First, let me tell you something about my company. Williams is a global energy and communications company headquartered in Tulsa, Oklahoma. We have about 23,000 employees and operate about $25 billion in assets. Through our various energy businesses, we own and operate nearly 60,000 miles of natural gas and liquid pipelines located throughout the United States. Williams is a producer of natural gas, a large processor of natural gas and natural gas liquids, and our energy marketing and trading group is one of the largest in the country. We own two refineries in the United States and operate a refinery in Lithuania. We transport, terminal and retail gasoline and other petroleum products. Our bio-energy group, of which I am part, is the second largest producer of ethanol in the country, with plants in Illinois, Nebraska and most recently, a new project announced in Wisconsin. Given our extensive involvement in both the petroleum industry and the ethanol industry, I believe we have a unique perspective on the issues being discussed today.
Summary:
We believe the RFG program has successfully improved air quality in those regions of the country where it is in place. In the Midwest markets, where ethanol has been used extensively, the air quality record is excellent. On the other hand, many Americans are well aware of MTBE groundwater contamination issues in other RFG areas. Many suggest the solution to this groundwater problem is opening the Clean Air Act to remove the oxygen requirement.
Williams does not believe this type of legislation is necessary. Ethanol production can be expanded to replace MTBE. Ethanol can be transported and distributed efficiently to California and other RFG markets. To the extent refiners need flexibility, EPA could modify the program to require that the oxygen requirement apply on an average basis, rather than a per gallon basis. This would allow refiners to make significant quantities of fuel without oxygen.
If Congress chooses to legislate in this area, then the clean air benefits achieved by including oxygen in gasoline should be preserved. This should be the overriding factor that drives policy. Williams does not advocate using the legislative process to favor one fuel over another, but if ethanol does provide a better overall environmental solution than MTBE, we should not hesitate to use ethanol.
Background:
Before turning to the RFG program, I would like to provide some perspective as to why ethanol is so critically important to the nation's economic, energy and environmental policies. One need only look at today's headlines to appreciate the need for increased production and use of fuel ethanol. The Energy Department reports oil prices are at the highest levels since the Gulf War, and gasoline prices are expected to top $1.60/gallon this summer. Blending ethanol with gasoline provides an economically competitive source of octane, helping to constrain gasoline prices. As the Congress considers policies to moderate gasoline prices and assure fuel supplies, providing increased market opportunities for domestically produced renewable energy, such as ethanol, should be a top priority. In fact, the farm income and energy security benefits of ethanol were principle factors leading to congressional approval of the RFG program and the oxygen content requirement in the Clean Air Act Amendments of 1990. Today's headlines merely reinforce the efficacy of that decision.
At the same time, overall conditions in the farm economy in 2000 expected to be similar to last year and the nation facing record oil prices due to OPEC production cutbacks, ethanol production and use will play a pivotal role in providing value-added processing for grain while helping to constrain gasoline prices and promote competition. At a recent USDA Agricultural Outlook Forum, USDA Chief Economist Keith Collins stated that the price for corn this year is "expected to average only $1.90 a bushel, slightly below the 1998 crop." With total supplies predicted to be near 1999 levels and little change in ending stocks, Collins noted that "corn prices are expected to show only modest improvement next season." Collins also predicted that in light of weak markets, substantial government payments will be made under current programs in 2000. The use of corn for ethanol production not only adds to the price of a bushel of corn, it also helps to reduce government payments.
The Reformulated Gasoline Program:
I think it is important to underscore that the RFG program, with its oxygen content requirement, has worked quite effectively. Air quality has improved. Indeed, about 75 million people are breathing cleaner air because of RFG. EPA reports that RFG is reducing ozone-forming hydrocarbon emissions by 41,000 tons and toxic pollutants such as benzene by 24,000 tons annually. That's the equivalent of taking 16 million vehicles off the road each year. A study by the Northeast States for Coordinated Air Use Management (NESCAUM) shows that today's RFG reduces the cancer risk from gasoline by about 20 percent. It is critically important to recognize that these benefits are significantly greater than required by the Clean Air Act's performance standards for hydrocarbons and toxics, at least in part because of the federal oxygen requirement.
As a consequence of the growing concerns regarding MTBE water contamination, many have advocated amending the Clean Air Act. The domestic ethanol industry has opposed efforts which seek only to eliminate the federal RFG oxygen requirement or address the issue for particular states or regions. However, if Congress chooses to act in this area, the ethanol industry does not want to hinder legislative efforts to address this serious public health and environmental issue. We want to be part of the solution, not part of the problem. Toward that end, we have developed the following principles, which we believe should guide congressional action on this issue.
· Develop a national solution; · Address the cause of the problem; · Protect the environment; and, · Provide the necessary time and "flexibility" to allow refiners to make a rational transition to increased ethanol utilization.
Develop a national solution. State-specific actions will create a patchwork of fuel regulations resulting in increased consumer costs.
State specific programs increase logistics costs and reduce flexiblitity.
Address the cause of the problem. Congress should determine what controls on MTBE are necessary to protect water supplies.
Simply eliminating the RFG oxygen requirement will not assure that MTBE use is reduced and will undermine the "real world" environmental benefits of the current RFG program with oxygen.
Protect the Environment. The air quality gains provided by RFG with oxygenates should not be sacrificed as MTBE use is reduced, i.e., the toxic and carbon monoxide emissions benefits of oxygen should be preserved.
The RFG program assures air quality benefits through the combined application of emissions performance standards and an oxygen requirement. As a result, the RFG program has provided toxic reductions in excess of those required by the performance standards alone. The oxygen standard has also provided reductions in carbon monoxide for which there is no performance standard at all.
EPA should conduct a rigorous analysis of the "real world" emissions benefits of oxygen, including the impact on higher emitting vehicles, off-road and off-cycle driving (areas where the impact of oxygen is more critical) to assure there is no backsliding from these effects. EPA should also compare the potency-weighted toxic affects of oxygenated and non-oxygenated RFG. Finally, it is critical that the carbon monoxide (CO) benefits of oxygenates not be ignored. The oxyfuel program worked and CO has been dramatically reduced nationwide. Several CO non-attainment areas have been reclassified into attainment based in part on maintenance plans which include the oxygen content benefits of RFG. If the RFG oxygen requirement is repealed, the CO attainment status of these areas will be jeopardized. In addition, the National Academy of Sciences concluded last year that as much as 20% of the ozone coming from automobiles was attributable to carbon monoxide. EPA should assess this beneficial impact and either 1) incorporate a CO performance standard into the program or 2) promulgate a CO offset so that refiners can balance CO reductions with VOC increases.
Provide Flexibility to Refiners. Refiners and gasoline marketers should be given flexibility in meeting the challenge of removing MTBE.
Some claim the only way to eliminate MTBE without increasing consumer gasoline costs is to eliminate the oxygen standard itself. Indeed, some see the two as synonymous. At a time when gasoline prices across the country are soaring, Congress must consider the economic implications of reducing MTBE use. MTBE currently represents about 3% of the nation's transportation fuel supply. If it is eliminated without providing for a replacement of that supply, gasoline prices will clearly rise. Indeed, this fact has been established by both the Department of Energy and the California Energy Commission, which concluded a non-oxygenated fuel scenario in California (with no ethanol used) was the most expensive option available to the state in addressing MTBE. If MTBE volume is to be reduced, replacing that volume with safe alternatives, such as ethanol, is both environmentally and economically sound.
The U.S. Department of Agriculture has completed a comprehensive analysis demonstrating that ethanol can effectively replace MTBE by 2004 without price spikes or supply shortages. The Department's analysis shows that total ethanol production capacity will have to increase roughly 50%, to approximately 3 billion gallons by 2004, in order to supply the oxygenate demands of RFG while maintaining the existing ethanol octane markets in conventional gasoline.
USDA also analyzed the transportation affects of increased ethanol RFG. The Department concluded that ethanol would be shipped by barge or rail cost-competitively, and that there would be "no transportation impediment to the use of ethanol as a replacement for MTBE." As a company heavily involved in the transportation of liquid fuels, we are planning to ship ethanol to California and have been working with refiners in the state to demonstrate how ethanol could be distributed to the refineries. Based on our experience, the logistics of supplying ethanol to the market should not be a barrier to its use.
The Ethanol Solution The primary concern with maintaining the oxygen standard appears to be the industry's ability to supply the increased demand for ethanol. But such concerns are unfounded. It is important to understand that because ethanol has twice the oxygen content of MTBE, it will only take half as much ethanol to satisfy the oxygen requirements of RFG. Current MTBE use in RFG is approximately 257 bb/d (thousand barrels per day). That level of oxygen can be met by only 128 bb/d of ethanol. Current ethanol production is 100 bb/d. A recent report prepared by AUS Consultants, Inc. for the Governors' Ethanol Coalition demonstrates that the ethanol industry can double production within two years, quicker than the proposed three year MTBE phase out. According to the report, "Ability of the U.S. Ethanol Industry to Replace MTBE":
Replacing MTBE with ethanol would increase the demand for ethanol to nearly 3.2 billion gallons per year by 2004; The ethanol industry can increase production capacity from 1.5 billion gallons to 3.5 billion gallons per year by 2004 - more than exceeding the greater demand; The increased capacity would come from increased utilization of existing plants, expansion of existing facilities, new plants currently under construction, and proposed facilities currently in various stages of development; Using ethanol to replace MTBE will prevent an oxygenate supply shortage that could result in increased gasoline prices; Expanding ethanol capacity will result in $1.9 billion in new investment; Construction activity and increased commodity demand will add $11.7 billion to real GDP by 2004 and increase household income by $2.5 billion; and Switching to ethanol will create more than 47,800 new jobs throughout the country.
Ability of the Ethanol Industry to Replace MTBE (Million Gallons per Year)
2000 2001 2002 2003 2004
Ethanol Demand 1,343 1,781 2,231 2,693
3,168
Current Production Increased Use Expanded Plants Cap'y Under Construction Cap'y Under Development 1,5330 0 0 0 1,533180 420 60 0 1,533180 839 121 0 1,533180 1,049 121 333 1,533 180 1,049 121 598
Total Supply 1,533 2,193 2,673 3,216 3,481
Surplus 190 412 444 523 313
It is important to understand that ethanol production facilities are largely modular. Expansions can be done very quickly by simply adding new equipment to existing production streams. New production from green fields is also now done quite efficiently. Since 1990, most new ethanol production has been by farmer-owned cooperatives. These highly efficient dry mill plants typically go from drawing board to production within two years, at an approximate cost of $1.00 - $1.50 per gallon of capacity. The next generation of ethanol production facilities will also include production from cellulose and biomass feedstocks. Recently, a new ethanol production plant in Jennings, Louisiana was awarded a $120 billion bond and is expected to begin construction this spring. When completed, this plant will produce ethanol from rice hulls and bagasse. Three other plants are currently planned in California that will produce ethanol from rice straw. Another facility is planned in upstate New York producing ethanol from municipal waste. Already, ethanol is being produced from wood and paper waste by Georgia Pacific in Washington state, and production from forest residue is not far behind. None of this will happen, however, without the assurance of increased market opportunities for ethanol in RFG. If the oxygenate requirement itself is repealed, there will be little increased ethanol production in the coming years. On the other hand, maintaining the oxygen requirement as MTBE use is phased out will stimulate tremendous new economic development across the country.
Ethanol Production Capacity March 2000
Primary Capacity
Company City State Feedstock (MGY)
A.E. Staley Louden TN Corn 45.0
Ag Power, Inc Commerce City CA
2.0
AGP Hastings NE Corn 45.0
Agri-Energy Luverne MN Corn 18.0
AI-Corn Claremont MN Corn 18.0
Alchem Grafton ND Wheat 12.0
Archer,Daniels Midland Decatur IL Corn 750.0
Cedar Rapids IA Corn
Peoria IL Corn
Clinton IA Corn
Broin Assoc Scotland SD Corn 8.0
Cargill EddyVille IA Corn 70.0
Blair NE Corn 35.0
Cent MN Ethanol Coop Little Falls MN Corn 18.0
Chief Ethanol Hastings NE Corn 62.0
Chippawa Valley Benson MN Corn 20.0
Corn Plus Winnebago MN Corn 17.5
DENCO Morris MN Corn 15.0
Eco Products of Plover Plover WI
4.0
ESE Alcohol Leoti KS Corn 1.1
Ethanol 2000 Bingham Lake MN Corn 15.0
Exol Albert Lea MN Corn 18.0
Farm Tech USA Spring Green WI Corn 0.5
Georgia Pacific Bellingham WA Waste 3.5
Golden Cheese of CA Corona CA Cheese/Whey 2.8
Grain Processing Corp Muscatine IA Corn 10.0
Heartland Corn Prods Winthrop MN Corn 17.0
Heartland Grain Fuels Aberdeen SD Corn 8.0
Huron SD Other 12.0
Production
Primary Capacity
Company City State Feedstock (MGY)
High Plains Portales NM Corn 14.0
Colwich KS Corn 20.0
York NE Corn 40.0
J.R. Simplot Heyburn ID Potato Waste 3.0
Caldwell ID Potato Waste 4.0
Jonton Alcohol Edinburg TX
1.2
Kraft Melrose MN Cheese/Whey 3.0
Manildra Energy Hamburg IA Corn 7.0
Midwest Grain Atchinson KS Corn 8.0
Pekin IL Corn 100.0
Minnesota Clean Fuels Dundas MN
1.5
MMI/ETOH Golden CO
1.5
MN Corn Processors Marshall MN Corn 32.0
Columbus NE Corn 90.0
MN Energy Buffalo Lake MN Corn 12.0
New Energy Co of IN South Bend IN Corn 88.0
Pabst Brewing Olympia WA Bev Waste 0.7
Parallel Products Rancho Cucamonga CA Food Waste 2.0
Louisville KY Corn 10.0
Permeate Prods Hopkinton IA
1.5
Pro-Corn Preston MN Corn 19.0
Reeve Agri-Energy Garden City KS Corn 10.5
Stroh's Brewery Winston Salem NC Bev Waste 1.0
Sunrise Energy Blairstown IA Corn 5.0
Vienna Correctional Vienna IL Corn 0.5
Williams Energy Aurora NE Corn 30.0
Pekin IL Corn 100.0
Wyoming Ethanol Torrington WY Corn 5.0
Total
1,837.8
Source: Bryan and Bryan, Inc.
Ethanol Production Under Construction, March 2000
Capacity
Company City State MGY Feedstock
Golden Triangle Craig MO 14.0 Corn
Adkins Energy Lena IL 30.0 Corn
BC International Jennings LA 20.0 Bagasse/rice hulls
Nebraska Nutrients Sutherland NE 15.0 Corn
Dakota Ethanol Wentworth SD 40.0 Corn
NE Missouri Grain Proc Macon MO 15.0 Corn
Total
134.0
Source: Bryan and Bryan, Inc. Ethanol Plants Under Development, March 2000
City State Capacity (MGY)
Feedstock
Undisclosed CO 20.0 Corn
Central Iowa IA 15.0 Corn
NW Iowa IA 40.0 Corn
L. Cascade IL 100.0 Corn
Pratte KS 15.0 Corn/milo
Undisclosed KS 40.0 Corn
Undisclosed KY 20.0 Corn
Central State MI 40.0 Corn
St. Paul MN 30.0 Corn
SE Missouri MO 30.0 Corn
Great Falls MT 75.0 Wheat/Barley
Neely NE 15.0 Corn
Central State NJ 10.0 Corn
Clatskanie, OR OR 80.0 Corn/wheat
Milbank SD 40.0 Corn
Platte SD 15.0 Corn
Rosholt SD 15.0 Corn
Undisclosed TX 30.0 Corn
Moses Lake WA 40.0 Corn/Barley
Lacrosse WI 20.0 Corn
Subtotal
690.0
Biomass Conversion
SE Region AK 8.0 Wood Waste
NE Region CA 15.0 Forest Residues
Gridley CA 20.0 Rice Straw
Mission Viejo CA 8.0 Rice straw
Chester CA 20.0 Forest Residues
Onslow County NC 60.0 Sweet potatoes
Greene County NC 60.0 Sweet potatoes
Martin County NC 60.0 Sweet potatoes
Middletown NY 10.0 MSW
Central Region OR 30.0 Wood Waste
Philadelphia PA 15.0 MSW
Black Hills WY 12.0 Forest Residues
Subtotal
318.0
TOTAL NEW CAPACITY
1,008.0
Ethanol RFG will provide a tremendous economic stimulus to rural America by creating value-added demand for 500 million bushels of grain.
Thus, increasing demand for domestically-produced renewable ethanol will provide a tremendous economic stimulus to rural America.
Legislation:
As testament to the growing congressional interest in resolving MTBE groundwater issues, numerous bills have been introduced to phase-down or eliminate MTBE, while preserving a role for ethanol in this important program. The Renewable Fuels Association, the industry's trade organization, strongly supports legislation such as S. 2546 and S. 2233, which address MTBE water contamination directly, without undermining the existing air benefits of oxygenated RFG. S. 2546, introduced by Senators Kit Bond (R-MO) and Dick Durbin (D-IL), is particularly effective because it deals comprehensively with a number of issues important to this committee, including anti-backsliding from real-world air quality benefits, the highway trust fund, and MTBE remediation costs.
Another approach to resolving the MTBE issue consistent with the findings of the Blue Ribbon Panel is phasing out the use of MTBE while phasing in a renewable energy requirement. This approach has been incorporated in legislation introduced by Democratic Leader Tom Daschle (D-SD) and cosponsored by Senator Dick Lugar (R-IN). The Renewable Fuels Association supports this bill also, but would encourage the committee to craft this bill so that ethanol is used where it will provide the most environmental benefit.
As I indicated at the beginning of my testimony, Williams believes the primary responsibility for government in this area is to make sure that Americans have clean air and that means, among other things, setting emission standards for vehicles and the gasoline that fuels vehicles. These standards should be set on the basis of science. Inevitably, any standards will influence the recipe for gasoline and therefore the mix of additives used to make gasoline. However, so long as compliance with the standards is practical for refiners, then we should not sacrifice clean air. We believe the oxygenate standard is a useful proxy for limits of gasoline components that have negative health effects. If Congress chooses to repeal the oxygenate requirement, then equivalent emission standards will need to be substituted in its place.
Conclusion:
The domestic ethanol industry understands that the Congress is faced with a daunting challenge, i.e, how to protect water supplies by reducing the use of MTBE without sacrificing air quality or increasing fuel prices. We see ethanol as a solution. Increasing ethanol use in this program will allow MTBE to be phased out cost-effectively while protecting precious water resources and air quality. Stimulating rural economies by increasing the demand for grain used in ethanol production will help farmers left behind by our booming economy. Encouraging new ethanol production from biomass feedstocks will provide additional environmental benefits and take a positive step toward a sustainable energy future and global climate change. The bottom line is that we need to protect both air quality and water quality. With ethanol, we can.
Thank you.