Statement of  Dr. Edward Murphy

                                       on behalf of the

                             American Petroleum Institute

                                          before the

Senate Environment and Public Works

Subcommittee on Clean Air, Climate Change,

and Nuclear Safety

March 20, 2003

        

Thank you, Mr. Chairman and members of the Subcommittee. My name is Edward Murphy and I am the Downstream General Manager for the American Petroleum Institute (API), a trade association representing more than 400 companies from all sectors of the oil and natural gas industry.

 

API appreciates this opportunity to address the fuels supply problems facing U.S. fuel providers and consumers. Time is of the essence because individual state MTBE bans will start to take effect soon, with Connecticut's starting in October and New York's and California’s bans beginning in January 2004. Differing start dates and gasoline requirements from various states, combined with a federal oxygen content requirement for reformulated gasoline (RFG), will complicate an already tight fuels system and increase the potential for disruptions in the supply and distribution system.

 

As Congress considers a comprehensive national energy bill, we urge it to address problems with fuel supplies that have plagued the petroleum industry and energy consumers over the last eight years.

 

Solutions Needed to Fuels Problems Facing the Nation

 

We believe Congress should repeal the oxygen content requirement for reformulated gasoline that is in the Clean Air Act and require a national phasedown of MTBE.  As part of the package that meets these objectives, we also support a renewable fuels standard that phases up to 5 billion gallons over several years nationally, with an averaging and credit trading program to allow the use of renewable fuels where most feasible and cost-effective. In addition, we support provisions that would protect and enhance the environmental benefits already achieved from reformulated gasoline.

 

Repeal of the oxygen requirement and a significant reduction in the use of MTBE were two of the key recommendations of the U.S. Environmental Protection Agency’s 1999-2000 Blue Ribbon Panel on Oxygenates in Gasoline. The report is also important because it recognizes that refiners today can provide clean-burning reformulated gasoline without the oxygen requirement. Three years have passed since those recommendations were made.

 

These steps are a much better solution than the alternative—which is continued state MTBE bans and further aggravation of the already-troublesome situation of a patchwork of fuels requirements across the country. A solution that relies on state-by-state MTBE bans to fix the problem is not efficient and will exacerbate supply problems that are likely to arise out of uncoordinated and disjointed state requirements. Unique state fuel requirements isolate affected markets and, in the event of a supply disruption, could cause shortages and price volatility, as experienced in two of the last four years in Chicago and Milwaukee. Sixteen states already have enacted MTBE bans or caps and additional states are considering bans. 

 

In addition, there needs to be recognition that even without federal legislation, ethanol is going to be in our gasoline system in increased amounts – at a minimum to fulfill the federal oxygen content requirement for RFG. But the current rules allow little flexibility in how, when, and where ethanol would be used. We need a federal solution that phases down MTBE in a uniform manner and allows the use of renewable fuels where it makes the most economic sense.   

 

The Federal RFG Oxygen Requirement and State MTBE Bans

 

Let me briefly review the situation we face:  In 1990, Congress amended the Clean Air Act to require the use of RFG in areas with the worst ozone pollution.  Congress decided that RFG had to meet certain emissions performance standards but also had to include a specific amount of oxygen.  The two most widely used oxygenates at the time were MTBE and ethanol. Most of the RFG oxygenate demand was on the coasts, where ethanol use faced significant economic, transportation, and handling challenges relative to MTBE.  As a result, as Congress full well expected, MTBE became the most commonly used oxygenate in areas near the coast. Ethanol became the oxygenate of choice in the Midwest due to favorable economics and proximity to ethanol supply. However, when gasoline was spilled or leaked and MTBE came into contact with water supplies, odor and taste issues arose with even very small concentrations of MTBE. 

 

Many state governments reacted by banning the use of MTBE. Unfortunately, there is considerable variation in the start dates and requirements for these laws. For example, Connecticut’s ban starts on October 1, 2003, while neighboring New York’s starts on January 1, 2004. Some allow incidental amounts of MTBE to remain, while others do not. Differing state gasoline requirements will complicate and increase the likelihood of disruptions in the supply/distribution system; this will place considerable stress on the efficiency and, therefore, the reliability of the gasoline distribution system -- unless federal legislative changes are made to the fuels provisions of the Clean Air Act.

 

Harmful Effects of State MTBE Bans

 

In the absence of federal legislation, consumers will be subject to the uncertainties posed by uncoordinated state actions. Individual states are restricting the use of MTBE, but they cannot change the federal RFG oxygen content requirement. That requirement is unnecessary, uneconomical and inflexible. It requires the use of an oxygenate in each gallon of gasoline in RFG areas. It is driving New Hampshire, for example, to opt-out of the federal RFG program and try to impose a state oxy-flexible RFG program, which could add yet another boutique fuel to the system if they are successful. Maintaining the status quo – with the federal RFG oxygen requirement in place and states continuing to ban MTBE – will require using ethanol in RFG areas where it may not be cost-effective. Alternatively, other states may pursue solutions that further fragment the market in new and different ways.

 

Currently, most of the RFG is required on the east and west coasts, yet ethanol is predominantly manufactured in the Midwest. As additional state MTBE bans start to take effect, RFG markets will, by default, need to use ethanol in each and every gallon of RFG in order to meet the federal oxygen content requirement. The Connecticut, California and New York MTBE bans alone are expected to result in ethanol demand in those states of about 1.1 billion gallons in 2004. There are no assurances that the full extent of the infrastructure needed to transport the added amount of ethanol will be in place in time to assure a smooth transition.  As states get closer to the implementation date for their fuel programs, the greater the temptation to change the date rather than deal with the uncertainty. California has already delayed its ban once.  Such a changeable environment does not make the investment decision process easier. A federal solution would remove much of the uncertainty that exists now.

 

Individual state bans have the effect of balkanizing the fuels markets, requiring that fuels with different characteristics be moved through the limited distribution system. With more types of fuels comes more complexity and less flexibility as the fuels used under one set of requirements may not be used to supply an area with other requirements. This is a problem where adjacent states require different grades. It is also harder to ensure that gasoline with MTBE does not intermingle with other gasoline volumes since all gasoline is moved via the same pipelines.

 

These factors all argue for a national phasedown of MTBE. In order for such a phasedown to have the least impact on supply, it needs to be done over a four-year timeframe.

 

Increasing Use of Renewable Fuels

 

While oxygenates are not necessary to make clean-burning fuels, there is a public desire to increase the use of renewable fuels, such as ethanol.  We believe this goal and that of a flexible gasoline distribution system can be met by a repeal of the federal oxygen requirement, a uniform nationwide phasedown of MTBE, and a renewable fuels standard rising to 5 billion gallons over several years.  However, for the renewable fuels standard to function effectively, it is absolutely critical that refiners be allowed to freely buy and sell credits for renewable fuels under a national average and credit-trading program.  That would allow for flexible and economical use of renewable fuels.

 

Let me emphasize that the cost of an approach that includes a federal phasedown of MTBE, repeals the federal RFG oxygen content requirement and includes a renewable fuels standard with a flexible national averaging, banking and trading program, would be less than maintaining the status quo of state MTBE bans and maintaining the federal RFG oxygen requirement.  A study by the U.S. Department of Energy (DOE) revealed that the cost of the renewable fuels standard would be minimal, between 0.5 and 1.0 cents per gallon and likely less with an effective banking and trading system. Importantly, a state-of-the-art study in 2002 by MathPro, Inc., a leading economic analysis firm, concluded that replacing the 2 percent oxygen requirement with the renewable fuels standard would be less costly than the status quo outcome of continued state MTBE bans and continuation of the federal RFG oxygen requirement.

 

The Need for Limited Liability Protection

 

Finally, we support limited liability protection that recognizes that when Congress mandates the use of fuels components, and when those components have been studied and approved by EPA, it is reasonable to disallow a case in which the mere presence of a renewable fuel or additive in the gasoline makes it a “defective” product.  We believe the coalition’s safe harbor provision strikes a balance between the interests of providing limited liability protection for using an additive that was approved for that purpose and providing legal remedies to injured parties. This narrowly tailored provision only applies to design and manufacturing defective product claims under products liability law.  It would not affect the “failure to warn” defective product claim or other tort remedies, such as negligence, trespass, and nuisance. 

 

Moreover, the safe harbor provision would not affect liability under federal and state environmental laws, and therefore would not affect response, remediation and clean-up.  Federal and state environmental statutes such as the underground storage tank laws under RCRA would still apply if gasoline was released and got into a well or contaminated a drinking water supply.  There are legitimate concerns about the potential risks of renewable fuels, and Congress may address those concerns by including a requirement that the EPA take a more active regulatory role than it has in the past.  The protection afforded by a safe harbor provision would apply only to renewable fuels and additives that had been approved by EPA.

 

Conclusion

 

To conclude: If Congress fails to act, consumers are likely to face the increasing costs of uncoordinated state MTBE bans – leading to increased strains on the fuel distribution system. While individual states are restricting use of MTBE, they cannot change the inflexible federal RFG oxygen requirement. Maintaining the status quo of the federal oxygen requirement and state MTBE bans will force the use of large volumes of ethanol in a very inflexible and unnecessarily costly fashion – and it could severely burden, if not disrupt, fuels distribution and supply. 

 

The carefully crafted provisions I have discussed, as part of a package that meets our objectives, are supported by an historic coalition including API, numerous farm and ethanol interests, Northeast state air quality officials and environmental interests and were passed by the Senate last year as part of the comprehensive energy bill. They offer carefully considered solutions to the fuels problems that have challenged fuel providers and burdened American consumers. They protect important environmental benefits achieved by reformulated gasoline. We strongly urge Congress to adopt similar legislation.