Bingaman to DOE, EPA: Recommend Options on Boutique Fuels

April 14, 2004
10:23 AM
OPEC’s decision to cut production and to boost world oil prices, and correspondingly, prices at the pump in the United States, have fueled a new discussion over how to reduce the cost of filling American gasoline tanks. The Administration and Senate Republicans have had little to offer in terms of a substantive response. The Administration, in the run-up to last month’s OPEC meeting, said that it wouldn’t publicly pressure OPEC to forego the production cuts, then apparently reversed course mere days before the meeting, after it missed its window of maximum opportunity for influencing the outcome. Senate Republican leadership can only point to a stalled 1,200+ page bill that, by all accounts, will do nothing to affect gasoline prices this summer, and according to a detailed analysis by the Energy Information Administration, will have a "negligible" effect over the longer term on energy prices, consumption, production and imports. Nearly three weeks ago, Sen. Bingaman proposed 13 concrete actions for the President to take to respond to high gasoline and natural gas prices in the short- to medium-term (including more forceful intervention with OPEC, near-term steps to allow more imported gasoline into the U.S., and a National Fuels Strategy to increase domestic refinery capacity). While he hasn’t heard back from the Administration on what it plans to do, Bingaman continues to press for action that can be taken using legal authorities that the President already has. Bingaman specifically believes that there needs to be more focus on a problem that the Administration has not been doing much about since October 2001 – the proliferation of inflexible, local specifications for fuels such as gasoline. The U.S. gasoline market now is overwhelmed with an estimated more-than-110 different fuel blends required by different localities, as part of their state implementation plans under the Clean Air Act. These mandates for “boutique” fuels periodically result in regional price spikes when a region-specific fuel is in short supply due, for example, to an unexpected surge in demand or an unscheduled shutdown of a refinery or a pipeline. The National Association of Convenience Stores, whose members sell more than 75 percent of the gasoline consumed in the U.S. every year, says that the spread of boutique blends has greatly reduced the flexibility and efficiency of gasoline supplies nationwide. "America’s motor fuels system … was not designed to accommodate dozens of unique, non-fungible fuel blends," the association wrote in a letter to Sen. Bingaman, the Energy Committee’s ranking member. Sen. Bingaman agrees. That’s why today he asked Energy Secretary Abraham and EPA Administrator Leavitt to jointly analyze the impact that federal, state and local boutique fuels programs have on our nation’s gasoline marketplace and to come up with concrete options for action. A similar study was called for in Sec. 1509 of S.2095. The difference is that the old energy bill would not require this analysis before Dec. 31, 2007. Bingaman believes we need answers in 2004. Here is his letter:
April 14, 2004
The Honorable Spencer Abraham
The Honorable Michael Leavitt
Gentlemen: I am sure that you share my concern about the impact of rising petroleum and petroleum product prices on the American economy, American consumers and American jobs. U.S. gasoline prices are set to rise above $1.80 per gallon across the country this summer. In several regions, the average cost will exceed $2.00 per gallon; and in California, perhaps $2.50 or even $3.00 per gallon. The proliferation of "boutique" fuel specifications across the country has greatly reduced the overall flexibility and efficiency of our fuels system. While we lack a definitive study to quantify increased costs to consumers from this balkanization of fuel specifications, past analyses from the Environmental Protection Agency (EPA) have concluded that the proliferation of boutique fuels is an important factor in the increasing fragility of our fuels system to periodic spikes in the price of gasoline and other motor vehicle fuels. The Clean Air Act authorized States to regulate fuels (through Federally-approved state implementation plans) in order to attain a national air quality standard. That was the right policy, but the implementation has been flawed. There are now dozens of different kinds of fuels being required by different States and municipalities, all with Federal approval, leading to more than 110 formulations of these boutique fuels throughout the United States. These 110-plus different fuel types make the use of existing distribution infrastructure for fuels much less efficient, and correspondingly more costly on a per- volume basis. Those costs are likely passed on to consumers. The large number of fuel types also limits flexibility in product distribution, particularly if a disruption occurs. Motorists and consumers overall pay for that lack of flexibility whenever there is a local or regional fuel price spike. In my view, the current situation with boutique fuels is a significant problem that requires action. I have urged the President, in a letter dated March 24, 2004, to direct the EPA, with technical assistance from the Department of Energy (DOE), to require revisions of state implementation plans to reduce the overall number of fuel specifications by at least a factor of five from the current number of around 110. That recommendation was one of 13 specific steps I urged as a response to current high gasoline prices. Some analysis of the boutique fuels problem was undertaken by the EPA in 2001, in consultation with a broad set of stakeholders. The results of that analysis, summarized in a Staff White Paper dated October 24, 2001, pointed both to concrete actions that could be taken, and to additional analysis that was needed to support such actions. The 2001 analysis predicted that, absent effective action focused on the problem, the national fuels system was "likely to be further constrained" by boutique fuel specifications with the passage of time. That prediction has come true. To ensure that the Federal government takes the most effective approach towards the goal of greatly reducing the number of boutique fuel specifications, and to assist Congress in considering needed legislative changes and providing oversight of Federal actions in this area, I am requesting that the DOE and the EPA jointly prepare a Fuels Harmonization Options Paper. This report would provide in-depth analysis of how Federal, State, and local requirements concerning motor vehicle fuels could be rationalized and streamlined, including— • requirements relating to reformulated gasoline, volatility (measured in Reid vapor pressure), oxygenated fuel, and diesel fuel; and • other requirements that vary from State to State, region to region, or locality to locality.
Specifically, I would ask that the Fuels Harmonization Options Paper address the following seven elements, which are consistent with some of the additional analysis identified as needed back in 2001.
1. A more detailed study of the effect of the current variety of requirements on the supply, quality, and price of motor vehicle fuels available to consumers in various States and localities. That study, and the effects to be analyzed below, should take into account any further worsening of the boutique fuels problem since 2001.
2. The effect of these requirements on the achievement of— • national, regional, and local air quality standards and goals; and • related environmental and public health protection standards or goals.
3. The effect of Federal, State, and local motor vehicle fuel regulations, including multiple motor vehicle fuel requirements, on— • domestic refineries; • the fuel distribution system; and • industry investment in new refining and distribution capacity.
4. The effect of the requirements on emissions from vehicles, refineries, and fuel handling facilities.
5. Detailed evaluation of options for developing national or regional motor vehicle fuel slates for the 48 contiguous States that, while maintaining or improving air quality at national, regional and local levels consistent with the attainment of national ambient air quality standards, could— • enhance flexibility in the fuel distribution infrastructure and improve fuel fungibility; • reduce price volatility and costs to consumers and producers; • provide increased liquidity to the gasoline market; and • enhance fuel quality, consistency, and supply.
6. The feasibility of providing regulatory or fiscal incentives to promote the options in item number 5.
7. A more detailed evaluation of the extent to which improvements in air quality and any increases or decreases in the price of motor fuel can be projected to result from the options in item number 5, compared to what is expected for the Environmental Protection Agency's Tier II requirements for conventional gasoline and vehicle emission systems, the current reformulated gasoline program, the renewable fuel standard contemplated in S.791 and other pending legislation before Congress, current State programs regarding gasoline volatility, and any other requirements imposed by States or localities affecting the composition of motor fuel. It would be helpful if the Fuels Harmonization Options Paper contained specific recommendations for legislative and administrative actions related to reducing boutique fuels consistent with the most preferable options evaluated in item number 5, above. I also believe that the Options Paper should also identify the appropriate time-scale for implementing any recommendations, so that adequate advance notice of required modifications to refinery and fuel distribution systems can occur, and an adequate supply of motor vehicle fuel in all States can be ensured.
The U.S. refining industry has a number of planned investments predicated on the current patchwork quilt of standards and regulatory initiatives. It is important that the options be realistic in terms of the ability of the industry to respond to any move to a different national fuels strategy, even if it is a more rational strategy. In developing the report, I would hope that you would consult with the relevant experts and stakeholders, including State Governors; automobile manufacturers; motor vehicle fuel producers, distributors, marketers, and retailers; consumer interests such as the American Automobile Association and the American Trucking Association; environmental organizations; and the public. I would welcome the opportunity to meet with you, or to have my staff meet with yours, to discuss this request for a Fuels Harmonization Options Paper. I would hope that the discussion would focus on how to move forward on such a study by a joint interagency analytical team. The appropriate contact on my staff at the Committee on Energy and Natural Resources for follow-up is Jennifer Michael (202-224-4103). Given the importance that this matter has for our nation and for our economy, I look forward to what I hope will be a prompt and favorable reply. Sincerely,
Jeff Bingaman
Ranking Member