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in emissions of ozone-forming compounds and toxic air contaminants than now result from the federal regulations.

California has historically faced the most challenging and intractable air pollution problems in the nation. Because of our unique needs, for more than 25 years California has been the only state allowed by the federal Clean Air Act to develop and administer its own motor vehicle emission standards. As long as they are at least as protective as the federal standards and meet other criteria, our California motor vehicle emission standards can be substituted for the federal standards. California is also the only state given unconditional authority under the Clean Air Act to adopt its own emission control standards for gasoline and other motor vehicle fuels. In the case of fuels standards, however, both the California and federal standards are now applied in California.

The 1990 Clean Air Act Amendments directed the U.S. Environmental Protection Agency (U.S. EPA) to adopt a federal reformulated gasoline program for urban areas with the most serious smog problems. The amendments mandated that federal reformulated gasoline contain various specified properties, and imposed limitations on the level of flexibility that the U.S. EPA could build into the program. The federal reformulated gasoline regulations were promulgated in early 1994 and became applicable in December 1994. In California, the federal regulations now apply in the greater Los Angeles, San Diego, and Sacramento areas.

In the meantime, the ARB was developing a comprehensive program for cleaner cars and cleaner fuels. We adopted the California cleaner burning gasoline regulations in 1991, and they became applicable in the spring of this year. This program established the most stringent and comprehensive gasoline standards in the world. It contains specifications for eight different properties that affect emissions of ozoneforming compounds and toxic pollutants. The regulations also feature a "predictive model" that is based on the analysis of a large number of vehicle emission test studies. Instead of meeting the specifications set forth in the regulations, refiners have the option of producing gasoline subject to an alternative set of specifications that the predictive model shows will achieve equivalent emission reductions. California refiners are using the predictive model approach for much of the gasoline now being produced in the state.

Unfortunately, the overlapping applicability of the state and federal reformulated gasoline regulations substantially reduces the extent to which refiners can take advantage of the flexibility built into the California program. Refiners are required to comply with the federal Act even though the California predictive model shows that a different formulation will achieve equivalent or greater air quality benefits. Refiners are also required to meet complicated federal reporting and recordkeeping requirements that are not necessary for compliance with the state program. Although we are pleased that U.S. EPA exempted California refiners from a number of the federal enforcement requirements, a refiner can lose that exemption as a result of even a single violation of the California regulations.

Now that the California and federal reformulated gasoline regulations both are in place, we believe that it makes best sense for the more effective state regulations to apply in lieu of the federal regulations, as is the case with California's motor vehicle emission standards. Enactment of H.R. 3518 is necessary so that refiners can fully use the flexibility built into the California program, and can avoid needless paperwork requirements. This will reduce the costs of producing California gasoline, and should lead to lower prices at the pump.

H.R. 3518 is carefully crafted to assure that, without establishing new federal mandates, Californians enjoy all of the health benefits of reformulated gasoline. The California regulations will apply in lieu of the federal regulations only if they will achieve equivalent or greater emission reductions. Further, the California gasoline regulations have been approved by U.S. EPA as part of our State Implementation Plan, and are thus federally enforceable.

For these reasons, the ARB fully supports and urges the committee to act favorably upon H.R. 3518. Please let me know if there is anything I can do to assist in its passage.

Sincerely,

cc: Honorable Barbara Boxer

Honorable Dianne Feinstein

Honorable Brian Bilbray
Honorable Christopher Cox
Honorable Anna Eshoo

Honorable Carlos Moorhead

Honorable Henry Waxman

JOHN D. DUNLAP, III
Chairman

AMERICAN METHANOL INSTITUTE
OXYGENATED FUELS ASSOCIATION
RENEWABLE FUELS ASSOCIATION
September 10, 1996

The Honorable THOMAS BLILEY

Chairman

Committee on Commerce

U.S. House of Representatives

Washington, D.C. 20515

DEAR MR. CHAIRMAN: On behalf of the entire U.S. oxygenate industry, we would like to express our serious reservations regarding H.R. 3518, a bill introduced by Representative Bilbray to exempt certain states from federal reformulated gasoline (RFG) standards. We believe this bill is unnecessary and we strongly suggest the need for a thorough hearing and dialogue if the Committee should contemplate taking any action on this legislation.

Proponents of H.R. 3518 have failed to make a compelling argument that the legislation is needed. When introducing the bill in May, Congressman Bilbray argued that H.R. 3518 would ease the rising costs of gasoline. Time and the benefit of hindsight, of course, have demonstrated that the causes for the increases in gasoline prices this past spring had virtually nothing to do with Clean Air Act compliance costs, and everything to do with temporary supply shortages caused by a colderthan-normal winter and the decrease in inventories at refineries. As the market adjusted and gasoline prices were reduced, the need to provide legislative relief to lower refiner costs was proven to be unnecessary.

Exempting states from federal RFG standards would have little impact on the price of gasoline in any event. Market prices have shown that federal RFG costs only slightly more than conventional gasoline (2-3cts per gallon) and actually less than California RFG, the only state with its own RFG program. The reason California RFG is more expensive is the cost associated with reducing sulfur content capping aromatic content, capping olefin content and reducing distillation specifications that reduce the amount of gasoline that can be extracted from a barrel of crude oil. These requirements are far more stringent than federal RFG and far outweigh the nominal cost of oxygenates, which is the only additional specification of the federal fuel.

Advocates of H.R. 3518 also argue that the bill will allow refiners to take advantage of the flexibility built into the California program. But similar flexibility_is built into the federal RFG program. Refiners utilizing EPA's complex model for RFG have great latitude to adjust fuel parameters to maximize efficiency and lower cost. Therefore, the argument that H.R. 3518 is needed to promote flexibility is specious. Proponents of H.R. 3518 maintain it would only apply to California. But the legislation clearly allows "any such state" which has been granted an EPA waiver to develop its own RFG regulations which do not meet the federal RFG standards. This could create a patchwork of fuel requirements across the country that would severely burden the fuel production and distribution system.

The legislation, as drafted, has significant enforcement problems. The bill provides no mechanism to verify that gasolines indeed meet equivalent or greater reductions in emissions than required by federal RFG. While proponents have argued that the State Implementation Plan process allows for such a determination to be made, the means by which an appropriate evaluation and comparison would be made remains unspecified.

Presumably, proponents of H.R. 3518 believe the predictive model developed by the California Air Resources Board (CARB) could be used by refiners to demonstrate that fuels subject to an alternative set of specifications could achieve emissions reductions equivalent to fuels meeting the federal standards. But the CARB predictive model has shown significant differences from the complex model developed by EPA.1 A comparison of the two models suggests that the predictive model underestimates the benefits of oxygenates by, among other factors, failing to properly account for the impact of high emitters. Certainly, until the differences between the two models are more thoroughly understood and corrected, it makes no sense to legislate a change to the Clean Air Act establishing an alternative compliance mechanism.

We understand that EPA has dealt effectively with virtually all of the problems caused by the overlapping applicability of state and federal gasoline regulations. Thus, the only practical consequence of H.R. 3518 is to exempt refiners in Califor

1It is important to note that the complex model was developed with input from refiners, oxygenate producers, auto manufacturers, consumer groups and state environmental officials (including CARB).

nia, and possibly other states, from the oxygen requirement of § 211(k) of the Clean Air Act. Such relief is unnecessary, and could potentially undermine the air quality benefits of the RFG program. If the bill only impacts California, as proponents suggest, and the goal is to provide consistency in the California market, legislation is not necessary. Refiners could simply add the required oxygenate amounts to California RFG. The air would be cleaner and the state would have one gasoline.

Oxygenates play a critical role in assuring that the air quality and public health benefits of RFG are realized. Oxygenates provide significant reductions in exhaust VOC emissions. Without the oxygen standard, refiners would likely meet the VOC reduction requirements through evaporative VOC emissions reductions alone, thereby forfeiting significant ozone reduction benefits.2 In addition, oxygenates are the most cost-effective means of reducing benzene and other toxic emissions from gasoline. When refiners utilize the octane value of oxygenates, the toxic reductions realized often exceed those required by either California or federal RFG. Analysis of gasoline quality surveys done by the American Automobile Manufacturers Association indicate that 1995 reformulated gasolines had a reduction of approximately 25% in toxic emissions while their minimum requirement was only 15%. In the absence of the oxygen standard, those additional toxic reductions would be forfeited. In summary, H.R. 3518 will have no beneficial impact on gasoline prices, is not needed to provide refiners with the flexibility to effectively meet clean air regulations, creates unnecessary implementation and enforcement problems, and could undermine the air quality benefits of the RFG program. Again, we strongly advise against Committee action on H.R. 3518.

Thank you for your consideration of these views.
Sincerely,

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DEAR REPRESENTATIVE BILBRAY: The California Air Pollution Control Officers Association (CAPCOA) consists of thirty-five local air quality agencies throughout California. Our Association supports both your bill, H.R. 11, and Senator Feinstein's bill, S. 266. These bills would provide California greater authority over its clean air program by allowing California's cleaner-burning gasoline regulation to apply in lieu of federal reformulated gasoline regulations as long as these regulations achieve equivalent or greater emission reductions of ozone-forming compounds and toxic air contaminants.

The Clean Air Act currently requires the use of at least 2% by weight oxygenates in reformulated gas. Congress mandated, in the Clean Air Act, the use of reformulated gasoline in 1990 in those areas of the country with the worst smog problems, primarily here in California. This requirement results in 11% of MTBE in each gallon of gas-MTBE being the oxygenate/additive used in California to reduce fuel emissions. Although gasoline manufacturers claim it is feasible to produce cleanburning gas without MTBE, the 2% federal requirement prohibits them from doing so in many areas of the State.

H.R. 11 and S. 266 give California the flexibility to implement more stringent standards without having to meet the federal regulations requiring oxygenates, like

2 Exhaust VOC emissions are known to be more reactive than evaporative VOC emissions, meaning that they will form ozone more quickly. Therefore, the exhaust VOC reduction benefits of oxygenates are critical to the ozone reduction goal of the RFG program.

MTBE, in gasoline. This legislation permits California to meet an "outcome” based reformulated gasoline standard without requiring an additive that poses a serious ground-water pollution problem such as MTBE. We strongly believe that achieving cleaner air should not come at the expense of water quality.

For these reasons, CAPCOA fully supports H.R. 11 and S. 266. Should you have any questions, please contact our Legislative Committee Chairman Larry Greene at (530) 757-3656.

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DEAR MR. VAUGHAN, It was with some disappointment that we read your April 9 letter to Chevron Products Company President, Pat Woertz. As you know, we have spent countless hours in meetings with you, your staff, and key representatives of your industry over the past year trying to come up with a way to work together to achieve the common goal of eliminating MTBE from our California gasoline. Our objective in these meetings was to explain the obstacles faced by Chevron in hopes that we could convince your industry that providing California with the flexibility to depart from the federal reformulated gasoline oxygen mandate would allow us to remove MTBE with minimal inconvenience to our gasoline-buying customers. We also hoped your industry would understand that ethanol, though used scantily in California gasoline now, would be used in large quantities if MTBE were eventually phased out.

Your April 9 letter suggests that we failed in this endeavor. With your personal encouragement and with encouragement from at least one of your member companies, we thought at one point that we were close to agreement. But given the unqualified statement that you will "steadfastly oppose legislative efforts to remove the oxygen content requirement," we wonder whether the time we spent on the set of common principals we jointly drafted was well spent.

We also apparently failed to communicate the importance of flexibility in the manufacture and distribution of petroleum products. Chevron and TOSCO sponsored the report done by MathPro to show that if California refiners were allowed to optimize their production and distribution of gasoline-while meeting all emissions performance requirements-costs would be significantly reduced overall and ethanol, due to its advantageous octane, dilution, and distillation properties would still be used. It is disappointing that you should use those results to justify maintaining the current oxygen mandate for California when, in fact, MathPro's key conclusion supports just the opposite:

By allowing refiners to produce non-oxygenated CARB gasoline, the FeinsteinBilbray bill likely would: (1) reduce the cost of producing CARB gasoline; (2) reduce California's draw on limited supplies of mid-western ethanol; and (3) moderate possible increases in the price of ethanol or shortfalls in the supply of ethanol.

The federal oxygenate mandate interferes with flexibility by requiring in specific areas at specific times of the year in specific quantities. We are not surprised that MathPro showed only modest overall reductions in ethanol that would be used compared to the federal mandate. However, we are also not surprised that cost estimates were substantially reduced since lifting the mandate has an enormous impact on flexibility.

The implication in your letter that using ethanol in the winter in Los Angeles is a simple matter indicates we also were unable to communicate the existence of considerable logistical barriers involved. Seasonal switching between ethanol- and MTBE-blended gasoline is unavoidable in the near term because, under the mandate, oxygen is required in summertime gasoline and capital expenditures that could take four or more years to make are required to accommodate ethanol at mandated levels. Thus, for now, we will have to use MTBE in the summer. Seasonal

switching is very difficult since the federal government does not allow mixing of ethanol-blended gasolines with non-ethanol blended gasolines anywhere in the distribution system and because summertime gasoline is subject to stringent vapor pressure (RVP) control. The RVP increase that comes from mixing an ethanol-blended gasoline with any other is underappreciated outside our industry including the authors of the Downstream Alternatives, Inc., study you cited. Specific to Chevron, of course, the Downstream Alternatives study indicated that we have a long way to go before our terminals are capable of blending ethanol at any time of the year.

The so-called "real world environmental benefits" of oxygenates, as described in your letter, are at best an accidental byproduct of the oxygen mandate. It is also possible that they are fictional. These ancillary benefits have never undergone a real analysis using the normal process of genuine scientific inquiry. Should these ancillary benefits be compelling but achievable less expensively, then appropriate performance standards should be adopted rather than maintaining the prescriptive oxygen mandate. In our view, 700 million gallons of non-oxygenated gasoline produced at our Richmond refinery that met or exceeded the California Air Resources Board performance standards is sufficient proof that the imposition of the oxygen mandate is not necessary to maintain the air quality benefits of the Clean Air Act Amend

ments.

Curiously, your letter fails to mention the big "real world" detriment that ethanol produces, that of RVP increase when added to gasoline. It is this unalterable characteristic of ethanol, more than any other factor, that has limited its use in California reformulated gasoline. RVP increases drive volatile hydrocarbons into the atmosphere where under the summer sun they react with oxides of nitrogen to form ozone, precisely the opposite of what the Clean Air Act intended for reformulated gasoline.

Finally, we find your discussion of certainty interesting because while we have endeavored to keep the public policy debate focused on concerns about MTBE in California gasoline, you suggest that our support for the Feinstein/Bilbray bill has caused uncertainty. At the same time, your letter openly injects new and unrelated issues into the legislative arena. Perhaps we differ on which uncertainties are relevant to this issue. When we talk of it, we mean the need for legal and regulatory certainty that enables us to plan for the future, i.e., obtain necessary permits, configure our refineries and other facilities, and serve our customers. For the ethanol industry, the certainty you seek appears to be market certainty-mandates for the use of your product, supported by subsidies to make your product economical. If we have missed the mark in our understanding and legal certainty is in fact a goal you share with us, we invite you to support Feinstein/Bilbray or similar bills and to keep the discussion focused on the matter at hand and demonstrate your concern for the California consumer.

As you know, we have taken no exception to your contention that a reasonable amount of ethanol can be supplied (at a cost) to California. The uncertainty lies in whether the amount actually required is reasonable given the combination of mandated levels, the need to meet other California gasoline specifications, and octane demands. The Downstream Alternatives report suggests that far larger quantities may be needed than what you cite in your letter. By working against the flexibility our industry needs, your industry risks the backlash of California's drivers who, as we have learned from painful experience, don't want obstacles to their access to low cost and abundant motor fuel.

As committed as you are to maintaining the federal oxygen mandate nationwide, we are committed to supplying our customers with products that they want. Our California customers are telling us that they want MTBE out. Our ability to satisfy them is hindered by the oxygen mandate as it applies in California, we will continue to support efforts to remove it here or in other places where our customers say the same. At any time that you feel it would be productive, we are ready to renew discussions.

Sincerely

cc: Governor Gray Davis

Senator Dianne Feinstein
Congressman Brian Bilbray

AL JESSEL

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