RENEWABLE FUELS ASSOCIATION PATRICIA WOERTZ Chevron Products Company 575 Market Street San Francisco, California 94105 DEAR MS. WOERTZ: The domestic ethanol industry has followed with great interest Chevron's efforts to promote federal passage of H.R. 11 and/or S. 645 as a means of accelerating the ban on MTBE from California gasolines. Given the conclusion of the University of California-Davis report regarding the environmental risks posed by the continued use of MTBE, your effort to facilitate the expeditious removal of MTBE is laudable. But the problem is MTBE in water, not oxygen in gasoline. So your advocacy of a solution eliminating the oxygen standard appears to us to be misplaced. I understand from press reports that Chevron believes a combination of ethanol blended gasolines and non-oxygenated fuels will likely replace MTBE. And I have reviewed the MathPro Inc. report prepared for Chevron and Tosco Corporation which concludes "the 'optimal' (cost-minimizing) share of non-oxygenated CARB gasoline ranges from about 20 to 40 percent, depending on the time period and Predictive Model mode." But as CARB gasoline, which as you know does not require the addition of oxygen, currently accounts for about 35% of the state's total gasoline supply, it seems refiners would be able to produce the "optimal" amount of nonoxygenated gasoline today. Moreover, if accelerating the replacement of MTBE with ethanol is a goal, and as there are no volatility constraints to ethanol use during the winter months, refiners could certainly achieve 100% non-MTBE fuel use during the winter months far sooner than envisioned by either Governor Davis' Executive Order or your proposed accelerated schedule. Your marketing staff should clearly be able to advise you that ethanol supply is not a problem. There is more than enough ethanol to meet California demand. In fact, as ethanol has twice the oxygen content of MTBE, and can satisfy the oxygen standard for RFG with less than half the volume of MTBE, we estimate the total amount of ethanol needed to meet California RFG demand would be about 35,000 barrels per day, or less than 30% of existing U.S. ethanol production capacity. Enclosed is an analysis completed by Downstream Alternatives, Inc. which, after surveying every gasoline terminal in the state, concluded: “adequate supplies of competitively priced ethanol could be supplied to the California market almost immediately... it is clear that well over half the terminals offering gasoline could make ethanol available in six months or less. " One of your stated goals has been environmental equivalency. We agree. There should be absolutely no backsliding of the air quality benefits from RFG as MTBE is phased out. But while you have stated refiners can meet the required VOC performance standards without oxygen, you must also recognize that the "real world" environmental benefits of oxygenates are not reflected in the VOC reduction models. These "real world" benefits include reductions in combustion chamber deposits, which assure greater emissions reductions over the life of the vehicle; improved performance from higher emitting vehicles which benefit from the reduced exhaust emissions attributable to oxygen content; and, the reduced reactivity of exhaust emissions from oxygenated fuels. At the very least, we should be able to agree that eliminating the oxygen standard in carbon monoxide non-attainment areas such as Lake Tahoe would represent environmental backsliding. You should also know that to the extent ethanol fuels are used, there are the additional "real world" benefits of reduced greenhouse gas emissions, enhanced energy security and tremendous rural economic development which were all important policy objectives considered by the Congress when the RFG oxygen standard was enacted. Another key goal of the refining industry is certainty. Again, we agree. Companies need to know as soon as possible what the rules will be and make plans accordingly. In this case, the oxygen content standard was agreed to in the Clean Air Act Amendments of 1990. The rules governing oxygenates and RFG were made certain in 1994. But passage of Feinstein/Bilbray legislation is far from certain. And whether Feinstein/Bilbray remains focused on just the oxygen content provision or turns to other issues such as sulfur levels, olefin content, driveability index or greenhouse gases is even more uncertain. Thus, your advocacy of Feinstein/Bilbray only adds uncertainty to this process and thwarts your stated goal of accelerating MTBE's removal from gasoline. The U.S. ethanol industry sees Chevron Products Company and other refiners in California as partners in the effort to provide high-quality, clean-burning, MTBEfree gasolines as quickly as possible. But we will steadfastly oppose legislative efforts to remove the oxygen content requirement in federal RFG. We believe the oxygen standard is critical to maintaining the air quality goals of the Clean Air Act, and that attempts to remove it are unnecessary and counter-productive to expediting the removal of MTBE fuels in California. Again, I applaud your objective of providing non-MTBE fuels to California consumers and I look forward to working with you and others to realize that objective as quickly as possible. With best regards, I am DEAR SENATOR FEINSTEIN: It has been reported in the trade press that Senator Daschle is considering offering, among a number of prescriptive fuel specifications, a renewable fuels proposal that would greatly expand the mandate for ethanol use in motor fuels. The proposal, as reported, raises a number of public policy and operational concerns. I have had members of my staff put together the attached paper that highlights these issues in more detail. In summary, rather than providing refiners flexibility as long as they meet emission performance standards (as your legislation does), the proposal would continue the policy of providing government "recipes" for gasoline. The adverse consequences of MTBE use were not foreseen in 1990, the last time Congress tried to write a mandated "recipe" for reformulated gasoline. Congress should not make the same mistake again by mandating the use of ethanol, particularly in light of the known and recognized air quality concerns it would create. The proposal would likely have very significant adverse air quality impacts, by raising evaporative emissions of gasoline around the country, at a time when areas are struggling to find ways to meet air quality requirements. Additionally, the proposal would greatly expand the ethanol mandate, to all motor fuels conventional and reformulated gasoline, and likely to diesel fuel as well. The current oxygen mandate applies just to federal reformulated gasoline. Our analysis shows the proposed mandate would result in six-fold increase in ethanol use, increase the cost of refining, and decrease competition because refiners would have no other option (they could no longer make nonoxygenated gasoline). Finally the proposal would also result in billions of dollars of lost revenues from federal taxes, since ethanol enjoys a substantial federal subsidy. Because of all the adverse public policy concerns, and the negative operational effects this proposal would have, we would be strongly opposed to this renewable fuels mandate. We hope that you will continue to pursue your legislation, which we believe is based on sound public policy, and protects air quality, while providing refiners greater flexibility. We also will support the bill that we understand that Senator Chafee plans to introduce (and which we understand you will cosponsor) that would allow governors to opt-out of the oxygen requirement. It is important for California to have a solution as soon as possible. We're hopeful that working with Senator Chafee and other Senators, you will be able to craft a workable solution in the U.S. Senate. We would be happy to discuss with you or your staff in greater detail the concerns that the renewable fuels proposal raises. Sincerely, Attachment cc: The Honorable Gray Davis PATRICIA A. WOERTZ President The Honorable Brian Bilbray Mr. Winston Hickox, Secretary, California Environmental Protection Agency Mr. Ken Derr, Chairman, Chevron Corporation CONCERNS-RENEWABLE FUELS PROPOSAL It has been reported that Senator Daschle has proposed that beginning in 2001, 1% of all vehicle motor fuel sold in the U.S. shall be produced from renewable sources (i.e., other than petroleum, natural gas, coal, or peat), increasing to 2.5% in 2005, and 5% in 2010. Misleadingly labeled as a "renewable performance standard", it is in fact an ethanol mandate, which raises numerous concerns. These include: • Continuing a bad policy of providing 'recipes' rather than 'performance standards' • Degrading air quality and increasing gasoline manufacturing costs • Mandating an unprecedented six-fold increase in ethanol use over next 10 years • Decreasing competition-creating a monopoly for ethanol use in gasoline Increasing the ethanol subsidy by $10 billion over next 10 years; a subsidy that will have to be offset by a tax increase on some sector of the economy. • Causing an unprecedented change in the ethanol distribution and transportation system throughout the United States. The proposal would continue the bad precedent established in the 1990 Clean Air Act Amendments of government establishing gasoline recipes, rather than establishing performance standards. The adverse consequences of MTBE use were not foreseen in 1990, the last time Congress tried to write a mandated "recipe" for the reformulated gasoline program for the worst ozone areas in the country. Congress should not make the same mistake again by mandating the use of yet another additive in gasoline, ethanol, particularly in light of the known and recognized air quality problems it creates. The MTBE experience teaches that Congress should rely on emission performance standards, rather than mandating oxygen content-the way the California program does. Refiners can make gasoline that meets the emission reduction performance standard with or without adding oxygen. Government requirements for gasoline recipes only add to the cost, limit flexibility, and risk adverse unintended consequences. The California state program, which is performance based establishes emission limits without dictating to refiners how they must make the gasoline. The renewable fuels proposal just makes a bad situation worse. The proposal could result in significant air quality degradation throughout the United States. Adding ethanol raises the vapor pressure of gasoline-increasing air emissions. The ethanol mandate could result in significant degradation of air quality throughout the United States, unless other costly modifications are made to producing gasoline. It is well known that introducing ethanol as a gasoline blendstock increases the vapor pressure of gasoline (about 1 psi or 15% and, hence, the evaporative emissions of volatile organic compounds, or VOCs. VOCs lead to increased ozone formation, and can lead to increases in fine particulate. The new ozone and particulate standards will result in hundreds of new areas around the country being designated as non-attainment. Those areas will be looking to reduce VOC emissions, not increase them. Rather than helping improve air quality, adding ethanol, without making other changes to gasoline, only makes air quality worse. [Note: Ethanol is allowed a 1 psi waiver under the Clean Air Act for conventional gasoline even though these increased emissions adversely impact air quality.] From a public policy standpoint, it is hard to understand why Congress would greatly expand the mandate for ethanol use nationwide, and risk serious air quality degradation. Costly modifications are necessary to offset ethanol's vapor pressure effect. In order to meet the ethanol mandate proposal, without adversely impacting air quality, vapor pressure would have to be held constant. Refiners would have to remove about the same volume of current gasoline component (pentanes) as ethanol is added to keep the vapor pressure of gasoline down. Refiners would have to modify their refineries to (1) take out those blendstocks by adding new processing equipment, (2) build new pressurized tanks to hold those high volatility blendstocks, and (3) find new markets which don't exist today to dispose of those blendstocks. Where would these components go? What would be their use? Massive dislocation in use and transport of very volatile gasoline blendstocks, even when done safely, will have a significant impact on producing gasoline. All of which adds significantly to the cost nationwide of producing gasoline, with absolutely no commensurate air quality benefit, The bottom line: Air quality can be degraded and gasoline manufacturing costs will be increased-a lose-lose situation. The proposal would result in a significant expansion of required ethanol use. Significant new ethanol production capacity would need to be constructed. There is roughly 8 million barrels of gasoline sold per day in the United States, which equates to 120 billion gallons per year. Diesel fuel sales amount to roughly 30 billion gallons per year (on road diesel). If 1% needed to come from renewable sources (ethanol mandate) that would require roughly 1.5 billion gallons of ethanol, increasing to 9 billion gallons by the year 2010, when the ethanol mandate would increase to 5%. The current ethanol use in the United States is roughly 1.4 billion gallons per year (per the RFA website. The ethanol mandate would require a sixfold increase in domestic ethanol use or an additional growth of about 20% per year for the next 10 years of ethanol used in motor fuels. The proposal would hold refiners and the consumer hostage to ethanol prices. Currently, in areas where the oxygen mandate applies, refiners can choose which oxygenate (MTBE or ethanol) to add to gasoline thus promoting pricing competition for oxygenates. In areas not covered by the oxygen mandate, non-oxygenated gasoline competes as well. By expanding the mandate to all motor fuels nationwide, and limiting it to renewable sources-an ethanol mandate would in fact limit refiners' flexibility and reduce competition. Ethanol production in the U.S. is dominated by one company which has 50% of the domestic ethanol capacity. This would hold refiners (and ultimately consumers) hostage to whatever prices the ethanol industry wanted to charge. The proposal would result in significant loss of tax revenues to the United States government. Nearly every gallon of ethanol sold in the United States gets a $0.54/gallon subsidy today from the United States Treasury, through an equivalent reduction in either motor fuel tax revenue collected under the federal excise tax or through income taxes collected by blenders of ethanol. Therefore, current ethanol use (roughly 1.4 billion gallons/year) results in a loss of federal tax revenue's of ~ $750,000,000/year. Expanding the ethanol mandate by a factor of five in the year 2010 (to 5%, or 9 billion gallons/year) would result in a loss of almost $4,000,000,000/year in tax revenues. Over the next decade, this would result in a loss of over $10 billion that the federal tax revenues, most of which goes to states to spend on roads, highways, and other uses. The chart below shows the loss in revenue, assuming motor vehicle fuel (gasoline and on-road diesel, or mogas) continue to grow at ~ 2dyear, and that ethanol baseline growth is also at the same ~ 2%/year. The proposal would stretch the transportation system to the limit. Ethanol would have to be moved from the Midwest where it is produced, to every corner of the US, to every gasoline terminal no matter how remote. Since ethanol cannot be pipelined, ethanol cannot be blended at the refinery-like other oxygenates are. This will result in significant investment at marketing terminals around the country, in urban and remote locations, in order to blend and store ethanol. Ethanol would have to be brought in by railroad and truck causing increased highway traffic and further stressing our rail infrastructure that, recently, has dem onstrated an inability to deliver on time. This proposal would greatly exacerbate the nation's transportation system, risking run outs and gas lines at retail stations if ethanol cannot be delivered in a timely manner. STATE CAPITOL SACRAMENTO, CALIFORNIA April 14, 1999 The HONORABLE BRIAN BILBRAY United States House of Representatives DEAR REPRESENTATIVE BILBRAY: I am writing to convey my strong support for legislation introduced in the House (H.R. 11) and in the Senate (S. 266 and S. 645) that would enable California to phase out the use of the gasoline oxygenate methyl tertiary butyl ether (MTBE) from California reformulated gasoline. As you know, MTBE has led to the degradation and contamination of drinking water sources in communities such as Santa Monica, Santa Clara, Sacramento and Lake Tahoe. According to the Lawrence Livermore National Laboratory, MTBE has been detected at over 4,600 leaking underground fuel tank sites after inspecting only half the known sites. Furthermore, MTBE is known to cause cancer in animals and has been identified by several major scientific bodies as having the potential to cause cancer in humans. On March 25, 1999, I issued Executive Order D-5-99 where I found that the use of MTBE in gasoline poses a significant risk to California's environment. Required by State law, this determination was based on a study by the University of California, peer review comments of that study by the U.S. Geological Survey and the Agency for Toxic Substance and Disease Registry, and testimony from three days of public hearings conducted by the California Environmental Protection Agency. As a result of that determination, I have directed the appropriate state regulatory agencies to devise and carry out a plan to begin an immediate phase-out of MTBE from California gasoline, with 100% removal to be achieved no later than December 31, 2002. However, in order for California to achieve this necessary goal without a major disruption of our fuel supply, it is imperative that Congress provide flexibility to California to meet federal Clean Air Act emission standards without mandatory use of oxygenates. Both the House bill (H.R. 11) as well as the Senate bills (S. 266 and S. 645) provide exactly the flexibility California needs without weakening air quality regulations. The California Energy Commission and the University of California study have warned that an immediate ban or precipitous phase-out of MTBE would result in catastrophic price increases with a heavy impact on the economy. Most California refineries and terminals are not equipped to handle ethanol, the only viable alternative oxygenate, at this time. The re-tooling necessary to shift to an alternate such as ethanol would take a period of years and a multi-billion dollar capital investment by the oil and gas industry. The amount of ethanol California would need to import from other states and countries to cover an immediate ban on MTBE would amount to half of all the ethanol produced in the United States last year. Finally, I take seriously the admonition by the UC study that California learn from its mistake with MTBE and research the environmental impacts of any alternative before mandating its widespread use. Therefore, I have ordered the California Air Resources Board and the State Water Resources Control Board to conduct an analysis of ethanol and any other alternative oxygenate in air, surface water, and ground water. I am also directing the Office of Environmental Health Hazard Assessment to prepare an analysis of the health risks of ethanol in gasoline, including the products of incomplete combustion. Ethanol may very well play a large role in California's future fuel supply. But if California, or any state, can meet the emission standards of the Clean Air Act-with or without the use of oxygenates-we should be permitted to do so. Having that flexibility now will allow us to stop any further contamination of our drinking water while we transition away from MTBE. But the legislation outlined above is critical to California's ability to invest in a long-term solution. One that protects our water, keeps us on the road to clean air, and ensures an uninterrupted, afforded fuel supply. |