    Gasoline Markets: Special Gasoline Blends Reduce Emissions and
    Improve Air Quality, but Complicate Supply and Contribute to
    Higher Prices (17-JUN-05, GAO-05-421).

    The Clean Air Act, as amended, requires some areas with
    especially poor air quality to use a "special gasoline blend"
    designed to reduce emissions of volatile organic compounds (VOC)
    and nitrogen oxides (NOx) and requiring the use of an oxygenate
    such as ethanol. In less severely polluted areas, the Act allows
    states, with EPA approval, to require the use of other special
    blends as part of their effort to meet air quality standards. GAO
    agreed to answer the following: (1) To what extent are special
    gasoline blends used in the United States and how, if at all, is
    this use expected to change in the future? (2) What effect has
    the use of these blends had on reducing vehicle emissions and
    improving overall air quality? (3) What is the effect of these
    blends on the gasoline supply? (4) How do these blends affect
    gasoline prices?
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-421
        ACCNO:   A26939
      TITLE:     Gasoline Markets: Special Gasoline Blends Reduce
    Emissions and Improve Air Quality, but Complicate Supply and
    Contribute to Higher Prices
         DATE:   06/17/2005
      SUBJECT:   Air pollution control
    	     Environmental monitoring
    	     Fuel prices
    	     Fuels
    	     Gasoline
    	     Motor vehicle pollution control
    	     Standards and standardization
    	     Environmental protection

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    GAO-05-421

                     United States Government Accountability Office

                         GAO Report to Congressional Requesters

    June 2005

    GASOLINE MARKETS

    Special Gasoline Blends Reduce Emissions and Improve Air Quality, but Complicate
                         Supply and Contribute to Higher Prices

                                           a

    GAO-05-421

    [IMG]

    June 2005

    GASOLINE MARKETS

    Special Gasoline Blends Reduce Emissions and Improve Air Quality, but Complicate
    Supply and Contribute to Higher Prices

      What GAO Found

    Although there is no consensus on the total number of gasoline blends used
    in the United States, GAO found 11 distinct special blends in use during
    the summer of 2004. Further, when different octane grades and other
    factors are considered, there were at least 45 different kinds of gasoline
    produced in the United States during all of 2004. The 11 special blends
    GAO found are often used in isolated pockets in metropolitan areas, while
    surrounding areas use conventional gasoline. The use of special blends may
    expand because a new federal standard for ozone may induce more states to
    apply to use them. To date, the Environmental Protection Agency (EPA) has
    generally approved such applications and does not have authority to deny
    an application to use a specific special blend as long as that blend meets
    criteria established in the Clean Air Act. EPA staff told us that there
    had been recent congressional debate regarding EPA's authority with regard
    to approving special gasoline blends but that the bills had not passed.

    EPA models show that use of special gasoline blends reduces vehicle
    emissions by varying degrees. California's special blend reduces emissions
    the most-VOCs by 25-29 percent, NOx by 6 percent compared with
    conventional gasoline, while also reducing emissions of toxic chemicals.
    In contrast, the most common special gasoline blend (used largely in the
    Gulf Coast region) reduces VOCs by 12-16 percent and NOx by less than 1
    percent compared with conventional gasoline. The extent of reductions
    remains uncertain, because they rely, at least in part, on data regarding
    how special blends affect emissions from older vehicles, and these
    estimates have not been comprehensively validated for newer vehicles and
    emissions controls. Regarding air quality, EPA and others have concluded
    that improvements are, in part, attributable to the use of special blends.

    The proliferation of special gasoline blends has put stress on the
    gasoline supply system and raised costs, affecting operations at
    refineries, pipelines, and storage terminals. Once produced, different
    blends must be kept separate throughout shipping and delivery, reducing
    the capacity of pipelines and storage terminal facilities, which were
    originally designed to handle fewer products. This reduces efficiency and
    raises costs. In the past, local supply disruptions could be addressed
    quickly by bringing fuel from nearby locations; now however, because the
    use of these fuels are isolated, additional supplies of special blends may
    be hundreds of miles away.

    GAO evaluated pretax wholesale gasoline price data for 100 cities and
    generally observed that the highest prices tended to be found in cities
    that use a special gasoline blend that is not widely available in the
    region, or that is significantly more costly to make than other blends.
    There is general consensus that increased complexity, and higher costs
    associated with supplying special blends, contribute to higher gasoline
    prices either because of more frequent or severe supply disruptions or
    because higher costs are likely passed on at least in part to consumers.

    United States Government Accountability Office

    Contents

      Letter

    Results in Brief
    Background
    Special Gasoline Blends Are Widely Used and Use May Increase in

    the Future Special Gasoline Blends Reduce Emissions and Contribute to
    Improved Air Quality Use of Special Gasoline Blends Has Made It More
    Complicated and Costly to Supply Gasoline Areas That Use Uncommon Special
    Gasoline Blends Tend to Have

    Higher and More Volatile Gasoline Prices Conclusions Recommendation for
    Executive Action Agency Comments and Our Evaluation

    1 4 8

    15

    23

    28

    34 38 40 40

    Appendixes
                   Appendix I:            Scope and Methodology                42
                  Appendix II:    GAO Contact and Staff Acknowledgments        46
                                 Table 1: Projected Emissions Reductions
         Table                           Resulting from Low-RVP,
                                       RFG, and CBG Gasoline Blends
                                  Figure 1: Gasoline Supply and Demand,
        Figures                    September 2004 Figure 2: Map of Key
                                      Pipelines and Refineries, 2004        13 14
                                 Figure 3: Special Gasoline Blends-Summer      18
                                                   2004
                                 Figure 4: Market Shares for the Various
                                         Gasoline Blends Used in
                                                   2001                        19
                                  Figure 5: Map of Areas Not Meeting New
                                            8-Hour and Former
                                       1-Hour Ozone Standard, 2004             21

    Contents

    Abbreviations

    AQIRP Air Quality Improvement Research Program
    CBG Cleaner Burning Gasoline
    CO carbon monoxide
    DOE Department of Energy
    EIA Energy Information Administration
    EPA Environmental Protection Agency
    FIP federal implementation plan
    MTBE methyl tertiary-butyl ether
    NAAQS National Ambient Air Quality Standards
    NOx nitrogen oxides
    OPIS Oil Price Information Service
    RFG reformulated gasoline
    RVP reid vapor pressure
    SIP state implementation plan
    VOCs volatile organic compounds

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States Government Accountability Office Washington, D.C. 20548

    June 17, 2005

    The Honorable James Jeffords
    Ranking Minority Member
    Committee on Environment and Public Works
    United States Senate

    The Honorable Barbara Boxer
    United States Senate

    In 2004, consumers in the United States used approximately 140 billion
    gallons of gasoline, an amount equivalent to approximately 10 percent of
    the world's total consumption of petroleum products. Despite significant
    improvements in vehicle emissions and fuel efficiency technology, gasoline
    use remains a major source of harmful pollutants such as volatile organic
    compounds (VOC) and nitrogen oxides (NOx), both of which can
    contribute to formation of ground-level ozone-a pollutant linked to a
    variety of health problems including aggravated asthma, reduced lung
    capacity, and increased susceptibility to respiratory illnesses like
    pneumonia and bronchitis.1 Vehicle emissions also contribute to smog and
    acid rain, which can reduce visibility and damage property. The Clean Air
    Act (the Act), as amended, provides a federal and state framework to
    address air pollution and its health consequences. Among other things, the
    Clean Air Act has required improvements in emissions controls on
    automobiles, power plants, and other significant contributors to
    pollution.
    Under the Act, the federal government establishes air quality standards
    for
    several pollutants, including ozone and carbon monoxide. States that do
    not meet these standards must develop plans to improve air quality and
    submit those plans to the Environmental Protection Agency (EPA) for
    approval.

    In 1990, the Clean Air Act was amended to require some areas with poor air
    quality to use "special gasoline blends"-blends of gasoline, designed to
    be
    cleaner burning. Specifically, the Act requires areas with the worst air
    quality to use "reformulated" gasoline, a special blend of gasoline
    designed
    to reduce emissions of VOCs and NOx. Reformulated gasoline also

    1Research by EPA and others has shown that high levels of air pollution
    are correlated with these and other health effects. However, there is
    insufficient research linking health effects to the use of specific
    special gasoline blends and, as a result, this report does not address the
    health effects of special gasoline blends.

    includes additives such as ethanol, which reduce emissions of carbon
    monoxide in some engines-these additives are called "oxygenates" because
    they increase the oxygen content of the fuel.2 In less severely polluted
    areas, the Act gives states the option of using reformulated gasoline or
    seeking EPA approval to require the use of other special gasoline blends
    as part of overall efforts to meet federal air quality standards. States
    applying for EPA approval to require the use of a special gasoline blend
    must demonstrate that even with the use of all reasonable and practicable
    options, additional emission reductions are needed to achieve federal air
    quality standards. States also must demonstrate that no other measures
    that would bring about timely attainment exist or that existing measures,
    such as state inspection and maintenance programs, are unreasonable or
    impracticable. Once EPA has determined that these criteria are met and has
    approved a state's application to use a special gasoline blend in a given
    location, that fuel becomes a requirement.

    Gasoline is a mixture of multiple components. With the exception of
    ethanol and some other additives, these components are produced from crude
    oil through a set of processes collectively known as refining. The types
    and amounts of components in gasoline can be adjusted for a number of
    reasons, such as improving engine performance or reducing emissions. As a
    general matter, special gasoline blends differ from conventional gasoline
    in at least one of three ways: a reduced tendency to evaporate, the
    addition of an oxygenate, or reduced levels of one or more chemicals-such
    as sulfur. In this report, "conventional gasoline" refers to the basic
    gasoline blend used everywhere that a special gasoline blend (e.g.,
    reformulated gasoline, state special blends, etc.) is not.

    Whatever the blend, gasoline used in the United States is provided by some
    combination of U.S. refineries and/or imports of gasoline or components.
    Most gasoline produced in the United States is refined in one of four
    major refining areas located along the East Coast, West Coast, Gulf Coast,
    and Midwest. From a refining area or coastal terminal, gasoline is shipped
    through a network of pipelines, water barges, or trucks to large storage
    terminals, which may have tanks capable of holding hundreds of millions of

    2There are two oxygenates commonly in use. Methyl tertiary-butyl ether
    (MTBE) is derived from crude oil and was the most common oxygenate
    additive until recent years, when it was found to contaminate ground water
    supplies, and has since been banned in a number of states. In its place,
    ethanol has increasingly been used as an oxygenate.

    gallons of gasoline. From there, it is distributed to retail outlets such
    as local gasoline stations by large over-the-road tanker trucks.

    Over the past several years, gasoline prices in parts of the United States
    have on several occasions experienced sudden, significant price increases.
    Some areas with unique gasoline blends, such as California and parts of
    the Midwest, have been especially hard hit. Some experts have attributed
    these price increases, in part, to special gasoline blends and have
    suggested that more uniform national gasoline standards could lead to
    lower or more stable gasoline prices while meeting air quality goals.
    Others, including some state governments, believe that special gasoline
    blends are an important tool that has enabled them to meet federal air
    quality standards at lower cost than other alternatives.

    In this context, we agreed to answer the following questions:

    1.	To what extent are special gasoline blends used in the United States
    and how, if at all, is this use expected to change in the future?

    2.	What have EPA and others determined regarding the role of special
    gasoline blends in reducing vehicle emissions and improving overall air
    quality?

    3.	What is the effect of these blends on the gasoline supply in the United
    States?

    4. How do these blends affect gasoline prices?

    In answering these questions, we reviewed federal and state analyses of
    gasoline markets and the environmental effects of various special gasoline
    blends; examined the literature on gasoline supplies and prices; and
    analyzed wholesale gasoline price data for 100 cities and the national
    average. We interviewed a wide range of government officials and industry
    experts including federal officials at the EPA and the Department of
    Energy's Energy Information Administration; staff at state environmental
    offices; academic and industry experts; petroleum industry officials from
    companies involved in refining, terminal operations, and pipeline
    operations, as well as from large oil companies; and representatives of
    trade associations. We also conducted detailed examinations of markets in
    California, Louisiana, Texas, and New Jersey-states with large refining
    sectors and experience with producing and using special gasoline blends.
    Because many factors may affect gasoline prices at various times, only

    some of which are readily and consistently observable through available
    data, we agreed to report on prices and volatility but not to provide a
    definitive causal link between specific gasoline blends and prices. We
    conducted our work from June 2004 to May 2005 in accordance with generally
    accepted government auditing standards. For a more detailed discussion of
    the scope and methodology of our reiew, see appendix I.

    Results in Brief	Although there is no consensus on the total number of
    special gasoline blends used in the United States, we found that, in
    addition to conventional gasoline, at least 11 fundamentally distinct
    special gasoline blends were used during the summer of 2004 in parts of 34
    states and covering approximately one-sixth of all the counties in the
    United States. In the summer of 2001-the last year for which we had
    data-special gasoline blends accounted for slightly more than half of the
    total gasoline volume consumed in the United States, with the rest
    accounted for by conventional gasoline. When different octane grades and
    other factors are considered, there were at least 45 different blends of
    gasoline produced and handled by pipelines in the United States during the
    entirety of 2004. Special gasoline blends are often used in isolated
    pockets because these blends have generally been adopted in large
    metropolitan areas in response to severe air quality problems, while
    surrounding areas have generally continued to use conventional gasoline.
    Further, EPA's approvals of individual states' applications to adopt
    special gasoline blends have been made independently over time without
    consideration of the other fuels already in use in the region. For
    example, East St. Louis, Illinois, and St. Louis, Missouri (two cities in
    the same metropolitan area, which straddles two states and two EPA
    regions) separately applied to EPA and received approval for different
    gasoline blends. The use of special gasoline blends may continue to expand
    given that EPA recently finalized a more stringent federal standard for
    ozone and, as a result, another 138 counties across the United States are
    now out of compliance with the national air quality standard. To meet the
    new standard, it is likely that many more locations will apply to use
    special gasoline blends. To date, EPA has generally approved such
    applications and does not have authority to deny an application to use a
    specific special gasoline blend as long as that blend meets the
    environmental criteria established in the 1990 amendments to the Clean Air
    Act. EPA staff told us that there had been congressional debate regarding
    EPA's authority during consideration of recent energy legislation, but
    that its authority had not changed as of May 2005.

    Use of these special gasoline blends reduces vehicle emissions by varying
    degrees. California's special gasoline blend-the fuel formulated to reduce
    emissions the most-offers the greatest reductions. Specifically, EPA
    models how different gasoline blends affect emissions and estimates that
    California's blend reduces VOCs by 25-29 percent and NOx by about 6
    percent compared with conventional gasoline, while also reducing emissions
    of toxic chemicals and other substances. In contrast, the most commonly
    used special gasoline blend-one of the least stringent blends and used
    primarily in the Gulf Coast region-is estimated to reduce VOCs by about
    12-16 percent and NOx by less than 1 percent compared with conventional
    gasoline. The extent of reductions remains unclear, however, because these
    estimates are based, in part, on data regarding how special gasoline
    blends affect emissions from older vehicles, and these data have not been
    comprehensively validated through testing on current vehicle types with
    newer emissions controls. In the case of oxygenates, there appears to be
    agreement that the addition of oxygenates reduces emissions from older
    vehicles. However, improvements in automobile technology in newer vehicles
    now automatically reduce emissions of carbon monoxide and other pollutants
    and, for these vehicles, may have negated many of the benefits of adding
    oxygenates to gasoline. Some studies have also found that use of ethanol
    can increase emissions of pollutants that can increase ozone levels.
    Regarding air quality, EPA and other experts have concluded that
    improvements in air quality seen in some parts of the country are at least
    partly attributable to the use of special gasoline blends. However,
    studies on the impact of individual emissions reduction efforts-such as
    special gasoline blends-are limited and incomplete, in part because of
    difficulty isolating the effect of gasoline blends from other factors that
    affect air quality such as weather and emissions from other sources.

    The proliferation of special gasoline blends has made it more complicated
    to supply gasoline and has raised costs, significantly affecting
    operations at refineries, pipelines, and storage terminals. At refineries,
    making these blends can require additional investment such as installing
    new processing equipment and the use of larger amounts of valuable
    components in the blending process-making it more costly to produce
    special gasoline blends. Once produced, different blends of gasoline must
    be kept separate throughout the shipping and delivery process, and the
    increased number of gasoline blends has reduced the capacity of pipelines
    and storage terminal facilities, which were originally designed to handle
    fewer products. For example, several pipeline companies reported that the
    capacity of their systems has been reduced because they have had to slow
    the speed of products through the pipelines in order to off-load special
    blends at

    specific locations, which raises the average cost of shipping gasoline.
    Similarly, storage terminals have not been able to fully utilize the
    volume of their storage tanks because the tanks were designed to handle
    fewer types of fuel and are often larger in size and fewer in number than
    necessary for handling smaller batches of special gasoline blends.
    Further, the proliferation of special blends has, according to several
    buyers from these wholesale markets, limited the number of suppliers of
    some of these fuels, posing challenges when traditional supplies are
    disrupted, such as during a refinery outage or pipeline delay. In the
    past, local supply disruptions could be addressed relatively quickly by
    bringing fuel from nearby locations; now, however, additional supplies of
    special gasoline blends may be hundreds of miles away.

    We evaluated pretax, wholesale gasoline price data for 100 cities and
    generally observed that the highest prices tended to be found in cities
    that use a special gasoline blend that is not widely available in the
    region or that costs significantly more to make than other blends. We also
    found high prices in cities that are far away from major refining areas or
    other sources of gasoline. For example, of the 100 cities we examined,
    most of the 20 cities with the highest prices used special blends of
    gasoline. The other cities with the highest prices used conventional
    gasoline year-round, but these are long distances from major refining
    centers or are located on or near a single smaller pipeline. For the
    period, December 2000 through October 2004, average prices in the 20
    highest-price cities were between 14 and 41 cents per gallon higher than
    in the city with the lowest price. Further, 5 of the 10 cities with the
    highest average prices were in California, which uses a unique gasoline
    that only a few refiners outside of the state make and is expensive to
    refine. In contrast, the lowest prices were typically found in cities that
    are close to major refining centers or that used gasoline widely available
    in their region. For example, among the 20 cities with the lowest prices,
    8 used conventional gasoline-the most widely available gasoline blend-and
    9 used 7.8 reid vapor pressure (RVP) gasoline-the most widely used special
    blend, largely used in areas close to the Gulf Coast refining center. The
    other three cities with the lowest prices-Houston, Birmingham, and
    Atlanta-used less common special blends but are all close to the largest
    refining area, the Gulf Coast and, therefore, have many more potential
    supply options than more isolated cities do. In addition, we found that
    prices tended to be more volatile in cities that used special gasoline
    blends. Specifically, 18 of the 20 cities with the most volatile prices
    used special blends of gasoline, while 17 of 20 cities with the lowest
    volatility used either conventional or 7.8 RVP gasoline.

    While prices for special blends tend to be higher than for conventional
    gasoline, available data did not allow us to attempt to isolate the
    effects of specific special gasoline blends on gasoline prices or to
    definitively establish a causal link between specific special blends and
    price volatility. Specifically, we did not have sufficient data to control
    for all other potential contributing factors-such as the distance from
    cities to the sources of gasoline supply, or specific features of these
    cities that might influence prices regardless of the blend of gasoline
    used. However, there is a general consensus among the studies we reviewed
    and the experts we spoke with that the increased complexity, and higher
    refining, transportation, and storage costs associated with supplying
    special gasoline blends, have contributed to higher gasoline prices
    overall and for specific special blends either because of more frequent or
    severe supply disruptions or because higher costs are likely passed on at
    least in part to consumers. Moreover, our findings are generally
    consistent with results of government, academic, and private studies,
    which found that the gasoline supply system is increasingly stressed and
    also found isolated pockets of higher and/or more volatile prices in
    cities that use special gasoline blends that are not widely used.

    To provide better information about the emissions and air quality impacts
    of using special gasoline blends, we recommend that the EPA Administrator
    direct the agency to comprehensively study how special gasoline blends
    affect the emissions from the vehicles that comprise today's fleet and use
    the results of this work to make appropriate modifications to the models
    that states use to estimate the emissions and air quality benefits of
    using them. In order to identify how to balance the environmental benefits
    of using special gasoline blends with the impacts that the use of these
    fuels have on the supply infrastructure and prices, we are recommending
    that EPA work with the states, the Department of Energy, and other
    stakeholders to develop a plan to balance these factors. If warranted by
    the results of this study, we are further recommending that EPA work with
    the Department of Energy and others to identify what statutory and other
    changes are required to achieve this balance and report these to Congress
    and to request that Congress provide the needed authority to the
    appropriate federal agency or agencies.

    We provided a copy of our draft report to EPA for comment. The agency did
    not comment on our findings or recommendations but did provide technical
    comments that we have adopted, as appropriate.

    Background	The Clean Air Act, as amended, provides the basic statutory
    framework for the role of the federal government and the states in
    managing air quality in the United States. Among other things, the Act
    authorizes EPA to set and enforce standards, referred to as National
    Ambient Air Quality Standards (NAAQS), for pollutants. EPA has
    subsequently set standards for six pollutants-ozone, particulate matter,
    carbon monoxide, nitrogen dioxide, sulfur dioxide, and lead. While carbon
    monoxide is directly emitted when various fuels are burned, ground-level
    ozone is formed when VOCs and NOx mix in the presence of heat and
    sunlight. As a result, emissions of VOCs and NOx are considered by EPA and
    the states in their efforts to reduce concentrations of ground-level
    ozone. Because heat and sunlight act as catalysts in the formation of
    ground-level ozone, high ozone levels are most prevalent in spring and
    summer.

    EPA sets and enforces the NAAQS to, among other things, reduce the
    negative health effects of air pollution. Each of the six pollutants
    covered by the NAAQS is known to cause a variety of adverse health and
    other consequences. For example, at certain concentrations ground-level
    ozone and carbon monoxide can, among other things, cause lung damage, eye
    irritation, asthma attacks, chest pain, nausea, headaches, and premature
    death. To enforce the standards, EPA evaluates monitoring data on air
    quality to determine whether local air quality meets federal
    standards-designating areas as in either attainment (if they meet the
    federal standards) or nonattainment (if they do not meet the federal
    standards) with each of the NAAQS.3

    Under the Act, states that contain areas in nonattainment with the NAAQS
    are required to identify how they will reduce emissions and improve air
    quality to meet them. For each pollutant, states are required to prepare a
    state implementation plan (SIP) and have the plan approved by EPA.4 States
    have choices in determining how to reduce emissions and meet air quality
    standards, determining, among other things, how much to reduce emissions
    from mobile sources such as automobiles compared with other sources of
    similar emissions such as power plants. Because use of gasoline

    3In some cases, such as when air quality data are insufficient, EPA may
    not be able to designate an area as being in attainment or nonattainment.
    In these cases, EPA designates the area as "unclassifiable."

    4In the event that a state does not develop an EPA-approved SIP, EPA may
    develop a federal implementation plan (FIP).

    in automobiles emits several chemicals, including carbon monoxide,
    nitrogen oxides, and VOCs, and because emissions from automobiles are
    often an important contributor to local air quality problems, the federal
    government and the states often focus on reducing automobile emissions.
    Whatever the planned reductions, states must identify an inventory of air
    emissions and demonstrate in their SIPs how they will achieve attainment
    in a specific time frame. States typically demonstrate this through
    modeling analysis that estimates how the various efforts in their SIPs
    will reduce emissions and improve air quality.

    The Act also provides authority to set standards and establish
    requirements for some programs specifically designed to reduce vehicle
    emissions. For example, using authority provided under the Act, EPA has
    required newer cars to meet more stringent emissions standards, and
    vehicle manufacturers have incorporated emissions-control devices such as
    catalytic converters and oxygen sensors to meet them. Further, the Act
    requires cars to have under-the-hood systems and dashboard warning lights
    that check whether emissions control devices are working properly. In
    addition, the Act requires that some areas-generally highly populated
    metropolitan areas-have programs for periodic inspection and maintenance
    of vehicles. These programs identify high-emitting vehicles, which
    sometimes have malfunctioning emissions control devices, and require
    vehicle owners to make repairs before the vehicles can be registered.

        Federal and State Actions Regulate Gasoline

    The Act gives the federal government, through the EPA, primary authority
    for regulating the environmental impacts of gasoline use.5 For example,
    the Act sets minimum national standards for conventional gasoline, as well
    as requiring that certain gasoline blends formulated to reduce emissions
    be used in some areas with especially poor air quality. Specifically, for
    certain areas with long-standing and especially poor air quality, the
    federal government requires the use of special reformulated gasoline,
    commonly referred to as RFG. The amendments also require other areas to
    use special

    5Before 1990, fuel requirements were much simpler, with only limits on
    volatility in the summer months to control ozone formation. The state of
    California chose to more stringently regulate gasoline formulations before
    the federal government. Because California regulated gasoline formulations
    prior to the specific authority provided to the EPA, California may
    continue to require more stringent fuel formulation requirements without
    EPA approval, but must at least meet (or exceed) the other federal
    requirements.

    gasoline blends designed to reduce summertime ozone pollution and
    wintertime carbon monoxide pollution.

    The Act allows states or regions not required to use RFG to seek EPA
    approval to require use of other special gasoline blends to aid in
    improving air quality, provided that they do not violate minimum federal
    standards. In 2001, EPA studied the proliferation of gasoline blends and
    reported that several states had chosen special blends other than RFG for
    one or more of three reasons: (1) the states were not eligible to require
    RFG because their air quality was not bad enough, (2) the states wanted to
    avoid the RFG requirement to use an oxygenate and its added cost, (3) fuel
    suppliers and states believed that the other special blend would be less
    costly than RFG while meeting their need to reduce emissions. States
    seeking to use a special gasoline blend must obtain formal approval from
    EPA, generally the regional office with authority to review their SIPs.
    Specifically, under the Clean Air Act, section 211(c)(4)(C), EPA may
    approve applications by states to use special gasoline blends if the
    states demonstrate that the fuel is needed to reach attainment with
    federal air quality standards.

    In guidance issued in August 1997-after several of the special gasoline
    blends were approved-EPA clarified that they can approve a state gasoline
    requirement only if "no other measures that would bring about timely
    attainment exist," or if other measures are "unreasonable or
    impracticable." The guidance requires that states do four things in their
    application for approval of a new or revised SIP: (1) quantify the
    estimated emissions reductions required to reach attainment with the
    federal NAAQS for ozone; (2) identify possible control measures that could
    be used in place of special gasoline blends and provide emissions
    reduction estimates for those measures; (3) explain why those measures are
    "unreasonable or impracticable"; and (4) show that, even with use of all
    "reasonable and practicable" measures, additional emissions reductions are
    needed. As is the case with other new or revised SIPs, these applications
    are open for public comment, and EPA must consider those comments before
    making a decision. Once approved, states' special gasoline blends become
    federally enforceable requirements.

    Under some circumstances, EPA may temporarily waive special gasoline blend
    requirements, referred to as granting enforcement discretion, if, for
    example, the required special gasoline blend is not available due to a
    supply disruption. Over the past several years, EPA has waived the
    requirement to use these special gasoline blends on several occasions when
    it determined that overall supplies might become tight. We found that

    EPA has granted enforcement discretion on at least 23 occasions, allowing
    gasoline that did not comply with local requirements to be sold there. The
    causes of these supply disruptions included the 2003 blackout in the
    Northeast, the series of hurricanes in Florida and the Gulf Coast in 2004,
    as well as refinery fires, pipeline breaks, and other infrastructure
    problems. Although there was one short waiver that applied nationwide
    following the terrorist attacks of September 11, 2001, several of the
    other waivers were provided to local areas with particularly stringent
    gasoline formulations including St. Louis, Chicago/Milwaukee, Atlanta, Las
    Vegas, and Phoenix when there were supply shortages in these areas.

        All Gasoline Is a Blended Mix of Components Derived Primarily from Crude Oil

    All gasoline is a blend of different components that are predominantly
    produced in refineries. The simplest refineries primarily separate the
    components already present in crude oil. More complex refineries also have
    the ability to chemically change less valuable components of crude oil
    into more valuable ones. Because of their ability to chemically alter
    components, complex refineries can increase the amount of gasoline yielded
    from a given amount of crude oil and reduce the amount of less valuable
    products. Although most refineries can process many types of crude oil,
    refineries are generally configured to run most efficiently when refining
    a specific type of crude oil into a specific group of products.

    Absent specific regulatory requirements, refiners blend several components
    derived from crude oil to produce a gasoline that achieves acceptable
    engine performance at the lowest cost. Two key aspects of gasoline affect
    engine performance:

    o 	Reid vapor pressure is a measure of gasoline's tendency to evaporate
    and also reflects the ease with which it ignites when the spark plug fires
    in a cold engine. To maintain engine performance, RVP must vary by season
    and region. Higher RVP is required in colder climates and seasons to allow
    an engine to start.

    o 	Octane number is a measurement of gasoline's tendency to ignite without
    a spark, commonly known as "knocking" in a running engine. Some
    high-performance and other vehicles require gasoline with a higher octane
    number. To satisfy these requirements and consumer demand, retailers in
    the United States typically sell three different octane grades of
    gasoline.

    Special gasoline blends developed to reduce pollution are generally
    adjusted in at least one of the following ways:

    o RVP is reduced during the summertime to reduce VOC emissions. Reducing
    the RVP of gasoline requires reducing the amount of very light compounds,
    such as butanes and pentanes, blended into the gasoline.

    o 	Toxics, their precursors, or other chemicals are limited so they are
    not released into the air when the gasoline is burned. Some of these, such
    as sulfur, naturally occur in crude oil while others, such as benzene,
    result from gasoline refining.

    o 	Oxygenates, chemical compounds containing oxygen to aide in combustion,
    are added to gasoline to improve environmental performance when the
    gasoline is burned, including reducing carbon monoxide (CO) emissions. The
    most commonly used oxygenates are MTBE and ethanol. Several states have
    banned MTBE as a result of concerns about groundwater pollution and have
    switched to using ethanol as an oxygenate where required.

        Gasoline Is Moved from Refineries to Consumers through a Complex, Shared
        Distribution System

    Gasoline is shipped from U.S. refineries to consumers by some combination
    of pipelines, water barges, rail, and trucks to retail gasoline stations.
    Most of the country's refining capacity is located in the Gulf Coast, West
    Coast, East Coast, or Midwest with only a small amount in the Rocky
    Mountain states. As shown in figure 1, the Gulf Coast region supplies
    gasoline to all the other regions-of these, the Midwest and the East Coast
    are the most dependent on gasoline from the Gulf Coast. The East and West
    Coast markets have also imported gasoline from other parts of the world
    such as Canada, Europe, and the Caribbean.

    gasoline before it is distributed, generally by trucks, to retail gasoline
    stations. In all of these locations, different gasoline blends must be
    stored separately, with only one fuel per tank at any given time.

    Ethanol that is added to gasoline cannot be shipped in pipelines with
    other petroleum products because of ethanol's tendency to absorb water.
    Instead, ethanol is shipped primarily by rail or trucks to terminal
    stations where it is "splash" blended-mixed in specific proportions as the
    fuel is added to the storage tank or tanker truck. The federal government
    and some states have considered requiring or expanding the use of ethanol
    to reduce consumption of oil and increase demand for agricultural products
    used to produce it, such as corn.

      Special Gasoline Blends Are Widely Used and Use May Increase in the Future

    There were 12 distinct gasoline blends in use in the United States during
    the summer of 2004: 11 special gasoline blends and the conventional
    gasoline used everywhere a special blend is not used. When different
    grades of gasoline, special blends used in winter, and other factors are
    considered, the number of gasoline blends rises to at least 45. New ozone
    standards and other factors may further increase the number or the use of
    special gasoline blends in the future, in part because EPA must approve
    any state's application to require use of a special gasoline blend as long
    as the proposed fuel meets EPA's environmental standards.

        Eleven Special Summer Gasoline Blends Were Used Mostly in Large Cities
        Creating Isolated Markets

    Eleven special gasoline blends were used in the United States during the
    summer of 2004 in addition to conventional gasoline. The use of special
    gasoline blends is most prominent during the summer because special fuels
    are used predominantly to reduce summer ozone levels, and gasoline use is
    generally the highest during the summer. The requirement to use these
    fuels requires that all the fuel sold at terminals meet certain
    specifications at a certain date, which generally requires terminal
    operators to draw down their inventory of non-summer fuels in advance of
    filling their tanks with summer fuels. Special gasoline blends are
    primarily used in highly populated urban areas, and 34 states use a
    special gasoline blend in one or more areas. The 11 special gasoline
    blends in use during the summer of 2004 fell into the following
    categories:

    o 	Three different types of RFG used year-round, the federally required
    fuel used in areas with the worst air quality. RFG has very low RVP;
    reduced levels of benzene and other toxics; and contains an oxygenate. The
    type

    of RFG blend depends on the area of the country where the gasoline is used
    and the oxygenate selected. These blends are identified in figure 3 as
    "RFG North," "RFG North with ethanol," and "RFG South."

    o 	Two types of California Cleaner Burning Gasoline (CBG) used year-round,
    also referred to as CARB. California CBG is formulated to meet the most
    stringent gasoline standard in the United States, including very low RVP
    and reduced levels of sulfur, benzene, and other chemicals. In general,
    the state of California does not require the addition of an oxygenate in
    areas not subject to federal RFG standards-identified in figure 3 as "CA
    CBG." Gasoline sold in areas also subject to the federal RFG standard must
    contain an oxygenate, identified as "RFG/CA CBG."

    o 	In the summer, Arizona allows the use of either a gasoline blend very
    similar to RFG or a blend similar to CBG. The blend required in Arizona is
    identified as "AZ CBG."

    o 	Three summer blends with various reductions in RVP. The federal
    government requires some areas to use 7.8 RVP gasoline6 and, in other
    areas, states have mandated the use of this blend. The other two low-RVP
    blends are state requirements. These blends are identified in figure 3 as
    "7.8 RVP," "7.2 RVP," and "7.0 RVP."

    o 	One blend with reduced RVP and reduced sulfur content. The state of
    Georgia requires this blend for use in the Atlanta area, and it is
    identified in figure 3 as "7.0 RVP, 30 ppm sulfur."

    o 	One blend of conventional gasoline with a minimum of 10 percent ethanol
    by volume, used year-round. The state of Minnesota requires this blend,
    which is identified in figure 3 as "Ethanol Mandate."

    As figure 3 shows, many areas using special gasoline blends are surrounded
    by regions that use conventional gasoline. In some cases, these areas are
    relatively large, as is the case for the state of California, where nearly
    all of the state uses the same fuel-RFG/CA CBG. In other cases, "islands"
    of special gasoline use can divide otherwise regional gasoline markets.
    For example, the St. Louis metropolitan area, which includes parts of two

    6RVP values throughout this report are measured in pounds per square inch
    at 100-oF, the standard industry measure.

    states7-Missouri and Illinois-uses three different fuels: one special
    gasoline blend required on the Missouri side, a different special gasoline
    blend required on the Illinois side, and conventional gasoline is allowed
    in the surrounding area. In some cases, special gasoline blends are used
    in only one area of the country. For example, California CBG, Arizona CBG,
    and the special blend used in Atlanta, Georgia, are not used anywhere else
    in the United States. Even relatively common special gasoline blends can
    create isolated markets if they are not used in nearby areas. For example,
    although 7.8 RVP is a relatively widely used blend, Pittsburgh,
    Pennsylvania, is the only city in its region that uses it. Similarly, the
    Chicago/Milwaukee area uses RFG North with ethanol, a gasoline blend used
    in the Northeast but not used elsewhere in the Midwest.

    7Each state is overseen by a separate EPA regional office; Missouri is
    overseen by EPA region 7 and Illinois is overseen by EPA region 5.

    Figure 4: Market Shares for the Various Gasoline Blends Used in 2001

    While we have reported that there are 11 special blends used or handled
    during the summer of 2004, additional factors increase the total number of
    gasoline blends sold in the United States throughout the year to at least
    45. First, although this report focuses on summer gasoline blends, at
    least 3 special winter-only gasoline blends are required to be used in
    areas of eight states. Use of these fuels requires that fuel terminals in
    these areas transition from the fuel that they use in the non-winter
    season to the required winter fuel. These blends contain an oxygenate to
    address winter carbon monoxide pollution. Second, because of consumer
    demand, many gasoline stations sell gasoline in three octane grades-both
    premium and regular grades are refined and shipped to terminals, where
    they are blended together to make a midgrade gasoline. Therefore, each
    gasoline blend is effectively two fuels from the perspective of pipelines
    and terminals. As a result, pipelines, fuel terminals, and retail gasoline
    stations

    1%

    7.0 RVP

    1%

    7.2 RVP

    2%

    Ethanol mandate

    2%

    7.0 RVP, 30 ppm sulfur

    California gasoline AZ CBG (3%) CA CBG (3%) RFG/CA CBG (7%)

    RFG blends RFG North w/ethanol (3%) RFG North (8%) RFG South (10%)

    7.8 RVP

    Conventional

                           Source: GAO analysis of EPA data.

        Other Factors Raise the Number of Gasoline Blends Carried by Pipelines and
        Other Means to at Least 45

    carry multiple variations of the gasoline blends previously discussed.
    Third, gasoline blends differ regionally and seasonally because
    differences in outside temperatures require different blends to maintain
    vehicle performance. The primary difference among these blends is RVP.
    Refiners produce gasoline with higher RVP in cold conditions to allow cars
    to start and gasoline with lower RVP during warm conditions to improve
    vehicle operation, even in areas that use conventional gasoline. As a
    result of these differences, refiners routinely ship different fuels to
    different regions and also ship different gasoline blends seasonally, but
    special blends tend to compound these variations. One official with a
    major petroleum company reported that there were at least 45 different
    grades of gasoline used in the United States.

        New Ozone Standard and Other Factors May Further Increase the Number and/or
        Use of Special Gasoline Blends

    A new ozone standard and deteriorating air quality may lead to an
    increased number of special gasoline blends and/or more use of these
    blends in the future. In 2004, EPA issued a final rule implementing a new,
    more stringent federal air quality standard for ozone that led to the
    identification of 138 additional counties in nonattainment or maintenance
    as seen in figure 5.8 EPA officials that we spoke with did not have any
    indications that states were planning to submit applications to use
    special blends in these areas but acknowledged that gasoline is viewed as
    an effective emissions control strategy and said that they expect some
    states to consider doing so. Oil company officials told us that officials
    from some states had approached them to discuss using special gasoline
    blends. Because states must begin preparing SIPs for the recently
    designated nonattainment areas, and because several of those states
    already have chosen to use special gasoline blends, it appears likely that
    states may seek approval to use such blends in more areas.

    8The new standard measures ozone levels averaged over 8 hours, while the
    prior standard measures these levels over 1 hour.

    scheduled to phase in, though some of these states did not use MTBE.9
    Worsening air quality in areas such as Atlanta and Baton Rouge may require
    the gasoline used in these cities to shift from a special blend to RFG,
    reducing the number of fuels.10 In addition, a new federal standard for
    all gasoline-including special blends-that mandates reduced sulfur,
    promises to improve the effectiveness of catalytic converters already
    present in most vehicles and could aid some areas in meeting federal air
    quality standards, potentially reducing the need for these fuels in some
    areas.

        EPA Lacks Authority to Deny Requests to Use Special Gasoline Blends Due to
        Effects on Supply

    During the course of our work, staff from EPA's Office of the General
    Counsel stated that EPA could not deny an application to require the use
    of a special gasoline blend that addressed the four elements outlined in
    EPA's 1997 guidance. They explained that EPA's determinations often
    deferred to states' evaluations in their applications that, under the
    Clean Air Act, section 211 (c)(4)(C), no other measures that would bring
    about timely attainment exist, or that existing measures, such as vehicle
    inspection and maintenance programs, are unreasonable or impracticable.
    Further, staff with EPA's Office of the General Counsel staff told us EPA
    could not reject an application on the basis of the potential impacts on
    gasoline supply or other regional effects on the gasoline market because
    such a rejection would be outside of EPA's current authority. Several of
    the special fuels in use during 2004 were approved prior to the issuance
    of the 1997 guidance, and EPA officials reported that a variety of
    standards were used to evaluate applications.

    EPA's most recent effort to examine special gasoline blends is consistent
    with EPA's view that the agency does not have authority to reject a
    state's application based on regional supply impacts or costs. In 2001,
    EPA released a staff white paper, in response to a presidential directive,
    examining whether there were options to maintain or improve environmental
    benefits while also improving the supply of fuels, such as

    9These states are, with phase-in year in parentheses, California (2003),
    Colorado (2002), Connecticut (2000), Illinois (2004), Indiana (2004), Iowa
    (2000), Kansas (2004), Kentucky (2006), Maine (2007), Michigan (2003),
    Minnesota (2000), Missouri (2005), Nebraska (2000), New Hampshire (2007),
    New York (2004), Ohio (2005), South Dakota (2001), Washington (2004), and
    Wisconsin (2004).

    10EPA determined that these cities are required to use RFG; however, the
    states sued, and the lawsuit was in the courts as of April 2005.

    gasoline.11 In that report, EPA examined a number of options to reduce the
    number of fuels available for states to choose from-similar to a gasoline
    menu. That report concluded that these options were beyond EPA's statutory
    authority and would require legislative action to implement.12 The white
    paper also noted that it represented a first step in EPA's response to the
    directive, but that significant additional analysis and study were
    required. EPA staff told us that there had been congressional debate
    regarding EPA's authority during consideration of recent energy
    legislation, but that its authority had not changed as of May 2005.13 In
    the study, EPA identified a number of changes that it would make to ease
    the seasonal transition between gasoline blends used during different
    parts of the year. Staff also said that little, if any, additional work
    had been done since the 2001 study, in part because of EPA's lack of
    authority to implement some of the actions outlined in the study.

      Special Gasoline Blends Reduce Emissions and Contribute to Improved Air
      Quality

    Special gasoline blends reduce emissions-particularly those involved in
    the formation of harmful ground-level ozone-by varying degrees, depending
    on the blend. The extent of reductions remains unclear, however, because
    the estimates have not been comprehensively validated through testing on
    current vehicles and emissions controls. According to EPA and others,
    these special gasoline blends have contributed to improvements in air
    quality seen in some parts of the country. The extent of their
    contribution to improvements relative to that of other contributing
    factors, such as reductions in power plant emissions, is somewhat
    uncertain because of the difficulties in isolating the effects of
    individual emissions reduction efforts, such as special gasoline blends,
    from other factors that may affect air quality.

    11The directive was issued as part of the President's National Energy
    Policy Report issued on May 17, 2001.

    12According to EPA staff, Congress considered providing additional
    authority in legislation after the release of this report; however, those
    bills did not pass. As of April 2005, new legislation passed by the House
    of Representatives, but not yet passed by the Senate, would limit the
    number of gasoline blends, but this bill has not yet become law.

    13In April 2005, the U.S. House of Representatives passed a bill, H.R. 6,
    which, among other things, limited the expansion of special gasoline
    blends and requires EPA and DOE to examine the issue and present options
    to Congress. As of May 2005, no comparable bill had passed the Senate.

        Special Gasoline Blends Reduce Emissions, but the Extent of Reduction
        Remains Uncertain

    Over the past 15 years, a wide range of studies by EPA and others have
    concluded that changes to the properties of gasoline can substantially
    reduce emissions from automobiles. For example, in 1996, EPA concluded
    that RFG and low-RVP blends can both significantly reduce VOCs but that
    RFG offers greater promise in reducing NOx, CO, and toxics. The Air
    Quality Improvement Research Program (AQIRP), funded by the auto and oil
    industries, analyzed gasoline properties in detail and comprehensively
    tested a variety of gasoline blends in a range of vehicles between 1989
    and 1992. This effort produced data regarding how the use of various
    gasoline blends affect emissions from then-current vehicles and concluded
    that changing certain properties of gasoline, in particular reducing RVP
    and sulfur, was effective in reducing emissions of pollutants such as NOx,
    CO, and also hydrocarbons such as unburned fuel. According to EPA
    officials, using special gasoline blends is attractive to states because
    the blends can offer immediate emissions reductions from vehicles already
    on the road.

    EPA and others have used the results of these studies to develop models
    that provide detailed emissions estimates for several of the special
    gasoline blends currently in use. These models have been used by states in
    their SIPs to estimate the expected emissions from requiring the use of
    special gasoline blends instead of conventional gasoline.14 As shown in
    table 1, the models estimate that special gasoline blends reduce emissions
    by varying degrees. California's gasoline-the blend formulated to reduce
    emissions the most-is estimated to provide the greatest level of emissions
    reductions, about 25-29 percent for VOCs and about 5.7 percent for NOx.
    RFG is estimated to provide about the same level of VOC reduction, a lower
    NOx reduction of about 0.7 percent, but also a 10-20 percent reduction in
    CO. The special gasoline blend most commonly used in areas not using
    conventional gasoline-gasoline with an RVP of 7.8-is estimated to reduce
    VOC emissions by 12-16 percent and NOx by about 0.7 percent. In addition
    to the pollutants listed in table 1, RFG and California's cleaner burning
    gasoline also reduces emissions of some toxics such as benzene.

    14Excluding California, which uses the Motor Vehicle Emissions Inventory.

    Table 1: Projected Emissions Reductions Resulting from Low-RVP, RFG, and
    CBG Gasoline Blends

               Estimated emissions reductionsa Gasoline blend VOC NOx CO

    Low RVP

    12 to 16% 0.7% No effect

    19 to 23% 0.7% No effect

    21 to 25% 0.7% No effect

    RFG

                          Federal RFG 25 to 29% 0.7% 10 to 20%

                      California CBGb 25 to 29% 5.7% Not estimated

    Source: GAO analysis of EPA data.

    aEmissions reductions are based on reductions from conventional 9.0 RVP
    gasoline projected to be in use in calendar year 2006.

    bEPA estimated VOC and NOx emissions reductions for California CBG and RFG
    CA/CBG (which includes an oxygenate) were the same for these pollutants;
    however, RFG CA/CBG would likely provide some reduction of CO, in
    addition.

    However, the extent of emissions reductions associated with various
    gasoline blends remains somewhat uncertain. GAO,15 the National Research
    Council, and others have identified concerns about the overall accuracy of
    emissions estimates. EPA has addressed some of the concerns about
    emissions estimates. In one effort to address concerns about the validity
    of emissions estimates, EPA sponsored a study that compared emissions
    estimates to measured emission data obtained between 1992 and 2001. The
    study looked at pollutant concentration data from tunnels and vehicle
    exhaust data collected from vehicles on roadways using special remote
    sensing devices at a limited number of sites using a limited range of
    gasoline blends. As a result, EPA found that the observed emissions data
    conflicted with emissions estimates; in some cases the testing data were
    higher than predicted, while in other cases it was lower.

    Despite this effort, EPA has not comprehensively studied how various
    gasoline blends affect vehicle emissions since the early 1990s-when the
    AQIRP comprehensively tested a variety of gasoline blends in a range of
    vehicles. Since then, there have been advances in emissions control

    15GAO, Air Pollution: Limitations of EPA's Motor Vehicle Emissions Model
    and Plans to Address Them, GAO/RCED-97-210 (Washington, D.C.: Sept. 15,
    1997).

    technology. Consequently, to the extent that emissions from vehicles with
    newer emissions control technology differ from those of older vehicles,
    emission estimates may become less certain, especially as vehicles with
    the newer technology compose a growing portion of the U.S. fleet. EPA
    officials acknowledge that their efforts since the early 1990s to validate
    emissions estimates have not allowed them to fully validate how special
    fuel blends operate in a full range of vehicles of varying vintages and
    designs over their operating lifetimes. EPA officials told us that they
    believe such a detailed analysis would improve their understanding of how
    special gasoline blends affect emissions, but said that they have not had
    sufficient budgetary resources to collect the needed data to support such
    an analysis.

    In addition to these broad concerns, there is also controversy over the
    emissions benefits associated with special blends containing oxygenates,
    which were initially added to gasoline to reduce the emissions of carbon
    monoxide and other pollutants. However, although there appears to be
    agreement that oxygenated fuels help reduce emissions of CO from older
    vehicles, recent studies indicate that the emissions benefits for newer
    vehicles are questionable. For example, AQIRP, the National Science and
    Technology Council, and others have reported that improvements in
    emissions controls on newer vehicles, such as oxygen sensors and
    computer-controlled emissions systems, may now automatically reduce
    emissions of CO and other pollutants and may negate many benefits of
    adding oxygenates. Further, some experts have concluded that adding
    oxygenates to gasoline may increase emissions of NOx and VOCs and may
    contribute to increased levels of ozone. As a result, some states,
    including California, New York, and Georgia have requested waivers from
    EPA to allow them to use fuel that does not contain an oxygenate. The
    state of California stipulated in its waiver application that its fuel
    reduces emissions to a greater extent than federal RFG and that the
    oxygenate requirement has impeded its efforts to reduce ozone. To date,
    EPA has not granted any of these waivers. Recently, Congress and others
    have considered expanding the use of ethanol in gasoline for other
    reasons, including to benefit U.S. farmers and to reduce the country's
    reliance on foreign oil.

        Reduced Vehicle Emissions Have Led to Air Quality Improvements, but the
        Extent of Benefits Attributable to Special Gasoline Blends Is Uncertain

    EPA and other experts have concluded that improvements in air quality in
    some parts of the country are at least partly attributable to the use of
    special gasoline blends. In 2004, EPA reported that ground-level ozone has
    decreased over the past 10 to 25 years and that these reductions resulted,
    at least in part, from emissions control programs that include
    requirements to use special gasoline blends. Further, EPA and other
    experts concluded that special gasoline blends, such as RFG and low-RVP
    blends, are effective strategies for states to use to reduce ozone
    pollution. In addition, a research effort funded by AQIRP found that
    reducing RVP decreased peak ozone in several cities and would continue to
    provide benefits for years to come. In addition, the National Research
    Council reviewed EPA data and found that average ozone levels dropped by
    about 1 percent coincident with reduced emissions of VOCs, NOx, and CO
    from on-road vehicles, which fell by 31 percent, 2 percent, and 20
    percent, respectively. Based on these and other data, the National
    Research Council concluded that improvement in air quality is likely
    attributable, at least in part, to recent improvements in gasoline
    properties.16

    Despite the conclusions that special gasoline blends have contributed to
    improved air quality, findings specifically linking air quality
    improvement to the use of special gasoline blends are limited and
    incomplete because of the inherent difficulties in isolating the effects
    of special gasoline blends from other efforts to improve air quality.
    Studies examining the effect of special gasoline blends on air quality
    noted that attributing a change in ozone levels to the use of a special
    gasoline blend would be difficult.17 In particular, experts from EPA, the
    National Science and Technology Council,18 and the National Research
    Council have determined that relating trends in the levels of ground-level
    ozone to trends in emissions and to emissions-control policies can be
    challenging because of the confounding effects of other variables,
    including the effects of other control efforts and

    16Other possible reasons for the improvements include the advent of more
    stringent standards for vehicles that gradually replace old vehicles built
    to more lenient standards than current models; and maturation of
    new-vehicle emissions-control hardware and software as field experience
    accumulated.

    17David Stikkers, "A Retrospective Study of Reformulated Gasoline Use in
    Chicago," Environmental Informatics Archives. 1 (2003): 282-294.

    18The National Science and Technology Council is composed of
    representatives from several federal agencies charged with coordinating
    science and technology policies across the federal government.

    meteorological fluctuations. For example, the National Research Council
    noted that since the 1990s-when special gasoline blends became widely
    used-several other efforts to reduce emissions from vehicles have been
    made that could also explain changes in air quality, such as the addition
    of enhanced emissions-control systems and improvements in inspection and
    maintenance programs in some areas. During this time, EPA and the states
    have also undertaken efforts to reduce emissions from electric utilities,
    chemical manufacturing, and other stationary sources that could have
    contributed to the improvements. Further, because ozone is more readily
    created when VOCs, NOx, and CO react in sunny and hot weather,
    meteorological fluctuations affect the relationship between emissions and
    ozone levels. For example, EPA has identified cases where air quality
    improved, but the improvement was largely due to better weather (more air
    circulation, lower amounts of heat and sunlight, and other factors).
    According to the National Research Council and others, determining how
    much air quality improvement is specifically attributable to any specific
    emissions control program, including special gasoline blends, would
    require the collection of high-quality, long-term data on air pollution,
    on other control measures, and on weather.

      Use of Special Gasoline Blends Has Made It More Complicated and Costly to
      Supply Gasoline

    The increasing numbers of special gasoline blends have made it more
    complicated and costly to supply gasoline, elevating the risk of localized
    supply disruptions. Producing special gasoline blends can require changes
    at refineries, making it more complicated and costly to produce gasoline.
    Special blends also add to the number of fuels shipped through pipelines,
    reducing the efficiency of the pipelines and raising costs. In addition,
    because the tanks at the fuel terminals were often built before the
    proliferation of blends, they are often too large and too few to
    efficiently handle the increased number and smaller size batches of
    special gasoline blends and, as a result, total storage capacity has
    fallen. Further, in some cases, the proliferation of blends has reduced
    the supply options available to some retailers, making them more
    susceptible to supply disruptions.

    Making Special Gasoline Producing some special gasoline blends sometimes
    requires refineries to Blends Has Added invest in additional refinery
    units, making their refineries more complex, or Complexity and Costs at
    reducing their capacity to make gasoline. For example, producing

    cleaner-burning fuel with lower levels of toxic and other emissions, such
    asRefineries RFG or CBG, has required some refiners to install specialized
    units that remove sulfur and benzene during the refining process.
    Similarly,

    production of low-RVP gasoline requires that refiners leave out the
    lightest components typically included in conventional gasoline.
    Separating these components or converting them to ones that can be used in
    these blends may require additional refinery units. If the components are
    not immediately used in gasoline at that refinery, they may be stored, may
    be used in less valuable fuels such as diesel or jet fuel, or shipped to
    other refineries that can use these components. The removal and additional
    processing of these components can decrease the amount of gasoline a
    refinery can produce. For example, officials from one California refinery
    told us that their refinery could produce 12 percent more volume if it
    produced conventional gasoline rather than California gasoline because
    conventional gasoline uses more of the components that are typically
    generated in the refining process.19

    Adding refinery units and losing refinery capacity can increase the
    overall costs of refining gasoline. Manufacturing low-RVP fuel generally
    involved reducing the use of some components and, as a result, was less
    costly than the more significant changes needed to make the cleanest
    burning blends. Specifically, in 1996, EPA estimated that low-RVP blends
    cost 1-2 cents per gallon more to make than the conventional gasoline at
    the time. In contrast, in 2003, the Energy Information Administration
    (EIA), within the Department of Energy, estimated that blends formulated
    to meet the most stringent standards, such as oxygenated California
    gasoline, cost 5-15 cents more per gallon to make than the conventional
    gasoline required at the time and that RFG generally costs 2.5-4 cents
    more per gallon to make.

    In addition, the use of oxygenates in blends such as RFG further increases
    the complexity and cost of the refining process because refiners must
    either invest in equipment to produce oxygenates from crude oil (in the
    case of MTBE) or they must purchase these components from other sources.
    MTBE is generally less expensive than ethanol as an oxygenate but has
    raised water quality concerns. As described earlier, ethanol is generally
    shipped by truck or rail, stored separately from other gasoline
    components, and blended just before gasoline is sent to retail stations.
    The higher cost of purchasing ethanol during the period of our analysis,
    together with these separate handling procedures, adds to the total cost
    of

    19While the switch from conventional gasoline to a special gasoline blend
    has led to reductions in refining capacity, all other things equal,
    refiners, in investing in new processes to make the special blends, have
    also typically increased the capability of their refineries to convert
    less valuable components to more valuable ones, thereby increasing their
    capacity.

    making ethanol-blended gasoline. Additionally, because ethanol has a high
    RVP, more components must be removed from ethanol-blended gasoline than
    from MTBE-blended gasoline to meet specifications for RVP. Removing these
    components and reprocessing them or diverting them to other products
    increases the cost of making ethanol-blended gasoline.

        Shipping More Special Gasoline Blends Reduces Pipeline Capacity and Raises
        Costs

    Shipping gasoline on a pipeline requires a great deal of coordination
    between refineries, pipelines, and terminal stations to maintain pipeline
    flows while fuels are being added and withdrawn. Pipeline operators told
    us that they develop schedules of when individual shipments (called
    batches) will occur at least 1 month in advance; however, some changes to
    this schedule may occur up to the date when a product is placed on the
    pipeline to adjust for, among other things, the need for more of a
    specific gasoline blend in some locations. On the day of shipment,
    pipeline operators precisely coordinate when refineries or other shippers
    add or "inject" fuel to the pipeline and when fuel is taken off of the
    pipeline along with other aspects of operating the system. Companies
    shipping fuel on the pipeline, may request to keep their products isolated
    from others (a segregated batch) or may choose to combine their product on
    the pipeline with other blends meeting similar or identical product
    specifications (a fungible batch). Because of the large number of gasoline
    blends and, because some shippers require segregated batches, the number
    of fuels shipped in pipelines has increased dramatically in recent years.
    For example, one pipeline company noted that in 1970 they shipped 10
    different products on their system over the entire year, whereas in 2004
    they shipped 128 (including distinct blends and segregated products).20

    The increased number of special gasoline blends has reduced the effective
    capacity of the nation's petroleum products pipeline infrastructure
    because the pipelines are generally operated at slower speeds to
    accommodate more and smaller batches of gasoline while keeping the
    different blends separate. The speed at which centrally controlled pumps
    move product along pipelines-typically between 3 and 8 miles per hour-can
    be affected by a number of factors, including the volume of product
    relative to the

    20Many of the pipelines that transport gasoline also ship other petroleum
    products such as diesel fuel, jet fuel, and propane-some of which also
    require multiple, although fewer, formulations. Recent regulations that
    will require lower levels of sulfur in some diesel fuels will further
    increase the number of fuels moving through the pipeline infrastructure
    and may cause other complications in maintaining fuel quality and are
    expected to have similar effects as special gasoline blends.

    pipeline capacity being shipped, the size of batches, and the availability
    of terminal storage along the pipeline route. Several pipeline operators
    told us that, prior to the introduction of special gasoline blends, they
    shipped many fewer products and much larger batches than they do now.
    Further, they said that shipping smaller volumes can require them to slow
    or stop the pipeline to allow shippers to inject or withdraw individual
    fuels at fuel terminals or other locations. Lost opportunities associated
    with reductions in the amount of fuel that the pipeline can transport
    serve to raise the average cost of moving gasoline.

    The increased number of fuels and fuel types shipped on pipelines has also
    increased losses and costs associated with mixing of fuels. Two types of
    fuel mixtures occur at the interface between batches on pipelines:
    downgrading and transmix. Downgrading occurs when two similar fuels mix,
    but the resulting mix no longer meets the more valuable product
    specification. For example, if a high-and regular-octane gasoline are
    mixed, then the downgraded gasoline may be sold only as lower-priced,
    regular gasoline. Transmix results when two dissimilar fuels mix and the
    fuel cannot be used without reprocessing. For example, if diesel fuel and
    gasoline mix, the transmix must be processed to separate the fuels into
    usable products. Similarly, because MTBE is banned in some areas, if
    gasoline blends containing MTBE come in contact with other fuels, the
    mixed fuel is considered transmix and must be reprocessed to remove the
    MTBE before it can be used. To minimize losses associated with downgrades
    and transmix and still maintain efficiency, pipelines generally set a
    minimum batch size. Several pipeline operators reported that they have
    witnessed increased losses and costs due to downgrades and because more
    fuel requires reprocessing as the number of special gasoline blends has
    increased.

    In addition, according to some pipeline company officials, because some
    gasoline blends are only used in one city or only in some areas served by
    a pipeline, shippers incur additional costs if these gasoline blends are
    not taken off the pipeline at the right location. For example, one
    pipeline operator told us that RFG with MTBE shipped in Midwest pipelines
    cannot be used without costly reprocessing if it is shipped past certain
    points on these pipelines because no regions beyond these points allow the
    use of RFG with MTBE. In some instances, the pipeline may need to be
    slowed, or even stopped, to allow a special gasoline blend to be taken out
    of the pipeline.

        Increased Numbers of Gasoline Blends Reduce Terminal Storage

    The increased number of petroleum products generally, including special
    gasoline blends, and the need to keep them separated, has reduced the
    storage capacity of some gasoline terminals which can create difficulties
    during periods when gasoline supplies are disrupted. To ensure product
    quality, special gasoline blends must be stored in separate tanks. Several
    terminal operators told us that their terminals were built before the
    proliferation of special gasoline blends and were designed to handle
    fewer, but larger, batches of gasoline. Terminal operators told us that,
    because many of the special gasoline blends are shipped in smaller
    batches, the tanks used for these blends are often not filled to capacity.
    One terminal operator told us that some new storage tanks had been built
    in recent years. This operator went on to say that adding new storage
    capacity at existing terminals is often either prohibitively expensive or
    extremely difficult because of space limitations and the need to obtain
    federal, state, and local regulatory approvals. One terminal operator told
    us that the company has chosen not to carry one or more gasoline blends
    used in its area because the company's existing tanks were insufficient
    and building additional tank capacity was too costly. For these same
    reasons, it is often difficult to build new terminals. In addition to the
    complexity of these factors, terminal operators told us that the
    proliferation of special gasoline blends also raised their costs by
    reducing their ability to fully utilize their existing tanks, which cost
    them the opportunity to store additional fuels, or by forcing them to make
    additional investment to build more tanks, or both.

    In addition, terminal operators told us that reduced storage capacity at
    their facilities, combined with the increased number of fuels in the
    pipeline system, has made it more difficult to maintain adequate
    stockpiles of some gasoline blends. Several pipeline operators said that
    the interval between when a fuel is available from the pipeline may be 10
    days or longer if capacity is not available on the pipeline-requiring that
    many days' worth of fuel to be stored at the terminal. Increasing demand
    for gasoline combined with this longer period between shipments, and
    limited terminal storage, increases the likelihood that some areas will
    run out of gasoline while waiting for a shipment. One pipeline operator
    said that the terminals that they served did not run out of gasoline from
    1995-1996, but that now one terminal per month runs out of fuel. One
    terminal operator explained that running out of gasoline can be very
    harmful to their business because terminal operators rely on retailers and
    independent gasoline tanker trucks to regularly visit their
    stations-visits that may not occur if their supplies are inconsistent. In
    addition, the operator told us that, when tanks are pumped dry and later
    refilled, they can release up to 1 ton of VOCs, which

    contributes to pollution. While the terminal operators we spoke with said
    they are generally able to maintain sufficient gasoline storage, they can
    run short of some fuels when demand is high or pipeline deliveries are
    delayed or interrupted. One operator noted that they increase their
    wholesale gasoline prices as their available supplies fall in an effort to
    reduce their sales and retain some gasoline for sale and avoid running
    out. The terminal operators we interviewed did not provide us data on the
    number of instances when they ran out of gasoline, but they said that the
    number has significantly increased in recent years.

        Special Blends Limit Supply Options in Wholesale Markets When Local Supply
        Disruptions Occur

    According to operators of independent retail gasoline stations that buy
    from the wholesale markets, they have more limited supply options as a
    result of the presence of special gasoline blends. According to an
    industry representative, some gasoline retailers affiliated with, or owned
    by, large oil companies (so-called "integrated" oil companies, such as
    ExxonMobil and ChevronTexaco) receive their gasoline-referred to as
    branded gasoline-only from these companies, generally paying slightly more
    for it. However, other companies that are not affiliated with these
    integrated oil companies, referred to as independent retailers, typically
    purchase gasoline from a variety of suppliers including, but not limited
    to, integrated oil companies and typically purchase gasoline at the lowest
    price available from nearby fuel terminals. As a result of this and other
    factors, independent retailers said that they generally sell gasoline at a
    lower price than branded gasoline stations. According to some, the
    introduction of special gasoline blends may increase the market power of
    some refiners. In its 2001 white paper, EPA noted that the development of
    special blends limits competition in the refining sector because some
    blends are small, and only a few refiners may choose to make some blends.
    Consistent with this view, independent retailers told us that they have
    had fewer choices in some markets near where special gasoline blends are
    required because some refineries and fuel terminals no longer sell
    gasoline for those markets, and that they have tended to pay higher prices
    in those areas. For example, one large independent retailer operating
    retail gas stations on the East Coast told us that the number of
    refineries producing gasoline for the market they serve fell from 12 to 3
    after the introduction of special gasoline blends-leaving the retailer
    with fewer options to identify the lowest cost supplies. Special gasoline
    blends have also complicated the ability of some large entities to enter
    local gasoline markets. Officials with a large company that has entered
    several local gasoline markets across the country as an independent
    retailer told us that obtaining sufficient supplies at reasonable prices
    is more difficult in markets where special gasoline

    blends are used and that limited supply options have reduced the company's
    ability to enter and compete in some of these markets.

    The plight of independent retailers is particularly pressing when
    traditional supplies are disrupted. The independent retailers that we
    spoke with said that their prices generally increase first and that they
    may not have access to fuel supplies provided to branded retailers if
    supplies are disrupted. Before special gasoline blends, these independent
    retailers were able to truck fuel in from nearby cities or neighboring
    states, however, because some gasoline blends may not be used anywhere
    else, or they may only be used hundreds of miles away, this is a more
    difficult and costly option today. For example, several industry officials
    noted that, if supplies of California gasoline are disrupted, they would
    expect prices to rise and that it could take weeks for additional supplies
    to arrive. They said that nearby suppliers capable of blending
    California's gasoline blend are generally operating close to their full
    capacity. In the event that these supplies are disrupted, additional
    supplies generally come from Western Canada, the Gulf Coast, the
    Caribbean, or farther away, because there are only a few refineries
    capable of making this special gasoline blend and, as a result, supplies
    could take 3 weeks or more to arrive.

      Areas That Use Uncommon Special Gasoline Blends Tend to Have Higher and More
      Volatile Gasoline Prices

    Among the 100 cities we examined, the highest wholesale gasoline prices
    tended to be found in cities that used a special gasoline blend not widely
    available in the region or that is more costly to make than other blends.
    Cities that are far away from major refining centers or other sources of
    gasoline also tended to have high prices. Prices also tended to be more
    volatile in cities having one or more of these characteristics. Other
    studies have also found higher and/or more volatile prices in some cities
    that use special gasoline blends. Greater complexity and higher refining,
    transportation, and storage costs associated with supplying special
    gasoline blends have likely contributed to increased gasoline prices
    overall, and for specific special blends, but it is not possible to
    conclusively determine the extent to which special gasoline blends have
    caused the higher prices and greater volatility found in specific cities.

    We Found Higher and More We examined data from 100 selected cities to
    determine how prices varied Volatile Gasoline Prices in across areas that
    use special gasoline blends versus conventional gasoline Cities That Use
    Special and found that, with some exceptions, the highest and most
    volatile Blends gasoline prices tended to be found in cities that used
    special gasoline

    blends that are uncommon or particularly expensive to make, or in cities
    that are long distances from major refining areas. Each of these factors
    tends to isolate a city from the overall gasoline market by limiting the
    available supplies of gasoline from other areas in the event there is a
    supply shortfall in that city.

    With regard to special gasoline blends, the data show that most of the 20
    cities with the highest average prices over about the past 4 years
    (December 2000 through October 2004) used special gasoline blends, most of
    them formulated to meet stringent emissions standards. In many cases,
    these cities used a fuel that is not widely used outside their area, or in
    some cases is unique to that city or state. For example, the five
    California cities in the data set are all in the top 20 cities with
    respect to gasoline prices. California's gasoline is the cleanest-burning
    gasoline and, in order to make it, California's refineries have invested
    substantial capital in new refining processes. Further, only a few
    refineries outside of California routinely make California gasoline, the
    closest of which is in Northern Washington. The uniqueness of California's
    gasoline has been noted by many sources as likely contributing to
    California's high gasoline prices relative to the rest of the country. For
    the period we examined, the five cities we looked at in California had
    average prices ranging from about 24 to 26 cents per gallon more than the
    city with the lowest price (Meridian, Mississippi), which uses
    conventional gasoline and is located near the large refining center in the
    Gulf Coast. The table in appendix II shows the price data and gasoline
    blend types for each of the 100 cities we evaluated. Some of the cities
    with the highest prices used conventional gasoline year-round, but most of
    these are far from major refining areas or are located on or near a single
    smaller pipeline. Average prices in these top 20 cities were between 14
    and 41 cents per gallon more than in the city with the lowest price.

    Using ethanol as an additive to gasoline is associated with higher
    wholesale gasoline prices. To evaluate this, we examined national average
    prices for gasoline blends containing ethanol. For example, for the nation
    as a whole, average prices for conventional gasoline with ethanol were
    about 4 cents per gallon higher than conventional without ethanol over the
    time period we analyzed. The switch to using ethanol, as opposed to MTBE,
    was also associated with higher gasoline prices.21 For example, in the
    years 2001-2003, during which California phased out MTBE and phased in

    21As discussed in this report, the switch to ethanol from MTBE has largely
    been the result of MTBE's tendency to contaminate ground water sources.

    ethanol, the average summer price of gasoline with ethanol was between
    about 4 and 8 cents per gallon more than the price of gasoline with MTBE.
    Similarly, over the period 2001-2004, the average summer price for federal
    reformulated gasoline with ethanol was between about 6 and 13 cents per
    gallon more than for federal reformulated gasoline with MTBE.

    In contrast to the highest-priced cities, the 20 cities with the lowest
    average wholesale gasoline prices over the period typically used common
    gasoline blends and/or were located near a major refining center-most
    often near the Gulf Coast, the largest refining center in the country in
    terms of both numbers of refineries and total refining capacity. For
    example, among the 20 cities with the lowest prices, 8 used conventional
    gasoline-the most widely available gasoline blend. Conventional gasoline
    is used extensively across the United States, and most cities that use it
    are surrounded by areas using the same gasoline. Another 9 cities with the
    lowest prices used 7.8 RVP gasoline-the most widely used of the special
    blends and the one formulated according to the least stringent emissions
    standards. Most of the 7.8 RVP gasoline is used in areas close to the Gulf
    Coast refining center. In addition, refiners told us that making 7.8 RVP
    gasoline is simpler and less costly than some of the other blends, so it
    may be more available from refineries in the event of a local supply
    shortfall. The other 3 cities with the lowest prices used less common
    special blends but are all close to the largest refining center, the Gulf
    Coast and, therefore, have many more potential supply options than more
    isolated cities do.

    We found similar results with regard to the volatility of gasoline
    prices.22 For example, 18 of the 20 cities with the most volatile prices
    used special blends of gasoline, and many of these cities were also among
    the highest-price cities. In contrast to the cities with relatively high
    price volatility, 17 of 20 cities with the lowest volatility use either
    conventional or 7.8 RVP gasoline. However, while prices for special blends
    tend to be higher and more volatile than prices for conventional gasoline,
    available data did not allow us to attempt to isolate the effects of
    specific special gasoline blends on gasoline prices or to definitively
    establish a causal link between specific special blends and price
    volatility. Specifically, we did not have sufficient data to control for
    all other potential contributing

    22We measured volatility for each city as the standard deviation across
    time of the city price minus the price of West Texas Intermediate crude
    oil-a widely used benchmark for crude oil, the principle physical input
    into gasoline. A more detailed description of our methodology can be found
    in appendix I.

    factors-such as the distance from cities to the sources of gasoline
    supply, or other specific features of these cities that might influence
    prices regardless of the blend of gasoline used.

        Other Studies Have Found Similar Results

    We reviewed the literature associated with special gasoline blends and
    gasoline prices and found a number of studies done by government,
    academic, and private entities. The results and conclusions of these
    studies were largely consistent with our findings. For example, a recent
    EPA study found that high prices and price volatility are most acute in
    isolated markets, particularly those using special gasoline blends.23 The
    study also pointed out that some states had adopted specific gasoline
    blends in an attempt to use a blend that had a lower refining cost than
    federal reformulated gasoline. EIA also studied these blends and
    concluded, among other things, that the increasing number of distinct
    gasoline blends has reduced the flexibility of the supply and distribution
    system to respond to unexpected changes in supply and demand for gasoline.
    EIA further pointed out that, in some cases, states have chosen low RVP
    gasoline blends in an attempt to achieve lower gasoline prices than if
    they had used federal reformulated gasoline, and they inadvertently may
    have added strain to the distribution system, leading to greater potential
    for price volatility. A number of other academic and private studies found
    similar results.

        Special Gasoline Blends Contribute to Higher and More Volatile Prices, but
        Available Data Are Insufficient to Control for all Other Factors

    There is a broad consensus among the experts and others we spoke with that
    the proliferation of special gasoline blends have contributed to increased
    and more volatile gasoline prices. The studies we reviewed also came to
    similar conclusions. Further, the greater complexity and higher refining,
    transportation, and storage costs associated with supplying special
    gasoline blends have almost certainly resulted in increased prices or
    volatility, either because of more frequent or severe supply disruptions,
    or because higher costs are likely passed on, at least in part, to
    consumers. For example, depending on the pipeline company, costs
    associated with downgrades or transmix are recovered from customers. At
    least part of these costs are, in turn, likely to be passed down the
    supply chain and eventually to consumers of gasoline. Similarly, the costs
    incurred to install

    23EPA Staff White Paper, Study of Unique Gasoline Fuel Blends ("Boutique
    Fuels"), Effects on Fuel Supply and Distribution and Potential
    Improvements, EPA420-P-01-004, Office of Transportation and Air Quality,
    U.S. Environmental Protection Agency: October 2001.

    new processes to make special gasoline blends are likely passed on, at
    least in part, to consumers because refining companies would not make
    these investments without a reasonable expectation of a return on their
    money.

    While it is, therefore, almost certain that special gasoline blends have
    been a contributing factor to higher gasoline prices, it is not possible
    with the data available to us to conclusively determine the extent to
    which these blends have caused the higher prices and greater volatility
    found in specific cities or to rule out other potentially contributing
    factors. Such other factors may include specific supply infrastructure
    problems in or around these cities that would impact gasoline prices
    regardless of the blend. For example, state and industry officials in
    California told us that marine terminals for off-loading gasoline and
    other petroleum products are in short supply in California, which
    constrains the ability of suppliers in the state to receive these products
    from outside the state in the event of a local supply shortfall. These
    constraints would potentially contribute to higher gasoline prices
    regardless of which blend is used. Another potential factor that might
    influence gasoline prices independently of gasoline blends is the level of
    competition in the petroleum products industry. For example, in a recent
    GAO report, we found that oil company mergers had contributed to a 1 to 2
    cent per gallon increase in conventional gasoline prices in the 1990s and
    as high an increase as 7 cents per gallon for California's special
    gasoline blend. In addition, there may be other such factors at play that
    we do not observe, so we cannot definitively determine the precise extent
    to which observed prices are the result of the proliferation of special
    gasoline blends.

    Conclusions	Special gasoline blends have reduced emissions and helped
    contribute to improved air quality in some parts of the country. Using
    special gasoline blends to achieve air quality standards is attractive to
    states; the blends offer immediate reductions in emissions from all
    vehicles already on the road by varying degrees. Unfortunately, EPA's
    knowledge about the emissions generated when special gasoline blends are
    burned is outdated. Much has changed regarding vehicle and emissions
    control technologies since special gasoline blends, including those with
    ethanol, were last comprehensively tested in automobile engines. However,
    EPA and the states continue to rely on models built largely around these
    dated findings when evaluating whether to allow states to use special
    blends as a component in their efforts to improve air quality. Given the
    significant changes in vehicles and fuels, EPA should have better
    information about how the current fuels affect the vehicles currently on
    the road. In addition,

    Congress should have better information regarding the effectiveness of
    these blends, particularly those containing oxygenates such as ethanol, to
    aid in setting policy on fuel blends and the use of oxygenates.

    Although special blends have helped reduce emissions and improve air
    quality, the introduction of these blends appears also to have divided the
    gasoline market, converting what had been closer to a single national
    commodity market, into islands of smaller and more local markets for
    blends of gasoline that are typically not interchangeable. Because of
    octane, seasonal, and other differences, each additional special blend
    that is added can require pipelines and fuel terminals to handle several
    additional blends. Overall, this transformation of the gasoline market has
    complicated the supply infrastructure, increased production and delivery
    costs, and reduced the availability of gasoline, in some cases. The
    impacts of the proliferation of special gasoline blends are most evident
    when there is a disruption in the supply chain, such as when a refinery or
    pipeline is shut down. In these instances, localities using a blend
    different from the gasoline used in nearby areas must seek replacement
    supplies from farther away, leading to delays that likely cause higher and
    longer price spikes until these supplies arrive. Overall, it is likely
    that gasoline prices are higher now than they would be if gasoline were
    closer to a single commodity.

    In light of the opposing effects of environmental benefits and negative
    market implications, an ideal policy for approving the use of special
    gasoline blends would balance these effects. However, each decision
    involves trade-offs that all stakeholders may not value equally.
    Specifically, different stakeholders may attach varying degrees of
    importance to the environmental benefits or the impacts on gasoline supply
    infrastructure. Further, individual state actions that impact the entire
    regional supply infrastructure may not fully take those impacts into
    account or, in some cases, even accurately predict the impact on their own
    gasoline supply. With the 8-hour ozone rule and other regulatory changes
    likely to lead to more applications to use special gasoline blends,
    balancing the emissions effects of specific gasoline blends against the
    implications for supply and price will be even more important in the
    coming years. While EPA is currently authorized to approve state
    applications to use special gasoline blends, the agency cannot effectively
    weigh environmental and supply considerations because it does not have
    authority to deny state requests to use these blends on the basis of
    regional supply or price considerations and because its information on the
    environmental benefits is dated.

      Recommendation for Executive Action

    To provide a better understanding of the emissions impacts of using
    special gasoline blends and these blends' impacts on the gasoline supply
    infrastructure, we recommend that the EPA Administrator direct the agency
    to take the following four actions: (1) work with states and other
    stakeholders to comprehensively analyze how various gasoline blends affect
    the emissions of vehicles that comprise today's fleet, including how
    overall emissions are affected by the use of ethanol and other oxygenates;
    (2) use this updated information to revise the emissions models that
    states use to estimate the emissions and air quality benefits of these
    fuels and provide this information to Congress; (3) work with states, the
    Department of Energy, and other stakeholders to develop a plan to balance
    the environmental benefits of using special gasoline blends with the
    impacts on gasoline supply infrastructure and prices, and report the
    results of this effort to Congress; and (4) work with the states, the
    Department of Energy, and any other appropriate federal agencies to
    identify what statutory or other changes are needed to achieve this
    balance and report these findings to Congress and request that Congress
    provide these authorities to the appropriate federal agency or agencies.

    Agency Comments and 	We provided a copy of our draft report to EPA for
    comment. The agency did not comment on our findings or recommendations but
    did provide

    Our Evaluation technical comments that we have adopted, as appropriate.

    As agreed with your offices, unless you publicly announce the contents of
    this report earlier, we plan no further distribution until 30 days from
    the report date. At that time, we will send copies to other appropriate
    congressional committees and the Administrator of EPA. We also will make
    copies available to others upon request. In addition, the report will be
    available at no charge on the GAO Web site at http://www.gao.gov.

    If you or your staff have any questions about this report, please contact
    me at (202) 512-3841 or wellsj@gao.gov. Contact points for our Office of
    Congressional Relations and Public Affairs may be found on the last page
    of this report. GAO staff who contributed to this report are listed in
    appendix II.

    Jim Wells Director, Natural Resources and Environment

    Appendix I

    Scope and Methodology

    To determine the extent to which special gasoline blends are used in the
    United States and how, if at all, this use is expected to change in the
    future, we reviewed related literature, reviewed data on the use of these
    fuels, and interviewed government and other officials. Specifically, we
    reviewed reports on the presence and use of special gasoline blends by the
    Environmental Protection Agency (EPA), the Energy Information
    Administration (EIA), and others. We also examined data on the use of
    special gasoline blends provided by EPA, ExxonMobil (a commonly mentioned
    source of information on use of special gasoline blends), the Oil Pipeline
    Information Service, state environmental agencies and others. In addition,
    we interviewed federal and state government officials, academic and
    industry experts, and industry officials. Specifically, we interviewed
    officials with the EIA and EPA in Washington, D.C., as well as officials
    with EPA's Office of Transportation and Air Quality in Ann Arbor,
    Michigan, and officials in each of the 10 EPA regional offices. We also
    interviewed representatives from industry trade associations including the
    American Petroleum Institute, the Renewable Fuels Association, the
    National Petrochemical Refiners Association, the Association of Oil
    Pipelines, the National Association of Convenience Stores, the Alliance of
    Automobile Manufacturers, and the Society of Independent Gasoline
    Marketers and with representatives from the National Governors
    Association. In addition, we interviewed academic and industry experts,
    and industry officials from companies involved in refining, terminal
    operations, and pipeline operations, as well as from large oil companies.
    We also conducted site visits in California, Louisiana, New Jersey,
    Pennsylvania, and Texas-states with large refining sectors and/or
    organizations with experience with producing and using special gasoline
    blends.

    To document what EPA and others have determined regarding the role of
    special gasoline blends in reducing vehicle emissions and improving
    overall air quality we reviewed related literature, interviewed federal,
    state, and other officials, and examined emissions estimates provided by
    EPA. Specifically, we examined reports on the emissions impacts of special
    gasoline blends done by EPA, the Auto/Oil Air Quality Improvement Research
    Program (AQIRP), National Research Council, state environmental agencies,
    and others. In addition, we interviewed federal and state government
    officials, academic and industry experts, and industry officials.
    Specifically, we interviewed federal officials at EPA and EIA, staff at
    state environmental offices, researchers associated with the National
    Academies of Science and the National Research Council, representatives
    from industry trade and health advocacy associations, including the
    American Petroleum Institute, the Renewable Fuels

    Appendix I Scope and Methodology

    Association, the National Petrochemical Refiners Association, the
    Association of Oil Pipelines, the National Association of Convenience
    Stores, the Alliance of Automobile Manufacturers, the Society of
    Independent Gasoline Marketers, and the American Lung Association. In
    addition, we interviewed academic and industry experts, and industry
    officials from companies involved in refining, terminal operations, and
    pipeline operations, as well as from large oil companies. To assess the
    reliability of emissions analyses, we reviewed the analyses' overall
    design and methodologies, including assumptions and inputs to modeling.
    Automobiles emit a number of harmful pollutants; however, some have been
    identified as potentially more significant than others. The Clean Air Act
    authorizes EPA to mitigate potentially harmful concentrations of major
    criteria pollutants, including carbon monoxide (CO), nitrogen dioxide
    (NO2), sulfur dioxide (SO2), ozone (O3), particulate matter (PM) and lead
    (Pb). GAO focused its analysis on VOC, NOX-important precursors to
    ozone-and CO emissions because the transportation sector is responsible
    for a large fraction of VOC, NOx, and CO emissions in the United States
    and, as a result, the Clean Air Act and EPA have specified the reduction
    of these pollutants through fuel control programs.

    To identify what effects, if any, special gasoline blends have on gasoline
    supply in the United States, we examined literature reporting on the
    effects of special gasoline blends on gasoline supply, interviewed
    government officials and a wide cross section of industry participants.
    Specifically, we interviewed agency officials with EPA, EIA, the Federal
    Trade Commission, and state regulatory agencies. In addition, we
    interviewed representatives from industry trade associations, including
    the American Petroleum Institute, the Renewable Fuels Association, the
    National Petrochemical Refiners Association, the Association of Oil
    Pipelines, the National Association of Convenience Stores, the Alliance of
    Automobile Manufacturers, and the Society of Independent Gasoline
    Marketers. We also interviewed petroleum industry officials from companies
    involved in refining, terminal and pipeline operations, and marketing,
    including interviews with senior industry officials from several
    integrated oil companies such as ExxonMobil, ChevronTexaco, five operators
    of large pipeline systems that carry multiple gasoline blends, several
    operators of terminals, and three large independent marketers of gasoline
    that buy wholesale gasoline and sell it to retail customers. We also
    conducted site visits in California, Louisiana, New Jersey, Pennsylvania,
    and Texas-states with large refining sectors and/or organizations with
    experience with producing and using special gasoline blends.

    Appendix I Scope and Methodology

    To determine how these blends affect gasoline prices, we examined the
    literature on gasoline prices, interviewed industry officials and experts,
    and analyzed wholesale gasoline price data. We reviewed reports on the use
    of specials gasoline blends and gasoline prices done by EPA, EIA, and
    others. We also interviewed government officials and industry experts
    including federal officials at EPA and EIA; staff at state environmental
    offices; academic and industry experts; petroleum industry officials from
    companies involved in refining, terminal operations, and pipeline
    operations, as well as from large oil companies; and representatives of
    trade associations.

    In addition, we evaluated data on wholesale gasoline prices in 100 cities
    provided by the Oil Price Information Service (OPIS), as well as data on
    national average prices1 from the same source-these national data covered
    all the terminals in the country for which OPIS collects data. The data
    were weekly average prices from terminals selling gasoline at wholesale
    and covered the period from December 2000 through October 2004. In
    choosing which cities to evaluate, we first selected all cities on major
    pipelines. Then we selected the largest cities in each state and in each
    contiguous area that used a special gasoline blend. In so doing, we chose
    at least one such city from each contiguous area in the United States that
    we determined used a special blend of gasoline. Then, we chose cities in
    areas that use conventional gasoline, using similar criteria-every
    conventional-gasoline city chosen was the largest city in its respective
    state that was on a major pipeline. We did not estimate an econometric
    model to try to isolate the effects of specific special blends because we
    felt we lacked sufficient data to control for all other potential
    contributing factors-such as specific features of these cities that might
    influence prices regardless of the blend of gasoline used or the degree of
    competitiveness in the gasoline supply industry. Instead, we ranked the
    100 cities according to the mean of their gasoline prices to determine if
    there were consistent patterns with respect to areas that use special
    gasoline blends versus areas that use conventional gasoline. To calculate
    the mean, we first created price differentials between each week's price
    in each city and the price per gallon of West Texas Intermediate crude
    oil-a commonly used benchmark for world crude oil prices. These crude oil
    prices came from Platts, a

    1Wholesale prices are the prices reported by fuel terminals and did not
    include any relevant taxes. According to OPIS, in some cases fuel
    terminals may have reported tax credits available for ethanol fuels in the
    prices that they reported, but they acknowledge that past reporting may be
    inconsistent in this regard.

    Appendix I Scope and Methodology

    common source for crude oil and petroleum product prices. For each city,
    we performed a statistical test comparing the average prices between each
    city and two comparison cities in Texas2.

    We also ranked the cities according to the standard deviations of their
    prices over time and looked for similar patterns. To calculate the
    standard deviations, we again created price differentials between each
    week's price in each city and the price per gallon of West Texas
    Intermediate crude oil. Creating a differential between gasoline and crude
    oil prices controls for some volatility in gasoline prices that is caused
    by changes in the price of crude oil, the fundamental raw material input
    in gasoline. Then, we calculated the standard deviation over time for each
    city for these price differentials. The standard deviation is a common
    measure of the variability of data and, in this case, is a measure of how
    much the prices in each of the cities varied over time, controlling for
    crude oil prices. For each city, we performed a standard test for
    statistical significance of the difference of the variability between that
    city and the city with the lowest standard deviation.3

    2Specifically, we performed a sign test. See, for example, R.V. Hogg and
    A. T. Craig, Introduction to Mathematical Statistics. 4th ed. (New York:
    Macmillan, 1978): 312-314. We use the sign test because it tests the
    equality of matched pairs of observations without imposing further
    assumptions on the underlying distributions. The results of this test
    showed that all the highest 20 city prices were statistically
    significantly greater than in the low price comparison city.

    3H. Levene, "Robust tests for equality of variances," ed. I. Olkin,
    Contributions to Probability and Statistics (Palo Alto: Stanford
    University Press, 1960): 278-292. We use the Levene test because the
    conventional F test is very sensitive to the assumption that the data are
    drawn from a Normal distribution, an assumption that does not necessarily
    hold for the gasoline price data. This test indicated statistical
    significance for the difference between the variances of most of the
    highest volatility cities compared to the lowest volatility city.

    Appendix II

                         GAO Contact and Staff Acknowledgments

                          GAO Contact Jim Wells (202) 512-3841

      Staff Acknowledgments

    (360504)

    In addition to the individual named above, Mark Bondo, Jon Ludwigson,
    Kristen Massey, John Mingus, Cynthia Norris, Frank Rusco, Barbara
    Timmerman, and Kim Wheeler-Raheb made key contributions to this report. In
    addition, important contributions were made by Diane Lund, Dawn Shorey,
    and Mary Welch.

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