As the report noted, California has its own reformulated gasoline program, which was established by the Air Resources Board to deal with California's unique air-quality problems. California's RFG program differs from the federal program in a number of ways.
Most notably, the California program contains limits on the sulfur and aromatic content of gasoline, while the federal program does not. California's program also utilizes a predictive model that enables refiners to market innovative fuel formulations that vary from California's gasoline specifications, as long as refiners can demonstrate using the model that the formulations provide the required air-quality benefits.
The California RFG program has been an unqualified success. Analyses of weather data and air pollution levels indicate that, following its introduction in 1996, California RFG reduced peak ozone levels in Los Angeles by about 10 percent. Airborne benzene levels throughout California decreased by 50 percent.
California RFG reduces smog-forming emissions from motor vehicles by 15 percent, and it reduces cancer risk from exposure to motor vehicle tonics by about 40 percent. These are about twice the air-quality benefits produced by Phase 1 Federal RFG, and they still exceed somewhat the benefits of Phase 2 Federal RFG, which will be introduced in much of the country in January 2000.
Unfortunately, the continuing controversy over MTBE has overshadowed the success of California RFG. Two California cities, Santa Monica and South Lake Tahoe, have seen their domestic water supplies decimated by MTBE contamination, and MTBE has been found in groundwater at several thousand leaking underground tank sites in California. But, as the Blue Ribbon Panel report emphasized, MTBE contamination is truly a national problem. The USGS/EPA Northeastern study found that MTBE is detected ten times more often in community drinking-water systems in areas using oxygenated fuels than in areas using non-oxygenated fuels.
California took its own proactive steps to remedy its MTBE problem this past March, when Governor Davis declared MTBE to be an environmental risk and ordered its elimination from California gasoline by the end of 2002. Governor Davis followed the recommendation of a comprehensive assessment of MTBE by the University of California.
We are extremely pleased with the Blue Ribbon Panel's recommendations for a substantial reduction of MTBE use, and for a clarification of both federal and state authority to eliminate the use of additives that threaten drinking water supplies. Both recommendations back up Governor Davis' order. However, perhaps the single most crucial factor affecting California's ability to eliminate MTBE use is the federal 2 percent oxygen requirement. The Blue Ribbon Panel's recommendation for the elimination of that requirement is absolutely critical for both the environmental and economic well-being of California. I would like to discuss this recommendation in more detail.
California does not believe that there is a technical or scientific basis for requiring the addition of oxygen to gasoline. Oxygenates are an important tool for making reformulated gasoline, and in general, oxygenates should remain an option that is available to refiners. But there is absolutely no reason to mandate them. It is possible to make both California and federal reformulated gasoline without oxygen, and it is much more cost effective to let each refiner decide for itself whether to use oxygenates.
About 70 percent of the California gasoline market is subject to the federal 2 percent oxygen rule. In the other 30 percent of the market, at least three refiners have produced and sold non-oxygenated gasoline that provides all the air-quality benefits required of California RFG. In 1998, a substantial amount of the remaining gasoline in that market contained less than 2 percent oxygen. The Blue Ribbon Panel report pointed out that California's predictive model, along with its sulfur and aromatics requirements, ensure that non-oxygenated formulations developed by refiners provide the same air-quality benefits as standard California RFG formulations.
The same cannot be said of Phase 1 Federal RFG - the Blue Ribbon Pant report notes the concern that the elimination of oxygenates could cause a backsliding of benefits due to the higher use of aromatics. There is a need for U.S. EPA and the Congress to address this issue, but please understand: It does not apply to California. California has shown that it can deliver the full benefits of its world-leading RFG program without an oxygen requirement of any kind.
The federal oxygen rule has awkwardly bifurcated California into two states.
In San Francisco, which is not subject to the requirement, it is possible to buy non-oxygenated gasoline. This non-oxygenated gasoline is California RFG; it meets all our requirements. However, if an oil company were to try to sell that gasoline two hours up the highway in Sacramento or six hours away in Los Angeles, it would be in violation of federal law even though the non-oxygenated gasoline provides the same air-quality benefits as the oxygenated gasoline mandated in Sacramento and Los Angeles.
Once MTBE is eliminated in California, the only feasible oxygenate will be ethanol. If the 2 percent oxygen rule remains in effect, ethanol will be effectively mandated in 70 percent of California gasoline. California welcomes the prospect of increased ethanol use that will almost certainly occur even without a federal mandate. The continuance of an oxygen requirement in California, however, raises serious economic questions.
In just three years, California would need about half of the amount of ethanol as the amount currently produced in the midwestern states. The Blue Ribbon Panel report acknowledges the large investment in infrastructure that would be needed over the next three years to meet this large demand. There is a cost to this:
The California Energy Commission estimates that the elimination of MTBE would add 6 to 7 cents a gallon to gasoline costs if the oxygen requirement remains in effect. This would amount to an average cost of $40 per year per California motorist, or $840 million per year to California motorists as a whole. Elimination of the requirement would allow gasoline costs to remain stable and possibly decrease by one cent a gallon. It is patently unfair- and makes no economic sense - to saddle California motorists with this extra $840 million cost, particularly because it would not even buy a single pound of additional air-quality benefits.
Let me be absolutely clear: This is not an ethanol issue. It is about the free marketplace. We expect ethanol to gain a new importance in California. But the market - not federal rules - should determine how much ethanol is used in California. In addition to the economics, it also is a matter of common sense. We have seen what happened when California and the nation in general became too dependent on a single additive, MTBE. Why should California simply trade its dependence on MTBE for an identical dependence on ethanol, when we can have a diverse and stable RFG marketplace featuring a range of ethanol-based and non-oxygenated formulations?
This past spring, California asked U.S. EPA for a waiver from the 2 percent oxygen requirement. We have exchanged technical correspondence with U.S. EPA on this issue and we are still awaiting their decision. At the same time, California continues to support legislation by Senator Feinstein and Representative Brian Bilbray (S. 266/H.R. 11) that, at the very least, would exempt California and possibly other states from the requirement.
I urge the committee to support the Blue Ribbon Panel's recommendation to eliminate the 2 percent requirement, and I especially urge you to support legislation that would provide California with an early exemption from that requirement. Refiners need to make decisions regarding plant modifications needed to produce non-MTBE gasoline by the end of 2002. Bear in mind that refinery modifications can take 2-1/2 to 3 years or longer to complete - environmental reviews and permitting typically take 12 to 18 months, engineering work takes six to 12 months, and construction can take 12 to 24 months. In order to complete these plant modifications within three years, refiners need to know now whether they will have to continue to use 2 percent oxygen or have the flexibility to produce non-oxygenated formulations.
In closing, I would like to emphasize that California has the need and the capability to produce RFG without an oxygen requirement.
As an arid state, we are more dependent than most other states on our groundwater resources, and we have an RFG program in place that can ensure the use of non-oxygenated fuel without sacrificing air-quality benefits.
Thank you once again for providing me with the opportunity to testify here today.