rest of the U.S. We suggest that the study be referred to a panel established under the aegis of the National Academy of Sciences. We also support your proposal that the State of California be allowed to waive the fuel oxygen requirement provided no deterioration in air quality occurs. As you may know, there is no risk to air quality in the event of a waiver since California's gasoline performance rules are as stringent as or more stringent than the federal counterparts. We would like to further discuss your proposal for a two-year waiver of the oxygenate requirement since it would not produce any significant changes in MTBE use. To substantially reduce the use of MTBE, refiners like ARCO must make modifications to refineries. Based on our experience, the time to get permits, design and construct the modifications of this sort would consume more than two years. But the real difficulty would be that we would not know which of the two alternative futures we would face: permanent repeal or reinstitution of the oxygenate mandate. Each path requires substantial modifications to refineries and capital outlays, but the two paths differ greatly. Next month Governor Gray Davis is expected to make a decision regarding the fate of MTBE in California fuel. Due to media and political pressures, the phaseout of MTBE appears likely. If MTBE is phased-out and the federal oxygenate mandate remains, ethanol is the only feasible alternative oxygenate. At first blush, this would appear to be a great boon to ethanol suppliers. However, we are concerned that an effective mandate for the use of ethanol in California on the same scale as the current use of MTBE would potentially cause a number of difficulties. There are several reasons for our concerns. First, ethanol shares some of the same physical characteristics as MTBE. It is extremely soluble in water-more so than MTBE-and is difficult to remove from water. Although it has a much higher taste and odor threshold than MTBE, water providers would likely have a similar response to its presence in drinking water supplies if MTBE is to be phased out, we clearly need a very thorough study to ensure that we are not exchanging one set of oxygenate issues for another. Second, large-scale, short-term demand for ethanol in California could produce supply shortages and price spikes. Gasoline and ethanol prices could rise substantially. Third, as noted above, if ethanol were the only option, refineries would have to be modified at substantial cost to deal with increased vapor pressure resulting from ethanol in the entire gasoline pool. Most of that investment would be wasted if at a later date the mandate disappeared. There would be new opportunities for expanded use of ethanol in California if MTBE were phased out and the oxygen requirement was eliminated. We think this is the right solution, and the one that will best serve all interests—including the environment, motorists, and oxygenate and fuel producers. We are very pleased that you have made the California MTBE issues a priority for the 106th Congress. We look forward to continuing this dialogue with you to find a cooperative solution. Thank you for your letter dated February 2, 1999 on the MTBE issue in California and your willingness to consider changes in gasoline specifications as possible solutions. As you are aware, this issue has been growing in intensity in California over the last several years. In December 1997, in response to our customers concerns, we publicly stated that we would work toward significantly reducing our use of MTBE in gasolines we make for California. Since that time, we have produced some gasoline with reduced MTBE content and have eliminated it entirely in some batches, for areas of the state where the overlapping federal oxygenate mandate does not apply (outside of the Los Angeles, San Diego, and Sacramento ozone nonattainment areas). We could do more immediately should the legislation sponsored by Senator Feinstein (S. 266) and Congressman Bilbray (H.R. 11) become effective. As we testified before Congress last year, we believe this legislation will make it easier for both ethanol-blended gasolines and non-oxygenated gasolines to compete in the marketplace. I would like to respond to several issues you raised in your letter: First, you have suggested that California be allowed to waive the federal oxygenate content mandate for a certain period of time, by granting refiners the flexibility to sell either federal RFG or CARB II gasoline throughout California. We certainly support the flexibility to replace the federal RFG requirements with the CARB RFG requirements.1 This, in fact is exactly what the Feinstein/Bilbray bills do. As we testified last year, CARB RFG outperforms federal RFG in reducing vehicle emissions, and the CARB program is performance-based in one important respect where federal RFG isn't, the oxygen content. We continue to believe that this is the best approach for government to take, rather than mandating specific formulas. However, limiting the time period to two years for refiners to take advantage of an oxygenate waiver provides little reason to change gasoline manufacturing practices by the industry. The modifications needed to refining, blending, and marketing operations to significantly reduce or eliminate MTBE would involve substantial investments that a short-term moratorium would not justify. In short a moratorium would only serve to postpone the tough decisions that must be made and further frustrate the people of California who are telling us and the political leadership of the state that they want action now. Second, you mentioned in return for this flexibility, no oxygenates would be phased out or banned. While we cannot respond for the state, we suspect the pressure will grow to phaseout MTBE in California. The issue is more complex than leaking tanks and two-stroke engines. MTBE, while a good gasoline blendstock, behaves differently from other gasoline components in the environment. It is highly water soluble, slow to degrade, and causes drinking water to smell and taste bad at extremely low concentrations. This means that even small discharges, such as spills by consumers, tank overfills, and vehicle accidents can result in MTBE contamination, which is more difficult to clean up and more likely to impact groundwater. Third, you discussed the idea of establishing a National Oxygenates Policy Advisory Commission (NOPAC) to conduct an intensive two-year evaluation of the use of MTBE and other oxygenates in gasoline. We would support additional steps which would further our collective understanding of this issue, since we believe issues will continue to arise regarding the national mandate. Finally, you mentioned you were hopeful there would be new opportunities for the expanded use of ethanol. As I mentioned earlier, we believe that gasoline with MTBE will be replaced with a combination of ethanol-blended and non-oxygenated gasolines in the marketplace. For one thing, oxygenates will continue to be needed in Los Angeles even if Senator Feinstein's bill were to become law, due to the need for carbon monoxide reductions in the winter. Ethanol will also be used voluntarily where its high octane and other favorable blending attributes make economic sense. I hope you will support the legislation sponsored by both Senator Feinstein and Congressman Bilbray, which has broad bipartisan support from the California delegation. The President of Chevron Products Company, Ms. Patricia Woertz, will be visiting Washington in the next few months, and would like to discuss this with you further, if your schedule permits. Thank you again for your letter, and your consideration of our thoughts on this issue. Sincerely, cc: The Honorable Dianne Feinstein The Honorable Gray Davis The Honorable Brian Bilbray K.T. DERR Chairman of the Board 1 Although your letter indicates that either federal RFG or CARB II gasoline could be sold in California during the waiver period, we don't believe that was your specific intent. Gasoline that only meets federal RFG requirements would not be as clean burning as CARB gasolineand thus would be unacceptable backsliding. Mr. MIKE BOWLIN UNITED STATES SENATE Chairman ARCO Corporation Los Angeles, CA 90071 DEAR MR. BOWLIN: One of my priorities for the 106th Congress is responding quickly to the existence of MTBE in groundwater in California. The potential ramifications of this problem for both the environment and the future of the RFG program are immense, and I am determined to work with all interested parties to fashion a response that allows California to address its immediate contamination concerns while preserving the long-term benefits associated with the use of oxygenates in gasoline. I view discussions with California's elected officials, the EPA and industry as essential to the realization of this goal. Therefore, I particularly appreciated the time that a representative of your company took recently to discuss the California situation with my Legislative Director, Eric Washburn. I am hopeful that that meeting marked the beginning of a constructive dialogue on the issue of MTBE and oxygenates use in gasoline. While I appreciate ARCO's desire to eliminate the oxygenate requirement for gasoline sold in California, I remain a strong believer in the oxygenate standard's contribution to a cleaner environment, a stronger economy and greater security. There should be no mistake about my commitment to the maintenance of the minimum oxygen standard over the long-term in cleaner burning gasoline. Last year, I actively opposed bills to waive the oxygen standard permanently, because I felt that they do not address the root cause of what I agree is a very serious environmental problem in California, and because they would have sacrificed the many benefits associated with using oxygenates. It is my understanding that the primary sources of contamination in California groundwater are leaking underground storage tanks and two-cycle boat engines. Any long-term solution to this problem should focus on these sources. Senators Feinstein and Boxer have reintroduced legislation in the 106th Congress to allow California to utilize non-oxygenated gasoline in RFG areas. I am sympathetic to their assessment of the urgency of the environmental threat posed by contaminated groundwater in their state and have suggested an alternative approach that will address this problem immediately while preserving the benefits of oxygenated fuels. Last fall, the EPA announced a series of steps designed to eliminate the pollution of water supplies by all constituents of gasoline, including MTBE. Since it will take time to fully implement those initiatives, I propose that the State of California be allowed to waive the oxygen requirement under certain prescribed conditions for a finite period of time. This interim approach will address the immediate environmental problem and allow us to reach the point where gasoline can be used without fear of water contamination. This compromise would, for a two year period (from date of enactment), grant to refiners the flexibility to sell either federal RFG or CARB II gasoline in California. No backsliding would be allowed, and no deterioration in California air quality would be permitted. In return for this grant of flexibility, no oxygenates would be phased out, or banned. In fact, I am hopeful that, in this environment, new opportunities would be found for the expanded use of ethanol. Given your concerns and the concerns of others regarding the continued use of MTBE, I also suggest that Congress establish a National Oxygenates Policy Advisory Commission (NOPAC) to conduct an intensive two-year evaluation of the use of MTBE and other oxygenates in gasoline. This panel would evaluate the effectiveness of oxygenates in cleaner burning gasoline, progress that has been made in leaking underground storage tank prevention, improvements in the efficiency of twocycle engines, MTBE bio-remediation, the relative safety, cost and availability of alternatives to oxygenates, and other relevant issues. It would then make recommendations to the Congress prior to the reinstatement of the oxygen requirement in California in two years. The efficacy of RFG with oxygenates is undeniable. The EPA has called the RFG program one of the most successful air pollution reduction programs in history, and early claims that RFG would cost 25 cents per gallon more than conventional gasoline have proven totally unfounded. RFG costs have averaged from 1 to 3 cents per gallon nationwide, much of the credit for which must go to companies like ARCO that have worked hard to provide cost-effective RFG to the American people. Today, four years after implementation of RFG, program supporters range from automakers to the American Lung Association. It is my intent to ensure that our economy and environment continue to enjoy the benefits of the minimum oxygen standard in cleaner burning gasoline for years to come. Again, thank you for your interest in this issue. I look forward to continuing this dialogue and finding a cooperative solution to the groundwater problem in California. DEAR REPRESENTATIVE BILBRAY: As you know, on May 6, the Health & Environment Subcommittee will hold a hearing on H.R. 11, your legislation that would allow California's reformulated gasoline (RFG) rules to preempt federal requirements if the state's rules achieve equal or greater emissions reductions. I am writing letters to all members of the subcommittee to encourage them to support H.R. 11 and to urge Subcommittee Chairman Bilirakis and Committee Chairman Bliley to move it through the Commerce Committee as quickly as possible and then urge Speaker Hastert to move it through the House of Representatives shortly thereafter. On March 25, 1999, Governor Davis signed an Executive Order phasing out the use of MTBE in California no later than December 31, 2002. Therefore, California urgently needs relief from the 2%-by-weight federal oxygenate requirement. Without relief, ARCO and other California refiners would have no choice but to use ethanol to meet the oxygenate requirement. While we do use ethanol in our gasolines in many areas during the winter, we could not use it in most of our gasoline in California without investing tens of millions of dollars to retool our California refinery. We are very reluctant to invest that capital for several reasons: (1) there are no air quality benefits associated with this expenditure, (2) gasoline vapor pressure limits in California make it exceedingly difficult to use ethanol in summertime gasoline even with refinery modifications, and (3) the oxygenate requirement may be eliminated soon after we make the investment. Instead, we would purchase gasoline and gasoline components on the open market to meet our customer's demands. Under this scenario, if we did not spend the money to optimize our CARB gasoline production with 2 weight percent ethanol, our gasoline output would decline by 15% to 30% during the summer. Since ARCO supplies about 20% of the gasoline in the state, California gasoline production would decline by 3% to 6%. California's most recent gasoline supply shortfall once again demonstrated that it is time-consuming and expensive to replace lost gasoline production from California refiners due to California's unique gasoline requirements and its geographic isolation from other major refining centers. The requirement to use a certain percentage of ethanol would further complicate California's gasoline supply infrastructure, since the ethanol necessary to meet the federal mandate would be transported to California primarily by rail cars from the Midwest. The ethanol industry will in fact make major gains in the California gasoline market without an oxygenate mandate. It has been estimated that about 44,000 barrels per day of ethanol would be used in California after MTBE is phased out. This represents about one-half of the total fuel ethanol currently produced in the entire U.S. and over a 100-fold increase in ethanol usage in California today. ARCO expects to use about 9,000 to 10,000 barrels per day of ethanol, assuming reasonable price and contract terms, even without a federal oxygenate requirement. Enclosed is a paper that provides further detail on why California needs urgent relief from the oxygenate requirement. Thank you very much for your continued hard work to get H.R. 11 enacted into law. Sincerely, ROGER E. TRUITT |