Good morning Mr. Chairman and members of the Subcommittee. My name is Jimmy Haslam. I am Chief Executive Officer of Pilot Oil Corporation, a family-owned private company headquartered in Knoxville, Tennessee. Thank you, Mr. Chairman, for inviting me to testify today on the Environmental Protection Agency's proposed regulations to reduce on-road diesel fuel sulfur levels.
Pilot was started by my father in 1958. We do not make diesel fuel -- we sell it. Our company currently owns and operates 180 travel centers and convenience stores in 37 states stretching from Connecticut to California, northward to Wisconsin, and south to Florida and Texas. We employ over 7,000 people nationwide and sold approximately 10 percent of all the on-road diesel fuel in the United States last year. As a result, Pilot is the largest independent retailer of on-road diesel fuel in the nation.
I appear before this Subcommittee today on behalf of the Society of Independent Gasoline Marketers of America. SIGMA is an association of approximately 260 motor fuels marketers operating in all 50 states. Together, SIGMA members supply over 28,000 motor fuel outlets and sell over 48 billion gallons of gasoline and diesel fuel annually -- or approximately 30 percent of all motor fuels sold in the nation last year. Collectively, SIGMA members sold over 13 billion gallons of on-road diesel fuel last year, and 89 percent of our members sell diesel fuel.
My personal experience with Pilot and my representation of all SIGMA members at this hearing today combine to make me well qualified to speak about the EPA's diesel sulfur proposal -- not just from the diesel fuel marketers' perspective, but from the perspective of diesel fuel consumers as well. From the point of view of diesel fuel marketers and our customers, EPA's proposal will have dire consequences on our business, on our customers, and, potentially, on our national economy.
SIGMA urges the members of this Subcommittee, as well your Senate colleagues, to join in strong condemnation of EPA's proposal. SIGMA strongly opposes the proposal for one fundamental reason: it will reduce -- perhaps substantially -- the supplies of on-road diesel fuel.
Diverse and plentiful sources of supply are the life's blood of independent petroleum marketers like Pilot. Without adequate supplies of diesel fuel, independent marketers -- the most competitive segment of the motor fuels marketing industry -- will cease to exist as a force in diesel fuel retailing. Currently, independent marketers have been able to rely consistently on numerous independent and integrated refiners to assure our sources of supply. However, if the sources of supply or the numbers of suppliers are restricted, independent marketers are forced to look towards integrated refiners -- in many cases our strongest competitors -- for diesel fuel supplies. When integrated refiners are aware that an independent marketer has many other sources of supply, then the integrated refiners are forced to be competitive. When sources of supply narrow, however, there are no such forces acting on the integrated refiners.
EPA's diesel sulfur proposal will result in a substantial decrease in the overall supplies of on-road diesel fuel in this country. As EPA admits in its proposal, some refiners will not be able to make the capital investments necessary to produce ultra-low sulfur diesel fuel -- resulting in reduced diesel fuel supplies. EPA also admits that desulfurization technology currently does not exist to remove sufficient sulfur from certain diesel fuel blendstocks -- reducing supply. EPA further admits that our nation's diesel fuel distribution system will be forced to "downgrade" an unspecified portion of our nation's diesel fuel production because it will become contaminated with higher sulfur products during distribution -- again, reducing overall supplies. And EPA highlights the fact that, under the proposal, domestic diesel fuel will have a substantially lower sulfur level than diesel fuel produced in most other industrialized countries -- which will prevent foreign supplies of diesel fuel from alleviating any shortage in domestic production.
Independent marketers of diesel fuel will not be the only ones to suffer under EPA's proposal. Consumers of diesel fuel, including our nation's trucking and agricultural industries, will pay for EPA's program at the pump. EPA predicts in its proposal that diesel sulfur reductions will cost approximately four and one half cents per gallon. That number is woefully low. As we witnessed this past winter and spring in the Northeast, even small supply shortages of diesel fuel and heating oil can cause dramatic increases in retail prices. If overall diesel fuel supplies are reduced by 10 percent as a result of EPA's proposal -- which I believe is not an unreasonable prediction given the refiners I have talked with -- then the $2.00 per gallon diesel fuel prices we saw in the Northeast last winter will become the norm, if not a bargain in the eyes of consumers.
Given the extent to which our nation relies on diesel fuel to power our on-road commercial transportation network, the ultimate impact of these price increases and diesel fuel shortages will be felt by the economy as a whole through increased transportation costs and inflation. While the current staff at EPA may not care about this impact of their proposal on the future of our economy because these impacts will occur long after this Administration has left office, I suspect that many of the members of this Subcommittee plan to be serving their constituents in Congress in 2006 and will be present when the repercussions from this ill-considered proposal are felt by consumers and our economy.
SIGMA would bring this Subcommittee's attention to an issue contained in the preamble to EPA's proposal that is not currently a formal part of its draft regulations. In the preamble, EPA requests comments on adopting a regulatory scheme that would permit two on-road diesel fuels to exist for a short period of time. EPA envisions that refiners would make some ultra-low sulfur diesel fuel for several years and continue also to supply the current low sulfur on-road diesel fuel during this transition period.
This EPA proposal should be roundly criticized and discarded. EPA, in its attempt to make its drastic proposal on diesel sulfur reductions seem reasonable, has floated this idea of dual on-road diesel fuels. As the nation's largest independent retailer of on-road diesel fuel, I must tell you that this proposal would be disastrous for our industry and the nation's motor fuel distribution system. This dual fuel proposal would force Pilot and other diesel fuel marketers into one of the following scenarios: (1) add an additional underground or aboveground storage tank and dispenser system to hold and pump the second grade of on-road diesel; or, (2) retail only ultra-low sulfur diesel fuel at a time when only a small percentage of our customers would require it and risk losing customers to competitors that choose to sell the cheaper, low sulfur diesel fuel.
At the vast majority of our company's 180 locations, we have very limited storage for diesel fuel -- at most sites, our tanks hold less than 24 hours of supply. In many instances, we would not have room at our sites to install additional tankage, even if we could get the permits to do so. Even if we could install the additional tanks, it appears from EPA's proposal that a second on-road diesel fuel would be phased out within five years, making our investment in that additional tank unnecessary and a wasted investment. While Pilot does not own or operate bulk storage terminals, I would assume that such a dual fuel approach would tax storage and distribution assets at the terminal level of distribution as well.
As a result, I urge the members of the Subcommittee to communicate to EPA your opposition to the Agency's dual fuel approach. While EPA has attempted to portray this idea as a means of easing the burdens of the program on refiners and marketers, it in fact will greatly increase the costs of the proposed program if it is implemented.
SIGMA would support a diesel desulfurization program that: (1) takes effect in 2010 or later to permit adequate time for the proposed experimental emissions control and diesel desulfurization technologies to mature and develop, and gives refiners additional time to install these new technologies; (2) sets a diesel sulfur cap at 50 ppm, rather than the 15 ppm cap that EPA's proposal would mandate; and, (3) establishes a uniform transition to the new lower sulfur diesel fuel without a dual fuel approach. An EPA regulation that adheres to these three principles would have only a minimal impact on overall diesel fuel supplies while reducing diesel sulfur levels by 90 percent and achieving substantial reductions in emissions from heavy duty diesel engines. In addition, the longer implementation time frame would permit the manufacturers of emissions control devices to develop their technologies to a level at which a 50 ppm sulfur level would not have a negative impact on emissions.
I appreciate the opportunity to present SIGMA's views to this Subcommittee. I would be pleased to answer any questions raised by my testimony.