The National Association of Convenience Stores (“NACS”) and the Society of Independent Gasoline Marketers of America (“SIGMA”) respectfully submit this statement to the Senate Committee on Environment and Public Works on the occasion of the Subcommittee’s hearing on a possible fuels title to the national energy policy legislation. NACS and SIGMA request that this statement be made an official part of the record of this hearing.
II. The Associations
NACS is an international trade association comprised of more than 1,700 retail member companies operating more than 100,000 stores. The convenience store industry as a whole sold 124.4 billion gallons of motor fuel in 2001 and employs 1.4 million workers across the nation.
SIGMA is an association of more than 270 independent gasoline marketers operating in all 50 states. Last year, SIGMA members sold more than 48 billion gallons of motor fuel, representing more than 30 percent of all motor fuels sold in the United States in 2002. SIGMA members supply more than 28,000 retail outlets across the nation and employ more than 270,000 workers nationwide.
III. Focus on Motorists
This statement will focus on one simple message. As this Subcommittee, and this Congress, debates national motor fuel policy, NACS and SIGMA urge you to consider the impact this legislation will have on NACS and SIGMA members’ customers -- your constituents.
The average motorist does not know or care whether gasoline contains MTBE or ethanol; they simply want competitively-priced gasoline and diesel fuel to power their automobiles and trucks. In general, motorists favor environmentally-friendly fuels, and favor strong environmental protections to assure that the use of motor fuels does not harm air quality and does not pollute our nation’s water supplies.
These motorists’ interests are closely matched by the interest of independent motor fuel marketers. NACS and SIGMA member companies sell motor fuels, but for the most part, we do not make either the gasoline or the diesel fuel we sell. Consequently, from a business perspective, an independent marketer has little interest in what its refiner-supplier puts into these products, be it ethanol or MTBE. Independent marketers’ primary concern is supply. Our customers, and therefore our companies, benefit from plentiful supplies of gasoline and diesel fuel from diverse sources, thereby assuring a competitive marketplace for motor fuel. Furthermore, like our customers, we also support the production of motor fuels that do not harm air quality and the strong and effective enforcement of regulations to prevent petroleum releases from underground storage tanks. We support these issues for the benefit of our communities as well as for the benefit of our business.
Therefore, as you consider a fuels title to national energy policy legislation this year, we strongly urge you to keep in mind the interests of your constituents, and our customers, the motoring public. NACS and SIGMA believe that this Subcommittee will have served its constituents well if it puts aside special interest pressures and instead develops energy policy legislation that focuses on expanding overall motor fuel supplies, easing the pressures on the motor fuel distribution system, and reducing motor fuel price volatility.
IV. Key Components of Fuels Legislation
For these reasons, NACS and SIGMA strongly support efforts in Congress to adopt national energy policy legislation in 2003. To accomplish these objectives, we urge this Subcommittee to include, at a minimum, the following core provisions in the motor fuels title of a 2003 energy bill.
First, we support the repeal of the reformulated gasoline (“RFG”) program’s oxygenate mandate contained in Section 211(k) of the Clean Air Act. Numerous studies have concluded that oxygenates, including MTBE and ethanol, are not necessary for the production of clean-burning gasoline. The oxygenate mandate is not environmental protection; rather, it is political protection for the MTBE and ethanol industries and should be repealed. Doing so will enhance the ability of America’s refiners to efficiently produce gasoline for America’s consumers.
Second, we support an orderly phase-out of MTBE as a gasoline additive in a manner that does not impact overall gasoline supplies negatively. The contamination of ground water supplies by MTBE has been documented widely. To address this problem, NACS and SIGMA support a nation-wide phase-out of MTBE over a period of years Doing this at the federal level will avoid the further segmentation of the market as individual states proceed with their own bans. A phase-out over several years will permit the orderly transition from MTBE to other fuel components and mitigate the impact on overall gasoline supplies. In addition, we also strongly support increased enforcement of federal petroleum underground storage tank laws to help prevent any future petroleum releases. We will return to this subject later.
Third, we support the adoption of legislative provisions to slow, and ultimately reverse, the “balkanization” of the gasoline and diesel fuel markets into islands of “boutique” motor fuels. Twenty years ago, our nation had the most efficient fuel distribution system in the world. Today, with the proliferation of boutique fuels, the distribution system is under constant stress which has led to spot supply shortages, wholesale and retail price volatility, and consumer complaints. Congress must tackle this important issue in order to improve gasoline and diesel fuel supply and reduce price volatility. Any federal initiative that does not substantially restore fungibility to the motor fuel supply and distribution system will only contribute to the continued supply dislocation and price volatility witnessed over the past several years.
V. Consideration of an Ethanol Mandate
During the consideration of energy policy legislation last year, there was spirited debate over the proposed adoption of a mandate to include ethanol in much of the nation’s gasoline. NACS and SIGMA strongly opposed, and continue to oppose, an ethanol mandate. We simply cannot support a provision to replace one mandate -- the oxygenate mandate -- with another -- an ethanol mandate.
The details of this issue have been debated for several years as representatives of the ethanol industry and the MTBE industry have competed for federal market support. NACS and SIGMA are not concerned with the rivalry between these two industries, but we are very concerned about the impact the proposed resolution could have on consumers.
The ethanol mandate proposed last Congress places the motor fuels market in serious jeopardy. Our central concern is the delivery of product to all markets throughout the country in a cost-efficient manner. Because ethanol is predominantly a regionally produced product, it must be shipped from its Midwest-production facilities to all markets. The problem is that our pipeline system cannot transport the product. This forces the market to rely on rail and truck deliveries, a much more expensive method of liquid product transport. In addition, it adds yet another level of potential disruption to the system. These factors alone could lead to increased regional supply shortages and even greater price volatility.
NACS and SIGMA do not oppose increased market opportunities for ethanol; in fact, our members are the leading retailers of ethanol-blended gasoline. However, we believe it would be a mistake for the federal government to mandate its use on a national basis.
NACS and SIGMA recognize, however, that there is substantial political support in the House and Senate for the adoption of an ethanol mandate. Therefore, if Congress is intent on adopting a renewable fuels standard (“RFS”) as part of an energy bill, we urge that the following modifications be made to the fuels title offered by the House to the Senate last fall. These suggested modifications will benefit overall gasoline supplies and environmental protection, reduce the number of boutique fuels, maintain the competitive position of independent marketers, and ease the introduction of the RFS.
VI. Commingling of Divergent Compliant Fuels
First, Congress should adopt a legislative provision to permit the commingling of divergent compliant fuels. Currently, EPA regulations specifically prohibit the blending of ethanol-additized RFG with MTBE-additized RFG during much of the year. In addition, the regulations generally prohibit the blending of any two compliant fuels if the resulting mixture would have a higher RVP (generated by the presence of ethanol) than allowed in a specific market. These prohibitions balkanize the gasoline markets and increase supply shortages during market disruptions, while having little or no environmental benefit. Furthermore, the requirements make it considerably more difficult for a marketer to proactively sell ethanol-blended gasoline. There are a couple of scenarios that last year’s proposed fuels title would create that could be improved by allowing the commingling of compliant fuels.
If the oxygenate requirement is repealed, MTBE is banned, and an ethanol mandate is created, there will be at least two primary varieties of reformulated gasoline sold across the nation—oxygenated gasoline with ethanol and non-oxygenated gasoline. Existing regulations would permit the blending of these fuels in the tanks of motorists’ cars, but not in the underground storage tanks (“USTs”) of gasoline marketers. This limitation will impair the ability of marketers to efficiently sell RFG and will make it more difficult for marketers to offer ethanol-blended RFG to their customers.
Another complication raised by the implementation of the ethanol mandate is the loss of fungibility for conventional fuel. Currently, many states and localities impose volatility controls on gasoline to control for pollution. Ethanol-blended conventional gasoline is afforded a one-pound volatility waiver to accommodate for the increased volatility contributed by the ethanol. However, if marketers begin selling ethanol-blended conventional and non-ethanol blended conventional, the mixture of the two products will result in non-compliant product.
In both conventional and RFG markets, therefore, a marketer must drain his storage tank in order to sell ethanol-blended product. If that same mixture is not available at a later date, the marketer would again be forced to drain his tank in order to refill it with non-ethanol product. This places an undue burden on the marketer by hindering his ability to provide uninterrupted service to his customers and will cause temporary supply shortages at certain retail outlets. Permitting the blending, or commingling, of these fuels in marketers’ USTs will increase marketer flexibility to respond to shortages of one fuel or another, will reduce price volatility caused by such shortages, and will reduce stresses on the gasoline distribution system.
Some may argue that allowing a marketer to commingle products will increase the environmental impact. NACS and SIGMA submit that any impact on the environment is likely to be minimal and will be far outweighed by the benefits to supply and price stability. Even today, divergent compliant fuels are being commingled in consumer’s gasoline tanks throughout the country. It will be rare that a marketer will be forced to commingle product in his tank, certainly less frequently than a consumer will fill his or her vehicle with divergent product. In fact, most of America’s gasoline retailers are branded marketers, locked into supply contracts, who will not be faced with this situation except in extreme supply situations. Unbranded marketers, which comprise approximately 30 percent of the market, are also unlikely to switch terminal suppliers except in tight market conditions. The provision NACS and SIGMA are advocating will simply provide extra flexibility to avoid unnecessary market disruptions and price spikes when these market conditions develop.
VII. Underground Storage Tank Reform
Second, Congress should adopt comprehensive federal leaking underground storage tank (“LUST”) program reforms. Last year’s House and Senate energy bills both contained modest provisions on UST reform. NACS and SIGMA urge that these provisions be expanded to accomplish comprehensive UST reform. The full Environment and Public Works Committee recently approved unanimously S. 195, Senator Chafee’s UST reform bill. In addition, this House Subcommittee on Environment and Hazardous Materials Subcommittee is considering similar legislation.
This year’s energy bill should not contain half-measures on UST reform. Whether the issue is full enforcement of existing UST rules, preventing future MTBE leaks, or providing States with more funding for their UST enforcement and remediation programs, comprehensive UST reform legislation should be an integral part of a 2003 energy bill and, at the very least, must not be compromised by the enactment of half-measures.
VIII. Seasonal Variation Protection for RFS
Third, the Senate’s 2002 RFS proposal required the use of ethanol throughout the year. This provision should be deleted. Use of ethanol during the summer months will require refiners to produce sub-RVP blendstocks, further reducing the overall supply of gasoline, create spot shortages, and promote retail and wholesale gasoline price volatility. If Congress is intent on mandating the use of ethanol in gasoline, then Congress should permit industry to meet that goal in the most cost-effective manner that causes the least disruption to gasoline supplies. Mandating that a certain portion of the RFS be satisfied during the summer months runs counter to this goal.
IX. Credit and Trading System
Fourth, NACS and SIGMA are concerned deeply about the proposed RFS credit and trading system contained in the 2002 Senate energy bill fuels title. Given the concentration of market power in the gasoline refining and ethanol production industries, there is cause for concern that some parties may attempt to “hoard” RFS credits in order to disadvantage their competitors. For example, if a Mid-West refiner with national marketing interests uses more ethanol than it needs for compliance and generates RFS credits, what incentive would that refiner have to sell these credits at a reasonable, competitive rate to an East or West Coast refiner that is a competitor? If that East or West Coast refiner cannot physically obtain ethanol or locate affordable RFS credits, it will be in violation of the RFS program.
NACS and SIGMA urge this Subcommittee to consider the adoption of a provision to incentivize refiners who are “long” on RFS credits to tender these credits to other refiners at a reasonable price. One solution might be to penalize refiners that are “long” on RFS credits in the same way refiners that are “short” on credits are to be penalized if there is unmet demand for RFS credits in the marketplace. Whatever solution Congress arrives at, assuring a competitive and open market for RFS credits must be examined.
X. Other Issues
Many other issues are under consideration with respect to a fuels title in an 2003 energy bill. NACS and SIGMA have adopted the following positions on several of these additional issues.
First, independent marketers support the adoption of a provision to shield MTBE users, manufacturers, and refiners from product liability claims that MTBE is a defective product. The 2002 Senate energy bill contained such protection for ethanol producers. Such protection should be afforded to MTBE, as provided in the House counter-offer. It must be noted that such liability protection will not shield marketers from potential liability for MTBE releases -- which generally is governed by negligence law. Instead, this provision would simply move MTBE release claims out of the product liability area of law.
Second, NACS and SIGMA support strongly a federal solution to address the problems associated with the proliferation of boutique fuels. To date, virtually all stakeholders have criticized the balkanization of the motor fuels markets, but there have been no studies completed to provide policy recommendations to halt, or reserve, the introduction of boutique fuels. Last year, both the Senate and the House included a provision in the energy bill requiring a federal study into this issue. We continue to support a federal assessment of the problem. However, the timing of such a study will not serve to assist this Subcommittee in developing a national energy policy.
The National Association of Convenience Stores has commissioned a study into this very subject that will be completed next month, in April 2003. This study is taking an in-depth look into the current market conditions generated by today’s overlapping federal, state and local fuel regulations and is assessing the impact of potential changes to these regulations on overall fuel supplies, product fungibility, cost and environmental impact. NACS looks forward to sharing the results of this study with this Subcommittee as soon as it is available and we hope that it will prove a useful tool as you work to complete an energy bill this Congress.
Mr. Chairman, members of the Subcommittee, thank you for this opportunity to comment on America’s national energy policy. NACS and SIGMA appreciate the chance to share our concerns and recommendations with you as you prepare a new energy bill. We hope to have provided some insight into the impact certain policies will have on the petroleum marketplace and some provisions that could help mitigate those impacts. We look forward to working with the members of this Subcommittee to craft energy policy legislation that meets the goals outlined in this testimony.
NATIONAL ASSOCIATION OF CONVENIENCE STORES
SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA
A STEP TOWARDS FUEL FUNGIBILITY AND AWAY FROM “BOUTIQUE” FUELS:
MODIFY RFS TO PERMIT COMMINGLING OF ETHANOL/NON-ETHANOL FUELS
I. The Issue
Over the past 25 years, the gasoline and diesel fuel distribution markets have become increasingly “balkanized” through the introduction of myriad “boutique” fuels designed to address air quality concerns. In 1980, the nation sold basically two different types of gasoline and one type of diesel fuel. In 2003, there are dozens of “boutique” gasolines mandated across the nation and the markets for diesel fuel will become even more fragmented with the mandates for ultra low sulfur formulations that take effect in 2006.
Most of the time, the motor fuels refining and distribution systems do an excellent job making sure that sufficient quantities of these boutique fuels are available in the right locations at the right time of year. Despite the significant strains these boutique fuels place on the motor fuel distribution system on a daily basis, the system, as EPA’s Staff White Paper on Boutique Fuels states, “is able to provide adequate quantities of boutique fuels, as long as there are no disruptions in the supply chain.”
However, as the EPA report notes, any disruption in the system -- from a refinery accident to a pipeline spill to a natural disaster -- can cause significant supply disruptions and increased price volatility. Different parts of the nation have experienced these shortages and price volatility repeatedly over the past decade.
II. A First Step Towards A Solution
NACS and SIGMA have repeatedly urged Congress to address the issue of the proliferation of boutique fuels during the debate over national energy policy legislation. While a comprehensive solution to the boutique fuels problem has thus far eluded policymakers, there is an intermediate step that Congress can take to reduce balkanization, improve fungibility, increase overall supplies, and reduce price volatility.
This intermediate step would permit the commingling of different compliant gasolines, including ethanol- and non-ethanol blended gasolines, in the underground storage tanks of retailers.
III. Current Regulation of Commingling
The Clean Air Act does not address the issue of gasoline commingling directly. Instead, EPA, as part of its regulations implementing Section 211(k) of the Act, prohibits the commingling of reformulated gasoline (RFG) blended with MTBE with RFG blended with ethanol by anyone other than the consumer when that gasoline is going to be consumed during the summer months of the year. EPA adopted this restriction because the blending of ethanol-RFG with MTBE-RFG results in increased gasoline volatility, which can lead to increased emissions.
In addition to this prohibition, it is also true that the blending of ethanol-blended conventional fuel with non-ethanol blended conventional fuel can lead to increased emissions due to the increased volatility contributed by the presence of ethanol. Volatility controlled conventional markets, therefore, pose a similar challenge to supply fungibility as do RFG markets.
EPA’s restriction, however, does not apply to a consumer, who is free to shop at any retail gasoline station he or she chooses. This consumer often commingles different compliant products in the tank of his or her motor vehicle due to his or her selection of different retailers. Thus, the widespread commingling of gasolines is occurring already -- EPA has simply chosen arbitrarily to ignore the commingling by consumers and to prohibit it for retailers. With the implementation of a renewable fuels standard, and the introduction in markets throughout the nation of ethanol- and non-ethanol-blended gasolines, the frequency with which this consumer commingle occurs will increase significantly.
IV. Issues Associated with Commingling
Currently, gasoline quality is regulated at the retail dispenser nozzle. To permit commingling of gasolines by retailers, enforcement of quality regulations would be moved above the retail tank, to the trucks delivering gasoline to the retail stations. As long as all of the gasoline delivered into a retailer’s tank complies with EPA standards, then the gasoline in the tank shall be deemed to comply with the EPA standards.
B. Air Quality
While the commingling of ethanol- and non-ethanol-blended gasolines results in a slight increase in fuel volatility, this commingling proposal will have little or no adverse impact on air quality. Approximately 70 percent of the nation’s retail gasoline outlets are branded under the name of a major refiner, and are unlikely the take advantage of this commingling flexibility because of the steady source of supply that major refiners can provide. Other than during times of severe supply dislocations, when branded marketers might be forced to take advantage of the commingling flexibility, commingling will be used primarily by unbranded, or privately branded, independent gasoline marketers that purchase gasoline from multiple suppliers. These marketers are not significant players in most large urban areas, where air pollution can be a problem. Therefore, the air quality impact of this commingling proposal will be minimal.
Further, it is much more likely that a motorist will commingle gasolines in his or her vehicle tank than it is that a retailer will commingle gasolines in his or her retail tanks. Most retailers have a relatively stable source of supply and will commingle only during periods of supply shortages or disruptions. Motorists, on the other hand, frequently purchase gasoline from different retailers -- resulting in the frequent commingling of ethanol- and non-ethanol-blended gasolines.
Commingling flexibility should not be permitted to disrupt the gasoline quality surveys undertaken by EPA. If the gasoline in a retailer’s tank is found out of compliance during a survey test, that non-compliant sample would be discarded if the retailer can prove through delivery documentation that all gasoline delivered to that retail outlet was tested and found in compliance. By discarding these commingling samples, survey results will not be skewed and will not impact negatively an area’s compliance efforts.
EPA’s current model ignores the commingling that takes place in a motorist’s vehicle when determining the amount of “credit” for emissions reductions a State will receive in its SIP if it adopts RFG as a control program. A legislative proposal to authorize commingling in a retailer’s tank must provide States with the same SIP credit for adopting RFG. Otherwise, a State would be disadvantaged in its attainment efforts.
E. Supply and Fungibility
This commingling proposal will significantly increase gasoline fungibility and will in effect increase overall gasoline supplies. This is true because it will ease some of the restrictions on segregating different fuels and permit retailers to seek supplies for their customers at the lowest price. This flexibility will reduce balkanization, reduce gasoline supply disruptions, reduce wholesale and retail price volatility, and expand the sources of supply many retailers can access.
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NACS and SIGMA strongly urge Congress to adopt a legislative provision to permit commingling as part of its national energy policy legislation in 2003.
Gregory M. Scott John Eichberger
(202) 342-8646 (703) 518-4247