Good morning, Mr. Chairman, my name is Curt Eischens, and I am a fourth generation farmer from Minneota, Minnesota.
I am here today as a representative of the National Council of Farmer Cooperatives (NCFC) to speak to you about EPA's proposed rule to reduce the sulfur levels in on-road diesel fuel. But more importantly, I will speak as (1) a director of a regional co-op, Cenex Harvest States Cooperatives; (2) a member of a local co-op; and (3) a family farmer and citizen of rural America.
American agriculture is vitally dependent upon a reliable and affordable supply of diesel fuel in carrying out its food, natural fiber, renewable energy, conservation and other missions. Through their cooperatives, farmers have invested heavily in a petroleum refining and distribution system to help assure a reliable and affordable supply of this vital input. Though less than two percent of the petroleum reaming industry, farmer cooperatives account for about 40 percent of all the on- farm fuel use in the United States and are unique in that the customer is also the owner. Farmer cooperatives also supply much of the highway diesel and home heating oil needs in rural America.
First, let me say that farmer cooperative representatives have been working with EPA, and we appreciate the agency's recognition of the unique structure and challenges of farmer-owned cooperative refiners, as well as possible compliance flexibility options identified in the proposed rule. However, we remain deeply concerned that the proposed sulfur diesel standard is overly stringent and could have adverse unintended consequences for American agriculture and rural America, particularly during a time of continuing economic hardship that threatens the survival of many farmers and ranchers.
EXECUTIVE SUMMARY
If implemented as currently drafted, the EPA proposal could: (1) increase the threat of supply disruptions, particularly in rural America, by effectively reducing diesel production capacity; (2) force cooperative and other refiners to produce more costly ultra-low sulfur diesel fuel for farm and other off-highway uses due to distribution limitations, especially in the agricultural heartland; (3) jeopardize the economic viability of farmer-owned refineries, leading to further concentration in the petroleum industry serving rural America; and (4) impose major costs on farmers directly, with no return on investment, and take away scarce resources desperately needed for investments in projects to improve farm income. Diesel fuel costs for farmers and other rural consumers could be 10 cents or more at 15 ppm, with much higher price spikes in the event of supply disruptions.
It is important to understand that even though the EPA proposal is for on-highway diesel, the rule will also adversely impact farm and other off-highway uses of diesel fuel. It has been our experience that much of the petroleum storage system, particularly in the rural markets served by our cooperatives, is generally capable of handling only one grade of diesel fuel. This was certainly the case when the existing 500 ppm standard for highway diesel was implemented. Thus, our farmer-owned refineries will be forced to go to the ultra-low standard even though much of our market is for farm uses.
We are deeply concerned about several key elements of EPA's proposed rule. For example, we have great concerns about going lower than a 50 ppm cap. We believe a level as low as 15 ppm at the pump puts diesel fuel supplies at risk, particularly in rural America. We know that any phase-in with a fuel requirement for two on-road diesels would be extremely costly.
For these reasons, we strongly urge that the rule be withdrawn until serious unresolved issues can be addressed. We further recommend that any final rule should include the following: (1) set an on-road diesel fuel sulfur cap of about 50 ppm, which would be a 90 percent reduction from the current level; (2) provide refiners maximum flexibility to meet the new standards, including the ability to choose which fuel standard to meet first, by 2010 -- the new gasoline rule or any on- road diesel rule; and (3) not require a phase-in or two low sulfur diesel fuels.
FARMER COOPERATIVE SYSTEM
But before I address these concerns and recommendations more specifically, I believe it is important that you understand and appreciate the farmer cooperative system from the bottom up, so you can better understand the adverse impacts this rule could have on agriculture and rural America. There are approximately 1.8 million farm families in the United States today. There are over 3,500 farmer-owned local co-ops, and many of these locals belong to larger regional co-ops such as mine--Cenex Harvest States Cooperatives. At the national level, we are represented by the National Council of Farmer Cooperatives.
In rural America, bulk fuel terminals and service stations are often many miles apart. These 3,500 local co-ops sell farmers all the inputs necessary for their production needs, including fuels for powering their equipment and vehicles, drying their crops, heating their livestock enclosures, and heating their homes. Many of these local co-ops depend heavily on petroleum sales to farmers for the majority of their sales income and their livelihood. To properly supply farmers, local co-ops maintain fuel tanks and pumps, and in turn, farmers maintain their own fuel tanks on their farms.
Adequate and affordable fuel supplies have always been very important to agriculture and rural America. Because of the special needs of agriculture and problems with relying on existing petroleum refiners, farmers in the early 1900s chose to pool their resources and invest in refineries. In 1979, there were eight refiner co-ops. Today there are only four refiner co-ops that supply much of the needs of Midwest farmers. They are (1) Cenex Harvest States Cooperatives' refinery in Laurel, Montana; (2) Farmland Industries' refinery in Coffeyville, Kansas; (3) the National Cooperative Refiners Association in McPherson, Kansas; and (4) Countrymark Cooperative's refinery in Mt. Vernon, Indiana. These cooperatives are owned by approximately one million farm families - over half of all the farmers in the United States --in some 28 states.
My regional cooperative, on which I am an elected Board Director, is Cenex Harvest States. We are headquartered in St. Paul, Minnesota and are comprised of over 1,000 local co-ops, in 18 states. We are owned by over 325,000 farmers, or nearly 20% of all farmers in the United States.
CONCERNS
Why am I as a farmer and cooperative leader concerned about the proposed rule?
FIRST: As a representative of NCFC, I stress the need to consider all of agriculture, not just the four farmer-owned cooperative refineries. Agriculture is the backbone of the United States economy from the "Back 40 on the farm to Aisle 40 in the grocery store" and contributes approximately 16% of the Gross National Product. In performing this vital role, we are heavily dependent upon diesel fuel. We believe EPA is moving "too far, too fast," with a rule that will directly cost the farmer money, with no return on investment and taking away scarce resources desperately needed for investments in projects to improve farm income. I have a letter for the record to EPA Administrator Browner with signatures of nearly 30 organizations representing all aspects of agriculture. The letter raises serious concerns about EPA's proposal.
SECOND: As an elected Director of Cenex Harvest States Cooperatives and one who will have to vote to approve spending farmers' money to make these expenditures, I have to look at the costs of this rule. We own refineries, pipelines, terminals, tankage, truck stops, local town convenience stores, and fuel delivery trucks -- all will be adversely affected by the rule.
For example, the rule will directly affect our refineries. How will we finance the capital expenditures? There are many air quality rules going into effect in the near future with which we will have to comply as well, such as - ozone, PM 2.5, regional haze, maximum achievable control technology, new gasoline specifications by 2003, and now, proposed on-road diesel fuel specifications by 2006. We also expect new EPA rules on off-road diesel fuel and green house gas emissions in the near future. These rules have a costly cumulative effect. How will we pay for them all? It will be extremely difficult at best.
Co-ops do not have the same access to equity markets as other businesses. For example, unlike our competitors, we cannot issue stock to raise capital. We cannot turn inward to our member owners for funds -- our current farmer-owners do not have the money. Over the past three years, Congress has had to approve about $20 billion in emergency funding to help farmers survive hard economic times. Our owners are farmers, many of whom have limited means.
THIRD: As a member of a local cooperative, it is even more challenging. We'll have to address many of the same issues as our regional co-ops, but with even less flexibility. Consider EPA's phase-in and two diesel fuel proposals. Regional co-ops will be of little help to local co-ops because they are extremely stretched for cash and have little working capital. The co-op system is heavily dependent on and limited by fuel tankage. If a dual low sulfur diesel system is mandated, how would we pay for the additional tanks and pumps? The answer is -- most of these local co-ops and Mom and Pop convenience stores cannot. We will be forced to decide which diesel fuel to carry and therefore lose those customers that need the other type of diesel.
What happens if EPA requires a phase-in? Again who pays? Farmers, local co-ops, small town fueling stations, co-op terminals and the regional co-ops will pay. Why? Because many of us will have to put in additional fuel tanks for only a few years. There are 1.8 million farmers, 3,500 local co-ops and 1,500 farmer owned convenience stores and fuel pumps in rural America that might have to comply with increased tank and pump requirements for a four to five-year phase-in. This is certainly not cost-effective for American agriculture.
FOURTH: I speak as a farmer, especially on behalf of my farm family. If our recommendations are not adopted, my farm family will be heavily penalized. How? First, who will pay for these hundreds of millions of dollars of upgrades? Well, farmers will have to pay through reduced patronage. I will lose patronage because my regional co-op will have to finance the refinery upgrades, thereby reducing any returns normally distributed from the regional co-op back to the local co-ops and on to farmers. I will lose patronage from my local cooperative if the local co-op has to pay for increased tankage or loses sales. Second, to whom will these additional fuel costs for ultra-low sulfur fuel be passed, at rates estimated to be from 10 to 15 cents a gallon? The answer again is to farmers.
Our livelihood depends on the success of our farm and the viability of our rural community. Local co-ops are an important part of these rural communities. We are very concerned about the environment. We believe in clean water and clean air and think a 90% reduction in diesel sulfur levels goes a long way in achieving clean air goals. What EPA is proposing - a 97% reduction - goes too far, particularly for rural parts of the country that do not have these clean air problems.
RECOMMENDATIONS
What can be done to help the farmer cooperative petroleum system and farm families?
CONGRESS can help the farm family and U.S. agriculture by urging that the proposed rule be withdrawn and reconsidered. Now that everyone has recently become aware that the on-road diesel rule can have major agricultural impacts, and is not just a refiner issue, Congress should direct EPA to retook the proposed rule's impacts on agriculture and rural America through the Small Business Regulatory Enforcement Relief Act process. It is important to understand the impacts on farmers and local co-ops as small businesses. Congress can also require for proposed new diesel sulfur specifications what it did for unleaded gasoline in 1985.
What happened in 1985? Uncertain about the impact of reducing lead in gasoline, Congress passed legislation directing EPA and USDA to conduct a two-year study and joint report. The relevant section from PL 99-198 is attached for the record. EPA and USDA completed their study in 1987, entitled "Effects of Using Unleaded and Low Leaded Gasoline, and Non-lead Additives Designed for Leaded Gasoline." This study revealed serious problems that had to be mitigated during the lead phaseout. We believe a study is also needed on EPA's ultra low sulfur diesel proposal and its potential impacts on the availability and costs of diesel fuel for farmers and rural America as well as any effects on agricultural equipment before the rule is finalized.
ALTERNATIVELY, if the rule is not reconsidered, we recommend that Congress support the following:
-- Set a petroleum industry cap of 50 ppm for sulfur in highway diesel fuel, in order to achieve major environmental benefits and avoid extreme costs.
-- Provide maximum compliance flexibility. For example, EPA has suggested some potential flexibility by (1) recognizing that refiner co-ops have the same difficulties as small refiners and asking for comment on eligibility for compliance flexibility mechanisms that may be available to small refiners; and (2) permitting a refiner co-op to apply for a compliance extension as a hardship case. NCFC supports these compliance flexibility options, in combination with the 50 ppm standard.
Should EPA move to an ultra-low standard for sulfur, such as 15 ppm, while compliance flexibility may help during the transition implementation costs will still be excessive. That is why we have argued for the permanence and affordability of the 90~% reduction in diesel sulfur levels.
-- Because the fuel rules for gasoline and on-road diesel are interconnected, and expected to overlap in a narrow time frame, refiners also need the flexibility to comply with these two rules in the order best achievable for them. Under some circumstances in the gasoline rule, some refiners may not have to fully comply until 2010. We also suggest that we be given until 2010 to comply with both rules.
-- Do not require a phase-in or two low sulfur diesel fuels. Local co-ops and farmers cannot afford to add more tanks and pumps. If the final rule contains these basic elements, we'll work to get the job done.
We look forward to working with the Congress, EPA and other stakeholders to achieve a final rule that is compatible with continued economic viability in American agriculture and environmental progress. Just as farmers need and want cleaner air, we also require reliable and affordable fuel supplies. I urge Congress, on behalf of farmer cooperatives, my Minnesota farm family, and other farm families across rural America, not to let EPA move "too far too fast."
Exhibit, NCFC June 15 E&PW; Testimony May 9, 2000
The Honorable Carol Browner Administrator U.S. Environmental Protection Agency Ariel Rios Building South, Room 3000 1200 Pennsylvania Avenue, NW Washington, DC 20460
Dear Administrator Browner:
The undersigned agricultural organizations and others that serve agriculture are deeply concerned that the Environmental Protection Agency's (EPA) proposal to reduce the sulfur levels in diesel fuel could have adverse unintended consequences for American agriculture and rural America. These could come in the form of fuel supply disruptions and excessively higher prices for farmers, for both on-farm and highway fuels, if the proposed rule is implemented as currently drafted.
The EPA draft proposal could (1) increase the threat of supply disruptions, particularly in rural America, by effectively reducing refinery capacity; (2) force many refiners to produce more costly ultra-low sulfur diesel fuel for farm and other off-highway uses due to distribution limitations, particularly in the agricultural heartland; and (3) jeopardize the economic viability of farmer-owned refineries, leading to further concentration in the petroleum industry serving rural America. Costs for farmers and other rural consumers could range from a 5 cents per gallon increase if sulfur levels are set at 50 parts per million (ppm) to 10 cents or more at 15 ppm.
In order to mitigate these potential problems, we strongly urge the agency to (1) set an onroad diesel fuel sulfur cap of about 50 ppm, which would be a 90 percent reduction from the current level; (2) delay and phase in any implementation of a diesel rule until the final gasoline rule has been implemented; and (3) maintain a higher off-highway diesel fuel standard in order to minimize costs to farmers and provide refiners with maximum flexibility to produce diesel fuel.
We support the Administration's clean air accomplishments, but we are concerned that an overly stringent diesel sulfur proposal could unnecessarily harm U.S. agriculture and rural America, particularly during a time of continuing economic hardship that threatens the survival of many farmers and ranchers.
We look forward to working with the Agency to achieve a final rule that is compatible with continued economic viability in American agriculture and environmental progress. Just as our constituents need and want cleaner air, they also require reliable and affordable fuel supplies. We are available to meet with you at any time on this important matter.
Signed,
(Several agricultural organizations)