when inventories are low, the 
opportunities for supply shortages and price volatility increases. 
Finally, the transition from MTBE additized gasoline to ethanol 
additized gasoline will be problematic for motor fuel retailers like 
me. Due to ethanol's characteristics, many marketers will be forced to 
pump out their retail underground storage tans to convert to RFG with 
ethanol to prevent clogged fuel dispenser filters or clogged motor 
vehicle fuel filters. Retailers will be undertaking these preparations 
at the same time that they are preparing to switch from winter to 
summer gasoline blends.
    Most marketers, myself included, are confused by the various 
announcements and predictions being made about the transition from MTBE 
to ethanol in RFG and have not been able to make concrete operational 
plans to carry one product or another.
    NACS and SIGMA members have been selling gasoline blended with 
ethanol for decades. The challenges of selling gasohol at retail are 
well-known: securing appropriate gasoline blendstock and ethanol 
supplies and the facilities to blend these products; phase separation 
if any water makes its way into the blend; cleaning storage tanks 
before adding ethanol to prevent clogged fuel filters; and, educating 
consumers about gasohol in areas where it may never have been sold 
previously. As a result, given sufficient time to effect this 
transition from MTBE to ethanol, such a transition would be transparent 
to our customers. However, many retailers like myself are making this 
transition for the first time and I can tell you that the conversion is 
rather daunting. For example, one of my gasoline suppliers provided me 
a document to walk me through the conversion process--it is a 20-page 
document! That is a lot of information for retailers to absorb and 
implement.
    Unfortunately, this transition is happening on a much tighter 
timetable than any previous transition from MTBE to ethanol. In 
California and New York, where MTBE was banned several years ago, 
retailers in those States had 2 to 3 years to plan for an orderly 
transition to ethanol. This is not the case with this transition. In 
most cases, retailers began hearing about the planned transition in 
January and only recently have received confirmation from their 
suppliers regarding the details and timing of the transition.
    In short, such transitions have been accomplished before with 
little disruption to gasoline supplies or significant price volatility. 
But this transition is being undertaken much more quickly and in larger 
geographic areas.
    This committee's inquiry on this issue could not be more timely. 
The gasoline refining and distribution industry is in turmoil in many 
areas of the Nation as each participant makes decisions concerning 
which products to offer, carry and sell. Suffice it to say that this 
turmoil will resolve itself in the near future. However, the question 
for policymakers must be how high gasoline prices will have to rise 
before sufficient quantities of gasoline blendstocks are attracted from 
foreign sources to make up for shortfalls in domestic production? And 
what role will ethanol supply and prices play in influencing retail 
gasoline prices in the next 6 months? Neither of these questions can be 
answered authoritatively at this time. However, to quote again from 
EIA's recent report: ``(T)he complexity of the transition away from 
MTBE-blended RFG may give rise to local imbalances between supply and 
demand and associated price surges during the change. As the summer 
progresses and demand grows, the right supply situation is not likely 
to ease significantly, leaving the market exposed to the increased 
potential for price volatility in the East Coast and Texas RFG 
regions.''
    Unfortunately, there are few public policy options open to Congress 
to mitigate these potential supply shortages and price volatility in 
the short-term. NACS and SIGMA propose the action that would have the 
most significant positive effect on supply and dampening effect on 
price increases in the next 6 months would be the temporary suspension 
of the tariff on imported ethanol. This suspension would be adopted to 
ease the transition of the domestic ethanol industry through the period 
of increased ethanol demand caused by decreased MTBE use and its 
inability, despite its best efforts, to totally fill the supply gap 
left by MTBE.
    In the medium term, NACS and SIGMA suggest that Congress consider 
two additional actions. The first would be to extend the boutique fuels 
cap under EPAct to limit State boutique renewable fuel mandates. Such 
an extension would prevent such State mandates from undermining the 
policy goals and the flexibility of the RFS in EPAct and would halt the 
renewed proliferation of unique fuel blends across the Nation.
    Second, NACS and SIGMA again urge Congress to pass legislation to 
encourage the expansion of domestic refining capacity. Mr. Chairman, 
the legislation you introduced last year to encourage such expansions 
was a very good effort to achieve this goal. Unfortunately, it was not 
approved by this committee. NACS and SIGMA urge you and your colleagues 
to redouble your efforts to pass such legislation. Without it, American 
motorists will continue to face the supply and price uncertainties that 
are so widespread this spring and summer.
    Last year, the subject of numerous congressional hearings was the 
destruction of Hurricanes Katrina and Rita and their effect on gasoline 
and diesel fuel supplies and prices. This year, the subject is the 
transition away from MTBE and the effect this transition will have on 
gasoline supplies and prices. Next year, it may be a different set of 
developments, but the underlying issue will be the same. Until domestic 
refining capacity is increased in this Nation, gasoline and diesel fuel 
supply shortages and price volatility will be the norm rather than the 
exception. I appreciate the opportunity to present NACS' and SIGMA's 
views at this hearing. I would be pleased to answer any questions that 
my testimony may have raised.
                                 ______
                                 
 Responses by Bill Douglass to Additional Questions from Senator Inhofe

    Question 1. In your testimony, you urge Congress to suspend 
temporarily the duty on imported ethanol. In your opinion, if Congress 
were to act on this recommendation, what would the short-term impact be 
on the prices you are paying for ethanol and that American motorists 
are paying for gasoline?
    Response. There is no question in my mind that suspending 
temporarily the duty on imported ethanol would almost immediately 
reduce the price of ethanol, perhaps significantly, because of the 
increased competition domestic ethanol manufacturers would face from 
foreign ethanol producers. While there are many factors that are 
contributing to the upward price pressures on gasoline, the increased 
price of ethanol is a significant one. By opening the U.S. market to 
foreign ethanol producers, Congress will encourage the importation of 
substantial additional quantities of ethanol. This increase in overall 
ethanol supplies and increased competition among ethanol producers, 
will help satisfy the market demands for the product and place downward 
pressure on ethanol and gasoline prices.
    Supporters of domestic ethanol producers oppose the suspension of 
the ethanol tariff because they believe that domestic producers must be 
protected from foreign competition. Given the fact that ethanol prices 
have more than doubled over the past year and domestic ethanol 
producers enjoy a 100 percent profit margin on every gallon of ethanol 
they produce, NACS and SIGMA suggest that suspending the tariff on 
imported ethanol is in the best interests of American consumers.

    Question 2. EIA's testimony highlighted how complex the fuels 
system really is. Would you agree that increasing the complexity of the 
fuels system, such as requiring new fuels mandates, would increase 
prices for consumers?
    Response. I would agree. The Energy Policy Act of 2005 sought to 
restore some fungibility to the motor fuels supply and distribution 
system by stopping the spread of additional boutique fuels and 
embarking on a process by which to responsibly reduce the number of 
fuels to a more manageable number. State fuels mandates serve to 
further isolate markets and create distribution challenges within a 
system that is already operating under a considerable strain.
    In addition, the Energy Policy Act of 2005 included a ``Renewable 
Fuels Standard'' (RFS) designed to increase the use of alternative 
renewable fuels, such as ethanol and biodiesel, as motor fuels. 
Incorporated into the RFS was substantial flexibility to insure that 
the motor fuels markets could meet this mandate in the most cost-
effective and efficient manner possible. State ethanol or biodiesel 
mandates--in effect, State ``boutique'' renewable fuels--undermine the 
flexibility built into the RFS by requiring minimum quantities of 
renewable fuels to be used in every gallon of gasoline or diesel fuel 
sold in a State. These State renewable fuel mandates also circumvent 
the Energy Policy Act's boutique fuels cap and, if left unchecked, will 
give rise to additional boutique fuels, further balkanization of the 
Nation's motor fuels markets, and more frequent supply disruptions and 
price volatility.

    Question 3. What would you say to policymakers who would recommend 
such new mandates?
    Response. The RFS will increase, by mandate, the use of renewable 
fuels to a minimum of 7.5 billion gallons by 2012. This was an historic 
provision designed to move the Nation toward a greater reliance on 
renewable resources. However, the regulations implementing this program 
have not yet been drafted by the Environmental Protection Agency due to 
their complexity. NACS and SIGMA believe it would be premature and 
inappropriate for Congress to consider yet another fuels mandate before 
the Renewable Fuels Standard signed into law in August 2005 has been 
fully implemented and its market affects have been appropriately 
analyzed and understood. Since the RFS was enacted, domestic ethanol 
prices have doubled and there have been widespread media reports that 
domestic ethanol supply will fall short of demand in the coming years. 
Before increasing the RFS, NACS and SIGMA urge Federal policymakers to 
permit the existing mandate to be implemented fully, study its impact 
on gasoline prices, and only then consider an expansion once this 
evidence has been gathered.

                               __________
    Statement of Bob Dinneen, President, Renewable Fuels Association

    Good morning, Mr. Chairman and members of the committee. My name is 
Bob Dinneen and I am president of the Renewable Fuels Association, the 
national trade association representing the U.S. ethanol industry.
    This is an important and timely oversight hearing, and I am pleased 
to be here to discuss everything the ethanol industry is doing to 
mitigate any potential consumer impact resulting from refiner decisions 
to eliminate the use of MTBE. In short, I can assure you the Nation's 
ethanol producers are working closely with their refiner customers to 
make the transition from MTBE to ethanol in those areas not yet having 
made the switch as seamless as possible. I am confident the transition 
can, and will, go smoothly.

                               BACKGROUND

    Today's ethanol industry consists of 97 biorefineries located in 19 
different States with the capacity to process more than 1.7 billion 
bushels of grain into nearly 4.5 billion gallons of high octane, clean 
burning motor fuel and 9 million metric tons of livestock and poultry 
feed. It is a dynamic and growing industry that is revitalizing rural 
America, reducing emissions in our Nation's cities, and lowering our 
dependence on imported petroleum. Ethanol has become a ubiquitous 
component of the U.S. motor fuel market today. Ethanol is blended in 
more than 30 percent of the Nation's fuel, and is sold virtually from 
coast to coast and border to border.




    The 4 billion gallons of ethanol produced and sold in the U.S. last 
year contributed significantly to the Nation's economic, environmental 
and energy security. According to an analysis completed for the RFA\1\, 
the 4 billion gallons of ethanol produced in 2005 resulted in the 
following impacts:
---------------------------------------------------------------------------
    \1\ Contribution of the Ethanol Industry to the Economy of the 
United States, Dr. John Urbanchuk, Director, LECG, LLC, February 2006.
---------------------------------------------------------------------------
     Added $32 Billion to gross output;
     Created 153,725 jobs in all sectors of the economy;
     Increased economic activity and new jobs from ethanol 
increased household income by $5.7 Billion, money that flows directly 
into consumers' pockets;
     Contributed $1.9 Billion of tax revenue for the Federal 
Government and $1.6 Billion for State and Local governments; and,
     Reduced oil imports by 170 million barrels of oil, valued 
at $8.7 Billion.
    In addition, because the crops used in the production of ethanol 
absorb carbon dioxide, the 4 billion gallons of ethanol produced in 
2005 reduced greenhouse gas emissions by nearly 8 million tons.\2\ 
That's the equivalent of taking well over a million vehicles off the 
road.
---------------------------------------------------------------------------
    \2\ Argonne National Laboratory, U.S. Department of Energy, GREET 
Model, February 2006.
---------------------------------------------------------------------------
  ENERGY POLICY ACT HAS STIMULATED SIGNIFICANT NEW ETHANOL PRODUCTION

    Mr. Chairman, in large part because of the Energy Policy Act of 
2005 (EPAct), the U.S. ethanol industry is today the fastest growing 
energy resource in the world. This committee should be proud of its 
role in getting the congressional debate regarding a robust Renewable 
Fuels Standard (RFS) started. With your leadership, and the tremendous 
support of members of the committee, such as Senators John Thune (R-SD) 
and Barack Obama (D-IL), the Congress last year enacted an RFS 
requiring the use of at least 7.5 billion gallons of renewable fuels by 
2012. That provision signaled a clarion call to the ethanol industry 
and the financial community that demand for ethanol and biodiesel was 
no longer uncertain, allowing the renewable fuels industry to grow with 
confidence.
    Indeed, there are currently 33 plants under construction. Eighteen 
of those have broken ground just since last August when President Bush 
signed EPAct into law. With existing biorefineries that are expanding, 
the industry expects more than 2 billion gallons of new production 
capacity to be in operation within the next 12 to 18 months. The 
following is our best estimate of when this new production will come on 
stream.


    This preceding chart reflects eight plants and three expansions we 
believe will be complete before July, representing more than 500 
million gallons of production capacity; and another 16 plants and 2 
expansion that will be complete before the end of the year, adding 
about 900 million gallons more. This new 1.4 billion gallons of new 
capacity represents a 32 percent increase in production, a phenomenal 
rate of growth, particularly when viewed in light of the 20-plus 
percent growth the industry has already achieved in each of the past 
several years.

                  MTBE IS HEMORRHAGING THE MARKETPLACE

    Another consequence of the Energy Policy Act appears to be a much 
more rapid elimination of MTBE than analysts anticipated. Because 
Congress chose not to provide liability protection for refiners and 
producers of MTBE, virtually every major refiner has decided to 
eliminate the use of MTBE by the time the Federal RFG oxygenate 
requirement is officially repealed (May 5, 2006). While State 
legislative actions to prohibit the sale of MTBE had already greatly 
reduced the volume of MTBE used in reformulated gasoline (RFG),\3\ 
there is still approximately 2 billion gallons of MTBE sold in the Mid-
Atlantic, Northeast and Texas. This volume will likely be replaced by 
ethanol.
---------------------------------------------------------------------------
    \3\ Twenty-six States have enacted legislation to prohibit the use 
of MTBE because of increasing concerns related to MTBE water 
contamination. These States include the RFG areas of California, 
Illinois, New York and Connecticut. Ethanol has already successfully 
replaced MTBE in RFG sold in these areas.
---------------------------------------------------------------------------
    It is important to note, however, that no provision of the Energy 
Policy Act or the Clean Air Act requires refiners to eliminate MTBE by 
this date. Refiners are not compelled to use MTBE in RFG, nor are they 
compelled to use ethanol once the oxygenate requirement is 
eliminated.\4\ The decision to stop using MTBE is the refiners' alone.
---------------------------------------------------------------------------
    \4\ Based on indications from the refining industry, the Colonial 
Pipeline had announced that MTBE shipments would not be allowed after 
March. That decision has been re-evaluated, however, and the pipeline 
system will allow MTBE RFG to be shipped upon request.
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 THERE WILL BE ADEQUATE SUPPLIES OF ETHANOL TO MEET THE DEMAND CREATED 
                         BY THE REMOVAL OF MTBE

    U.S. ethanol supplies will be available to meet this new demand. 
First, as noted, dramatically increased ethanol production capacity 
will satisfy much of the new demand. In addition to the new capacity 
previously discussed, several ethanol and gasoline marketers have been 
storing ethanol supplies at terminals in these new markets in 
anticipation of the transition from MTBE.
    Second, several refiners have contracted with Brazilian and/or 
Caribbean ethanol suppliers for product. Approximately 130 million 
gallons of ethanol were imported last year. That figure is expected to 
increase in 2006.\5\
---------------------------------------------------------------------------
    \5\ It is important to note that lifting the secondary tariff on 
ethanol is not necessary to encourage additional imports. Under the 
Caribbean Basin Initiative, 270 million gallons can be imported duty-
free. Moreover, the secondary tariff only exists to offset the tax 
benefit refiners receive for blending ethanol, regardless of its 
source. Eliminating the tariff, then, would result in U.S. taxpayers 
subsidizing already highly subsidized Brazilian ethanol. That is 
particularly unnecessary as the marketplace is seeing ethanol imports 
increase under the existing tariff regime.
---------------------------------------------------------------------------
    Third, the marketplace will migrate ethanol from existing 
conventional gasoline areas where it is added for octane or as a 
gasoline extender to MTBE replacement markets where it will be needed 
more. Indeed, many refiners and marketers are today renegotiating 
existing contracts to effect a temporary re-allocation of product and 
assure a smooth transition in new market areas.
    As a result, virtually every refiner and gasoline analyst now 
acknowledges there will be sufficient ethanol supplies to meet the 
demand created by MTBE replacement. Consider the following statements:
     ``The United States will have enough ethanol to blend into 
gasoline during the current spike in demand as companies transition 
away from the oxygenate MTBE.'' Valero Energy CEO William Klesse.
     ``We have enough ethanol to replace MTBE when the new 
ethanol mandate takes effect in May.'' ExxonMobil CEO Rex Tillerson.

 THE TRANSPORTATION, DISTRIBUTION AND BLENDING INFRASTRUCTURE WILL BE 
                                 READY

    The ethanol industry is working diligently with our refiner 
customers, gasoline marketers, terminal operators and the fuel 
distribution network to assure a successful transition from MTBE to 
ethanol in these areas. Over the past several years, the ethanol 
industry has worked to expand a ``Virtual Pipeline'' through aggressive 
use of the rail system, barge and truck traffic. As a result, we can 
move product quickly to those areas where it is needed. Many ethanol 
plants have the capability to load unit trains of ethanol for shipment 
to ethanol terminals in key markets. We are also working closely with 
terminal operators and refiners to build ethanol storage facilities and 
blending equipment.
    Great credit must be given to the petroleum industry for the effort 
that is being made to assure success. Examples of some of the 
investments being made to accommodate the switch from MTBE to ethanol 
in key markets include the following:
     Sewaren, NJ is expected to be the primary gathering point 
for ethanol for East Coast markets in 2006 because it has both unit 
rail car capacity and marine access. Ethanol will be trucked to serve 
New York and New Jersey, and product will flow out by barge to 
Providence, Boston and Baltimore.
     Unit Train unloading facilities are either being built or 
planned for Providence, RI, Linden, NJ, Baltimore, MD, and Dallas, TX. 
Already, a unit train breakout facility is in operation in Albany, NY.
     Barge receiving capability is either in place or being 
built in Philadelphia, Baltimore and Houston.
     Transloading (rail to truck) capability is being developed 
as a transitional step for Richmond, Washington and Dallas. More 
permanent rail terminals are being developed for these areas.
    There is no question that the dramatically accelerated removal of 
MTBE has challenged the marketplace. But the ethanol and petroleum 
industries have done this successfully before in New York, California 
and Connecticut. We know we can do it again. As one industry analyst 
observed recently, ``The very fact that these companies are on the 
record as discontinuing MTBE and replacing it with ethanol tells us one 
very important fact--they are prepared.''\6\
---------------------------------------------------------------------------
    \6\ The Ethanol Monitor, published by Oil Intelligence Inc., 
Oceanport, NJ, Volume 2, No. 11, March 27, 2006.
---------------------------------------------------------------------------
                               CONCLUSION

    In his State of the Union Address, President Bush acknowledged the 
Nation ``is addicted to oil'' and pledged to greatly reduce our oil 
imports by increasing the production and use of domestic renewable 
fuels such as ethanol and biodiesel. The Energy Policy Act of 2005 
clearly put this Nation on a new path toward greater energy diversity 
and national security through the RFS. The unprecedented transition 
from MTBE to ethanol may present short-term challenges that industry is 
working cooperatively and diligently to overcome, but it also presents 
a long-term benefit for the Nation, by moving us one step closer to 
President Bush's vision of a more energy secure America. Thank you.

                               __________
  Responses by Bob Dinneen to Additional Questions from Senator Inhofe

    Question 1. Mr. Dinneen the primary way to reduce ethanol prices 
would be to increase supply, and one suggestion has been made that 
ethanol prices will fall if the import duty on ethanol is suspended 
temporarily. I am not talking about repealing it entirely--your members 
clearly plan to have additional plants on line by next year, according 
to the facts, domestic supplies of ethanol will be short. Do you agree 
that suspending the duty will cause ethanol prices to drop?
    Response. Mr. Chairman. The recent voluntary shift away from methyl 
tertiary butyl ether (MTBE) to ethanol undertaken by U.S. gasoline 
refiners has put increased focus on America's ethanol and gasoline 
supplies. Some have suggested that the secondary tariff on imported 
ethanol should be removed, as least temporarily, to augment domestic 
supplies. It is claimed this would lower prices at the pump. This claim 
is flawed on a number of counts.
    First, Ethanol supplies are sufficient. The Energy Information 
Administration (EIA) estimates that 130,000 barrels per day (b/d) of 
ethanol will be needed to replace the volume of MTBE refiners have 
chosen to remove from the gasoline pool. The most recent EIA report 
shows that U.S. ethanol production has soared to 302,000 b/d in 
February, clearly enough ethanol to meet the new MTBE replacement 
demand while continuing to supply existing markets. With 32 new ethanol 
biorefineries under construction, ethanol production capacity will only 
continue to increase.
    In addition, EIA data shows a large increase in ethanol stocks. 
Because gasoline marketers and ethanol producers have been building 
stocks over the past several months in anticipation of the transition 
from MTBE, there is now nearly 29 days of supply in working inventory. 
Additional data has shown that imports are rising also, demonstrating 
the existing tariff structure is not a barrier to entry. Indeed, more 
than 50 million gallons of ethanol have been imported this year. 
Moreover, some 40 million gallons of the total has been imported duty 
free through the Caribbean Basin Initiative (CBI) as of May 1, 2006, 
with much of that being Brazilian in origin. All of these numbers 
indicate that ethanol supplies are sufficient to meet the new demand.
    Second, repealing the tariff won't lower gasoline prices. Gasoline 
prices will not be affected by removing the secondary tariff on 
imported ethanol. Imported ethanol represents just a fraction of the 
ethanol used to replace MTBE, and ethanol itself represents just 3 
percent of U.S. motor fuel supplies. The factors truly driving the 
price of gasoline higher have nothing to do with ethanol supplies. 
Record crude oil prices, tight refining capacity, lower gasoline 
production, lower gasoline imports and limited expansion of domestic 
refining expansion all play a much greater role than the supply of 
ethanol in today's higher gasoline prices.
    Furthermore, imported ethanol arrives in the United States at the 
same market price as domestic ethanol. Ethanol from Brazil is in short 
supply and ethanol marketers from Brazil do not discount the price of 
ethanol that is shipped to the United States.
    Third, removing the tariff means American taxpayers would be 
subsidizing Brazilian ethanol production. Removing the 54 cent 
secondary tariff would in essence be asking American taxpayers to 
further subsidize already heavily subsidized ethanol and sugarcane 
production in countries like Brazil. U.S. gasoline refiners receive a 
51 cent tax incentive for every gallon of ethanol they blend into 
gasoline, regardless of the ethanol's origin. So, imported ethanol from 
Brazil, for instance, qualifies for the tax incentive. Brazil has built 
its ethanol industry through 35 years of tax incentives, production 
subsidies, mandates, export enhancement, infrastructure development, 
debt forgiveness and currency devaluation. Brazil does not need U.S. 
tax dollars to compete effectively, as evidenced by the fact 135 
million gallons were imported last year and those volumes are 
increasing.

    Question 2. Mr. Dinneen, the ethanol industry existed along with 
MTBE. In order to help renewable fuels develop, ethanol benefited from 
State subsidies, Federal tax credits, State mandates, and protectionist 
Federal tariffs. As you pointed out in the RFA's conference, ``ethanol 
has arrived'' with the passage of the 7.5 billion gallon mandate. Since 
ethanol has arrived, isn't it time to repeal government sanctioned 
market interference and really let ethanol grow in a transparent and 
free marketplace?
    Response. Ethanol has arrived, because under the Renewable Fuels 
Standard (RFS), ethanol and biodiesel are now an official component of 
the transportation fuels market program, albeit only 3 percent. Today, 
only 4.8 billion gallons of ethanol and biodiesel are blended into a 
140 billion gallon gasoline market and a 45 billion gallon diesel 
market.
    The energy sector worldwide is heavily subsidized, including oil, 
natural gas, coal, wind, nuclear, hydrogen and biofuels. The current 
incentives for biofuels are necessary to continue to grow the industry.
    According to The National Defense Council Foundation, which 
completed a comprehensive analysis of the external costs of imported 
oil in a report issued in 2003 entitled, ``America's Achilles Heel: The 
Hidden Costs of Imported Oil.'' The study analyzed three basic 
categories: Direct and Indirect economic costs, Oil Supply Disruption 
Impacts and Military Expenditures. Taken together, these costs totaled 
$304.9 billion annually, the equivalent of adding $3.68 to the price of 
a gallon of gasoline imported from the Persian Gulf. In 2006 numbers 
the annual cost is $825.1 billion.
    In 2000, the Government Accounting Office analyzed specific 
incentives for the petroleum sector and concluded that in the last 25 
years, well over $150 billion of annual revenue to the United States 
Treasury had been lost due to Federal tax incentives. Finally, 
according the Joint Committee on Taxation, the petroleum sector also 
received well over $12 billion of additional tax benefits, under the 
Energy Policy Act of 2005 (EPAct).
    By comparison, the ethanol industry has gradually built a program 
that has benefited from government programs while at the same time 
providing a great deal of benefit to the both the Government and 
Nation. As I stated in my testimony, in 2005, the 4 billion gallons of 
ethanol produced and sold last year, contributed significantly to the 
Nation's economic, environmental and energy security. According to an 
analysis completed for the RFA, the 4 billion gallons of ethanol 
produced in 2005 resulted in the following impacts:
     Reduced oil imports by 170 million barrels of oil, valued 
at $8.7 Billion.
     Added $32 Billion to gross output;
     Created 153,725 jobs in all sectors of the economy;
     Increased economic activity and new jobs from ethanol 
increased household income by $5.7 Billion, money that flows directly 
into consumers' pockets; and,
     Contributed $1.9 Billion of tax revenue for the Federal 
Government and $1.6 Billion for State and Local governments.
    Furthermore, according the U.S. Department of Agriculture in 2005, 
the ethanol program reduced Federal farm program payments by nearly $5 
billion.
    Indeed, the targeted investment by the Federal Government in 
ethanol, has increased tax revenue and decreased Federal spending, 
while at the same time creating billions of dollars of private 
investment for new infrastructure across the United States, adding jobs 
to the economy and decreasing the trade imbalance.
    At this point, it is necessary to continue the ethanol program to 
grow the marketplace to its full potential which includes the 
realization of cellulosic ethanol. Through the new research and 
development programs created in EPAct, the industry is on track to 
begin construction of new ethanol plants using feedstocks from 
cellulosic sources by 2013. Changes to the current program will hinder 
that process significantly.

    Question 3. Mr. Dinneen in light of your support for the RFS, would 
you agree that the recent flurry of activity to adopt State ethanol and 
bio-diesel mandates actually undermines the RFS and its flexibility 
provisions? As EIA noted in its report, Minnesota's ethanol mandate 
actually harms the ability of ethanol to replace MTBE in many markets 
by inflexibly requiring minimum ethanol content in every gallon of 
gasoline sold in the State. If these State mandates expand, will they 
not continue to act as obstacles to the national renewable fuels market 
envisioned in EPAct?
    Response. I understand that some are concerned about the 
proliferation of State biofuels programs because they believe these 
programs may undermine the flexibility intrinsic to the national 
renewable fuels standard (RFS) adopted as part of last year's Energy 
Policy Act (EPAct). I am sympathetic to that concern. The Renewable 
Fuels Association worked in good faith with the American Petroleum 
Institute and others to pass a national RFS that gave refiners maximum 
flexibility to blend ethanol and other biofuels wherever the market 
place determined. To an extent, State biofuels mandates do chip away at 
that flexibility, which States should appropriately weigh when 
contemplating such programs.
    Even from an RFS implementation standpoint, however, the concerns 
about State biofuels programs might be overstated. First, only two 
State programs are currently in place (Minnesota and Hawaii); and those 
areas where such programs have been adopted or are proposed are largely 
in areas where refiners would be likely to utilize biofuels to meet RFS 
requirements in any case, i.e., in States with significant existing or 
potential ethanol production capacity. Indeed, several of the proposed 
State programs would not become effective until there is meaningful 
biofuels production in the State.
    Second, not all of the biofuels programs rely upon mandates. Iowa 
just enacted a very aggressive 25 percent oil displacement program by 
2019 that relies entirely upon tax incentives to motivate gasoline 
marketers to install biofuels infrastructure allowing for much greater 
ethanol, E-85 and biodiesel use. The Iowa legislation had support from 
the local petroleum industry and it is likely to become a model for 
other States to follow.
    Mr. Chairman. I appreciated the opportunity of testifying before 
your committee and to provide you with additional feedback on the 
additional questions. I look forward to working with you and your staff 
on the ongoing development of renewable fuels, if you have additional 
comments or questions, please contact me.

                               __________
               Statement of American Petroleum Institute

    API is a national trade association representing more than 400 
companies involved in all aspects of the oil and natural gas industry, 
including exploration and production, refining, marketing and 
transportation, as well as the service companies that support our 
industry. As a trade association, representing all members, API does 
not collect information about company-specific plans.
    We welcome this opportunity to provide our views on the fuels 
transitions and related issues involving the fuel needs of U.S. 
consumers.
    The Energy Policy Act of 2005 eliminates the reformulated gasoline 
(RFG) oxygen requirement in May, and also sets a new renewable fuel 
standard, requiring that the industry use 4 billion gallons of 
renewable fuel in 2006--increasing to 7.5 billion gallons in 2012 and 
increased amounts thereafter. In addition, ultra-low sulfur diesel will 
be introduced starting June 1. Eliminating the RFG oxygen requirement 
is a change in the law that the industry has long supported as one that 
will add to refiners' flexibility to produce gasoline and allow those 
who so choose to eliminate the use of MTBE in gasoline. Similarly, the 
introduction of ultra-low sulfur diesel, despite the large costs 
incurred by the nation's refiners, will have major benefits and is 
strongly supported by the U.S. oil and natural gas industry. However, 
both of these are major fuels changes and present significant 
challenges to fuel providers. Despite this, we know that oil companies 
are dedicated to ensuring that these transitions go smoothly as 
possible.
    API believes that, to be successful, fuel transitions should be 
based on the free and unfettered functioning of fuel markets. Market 
mechanisms are most effective in providing companies with appropriate 
indicators and in ensuring a rapid response to changes in market 
conditions or transitional problems that may occur. Changes to these 
market indicators by government--such as calling for waivers from clean 
fuel regulations in light of concerns about possible volatility in fuel 
prices--will only cause market uncertainty and send confusing 
information to markets in transition. There are already mechanisms in 
place to deal with true market supply disruptions, and we urge the 
Government to use appropriate caution in exercising this existing 
authority.
    There is very little literature available about a number of the 
impacts. The Blue Ribbon Panel on Oxygenates in Gasoline noted in its 
report dated September 15, 1999, that it is important to explore ``the 
potential for adverse effects . . . before widespread introduction of 
any new, broadly-used product.'' Further, the panel recommended that a 
full assessment be conducted ``of any major new additive to gasoline 
prior to its introduction.''
    Operating in a free marketplace, the U.S. oil and natural gas 
industry has the technical expertise and decades of experience in 
successfully handling fuel specification transitions. Our companies 
have repeatedly demonstrated their capability for making these 
transitions on the national level in dealing with RFG, low-sulfur 
gasoline and diesel fuel and in meeting so-called ``boutique fuels'' 
requirements at the State level. It has also successfully managed 
earlier phase-outs of MTBE from the gasoline supply, including those in 
California, New York, and Connecticut where, despite initial concerns, 
transitions to ethanol fuels went smoothly. Our companies have not only 
committed their expertise, they are also making the substantial 
investments required to complete these transitions. And we note the 
ethanol industry's statements that it is making a major effort to 
supply ethanol, as it did during the smooth transitions in California, 
New York and Connecticut.
    Since the Energy Policy Act of 2005 did not provide for a national, 
ordered phase-out of MTBE, individual companies are making individual 
decisions on how best to deal with the end of the RFG oxygen mandate 
and the use of oxygenates. The elimination of the RFG oxygen mandate, 
the State MTBE bans (26 so far), and announcements by refiners, 
pipelines and marketers indicate a likely rapid reduction in the use of 
MTBE. Companies are taking into account various factors such as 
customer preference, State laws, pipeline decisions, distribution 
system capabilities, and information from government agencies such as 
the Energy Information Administration (EIA).
    Recent data indicate that there is about 158,000 b/d of MTBE being 
used today. If ethanol were substituted for this amount, we would need 
roughly 225,000 b/d of additional ethanol. However, some of the MTBE 
loss could and likely will be made up through the use of different 
compounds and increased gasoline production. Moreover, the fuels market 
is worldwide, so we assume that increased reliance on imports is an 
option that some suppliers are also considering. We should keep in mind 
that, while there is a substantial volume of MTBE, it is a small 
component of the total reformulated gasoline market and an even smaller 
portion of the world fuels market.
    U.S. oil and natural gas companies have the expertise, experience, 
and resources required to make the fuel transitions that are required--
provided fuel markets are allowed to function freely. We think a 
valuable role for the Government is to help create as clear and 
transparent a picture as possible of what is occurring in the 
marketplace during this summer's upcoming transitions. In this vein, we 
strongly support continued efforts by EIA to monitor the supply and 
demand dynamics of the market, and provide timely updates to their 
initial study. API and its members are happy to cooperate in any such 
effort. Clearly, the Nation needs to work together--industrial and 
retail consumers, energy companies and government--to address the 
energy challenges we all face.

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