Coming from either direction the land changes before you have a chance to get ready for it. Traveling eastward, you see the grasslands for the first time from several thousand feet up in the Rocky Mountains. You come around a turn intent on the ruggedness of the mountains, and suddenly the pine trees, rocks, and fast-running water are gone. Below you, though still fifty miles off, is the flattest, smoothest, most treeless stretch of land imaginable. And if you're traveling west, you've just gotten used to the fertile, black soils of Indiana, Illinois, and Iowa, just come to expect the neatly painted, prosperous farm buildings surrounded by cultivated groves of trees, when you come to the Missouri River, and it all goes to hell. Suddenly the order is gone, the prosperity scattered. When you get the feeling that the whole world can see you but no one is watching, you have come to the grasslands of North America.
There are four reasons for this fundamental opposition. First, for states like South Dakota, located in America's heartland, no measurable public health benefit will be gained from regulating gasoline sulfur to a uniformly low national standard. Second, current gasoline sulfur levels in my state do not threaten public health or ambient air quality in any downwind states. Third, application of the proposed gasoline sulfur standard in South Dakota and neighboring states poses a serious and unwarranted threat to our consumer gasoline prices by harming refineries supplying our fuels. Fourth, there is a way, through vehicle maintenance, that is less expensive than EPA's proposal and more closely tailored to the need for clean air than imposing on South Dakotans and residents of nearby states the significant costs of curing air pollution in other regions of the country. South Dakotans and their neighbors do not contribute to this problem and will not benefit from the proposed solution. Do not make them pay with higher gasoline prices.
BACKGROUND
South Dakota has no refineries and is dependent on other states for gasoline and other fuels. Western South Dakota, the location of Ellsworth Air Force Base and an area very dependent on tourism, is supplied by refineries in Petroleum Administration for Defense District IV (PADD IV) to the west. Eastern South Dakota is supplied by pipeline from refineries in PADDs II and III. South Dakota's economy is heavily dependent on agriculture, perhaps more so than any other state, and agriculture is seriously depressed as farm prices are at perhaps their lowest levels in decades. The last thing our farmers need is an EPA-induced increase in the cost of business that returns no measurable public health benefit to them or any one else.
In 1996, South Dakota ranked 35th among the states in per capita income. Four of our western PADD IV neighbor states ranked 36th, 44th, 46th and 47th. Colorado, at 14th, is the only PADD IV state ranked in the top half. Our neighbors to the north and south, North Dakota and Nebraska, who also receive fuel from PADD IV ranked 25th and 39th. Any cost increase in our region, without commensurate benefit, is unwarranted and will impose an economic hardship on our residents.
NO PUBLIC HEALTH BENEFIT
Attachment 2 is a chart displaying the relative traffic density of the states in 1997 as measured by vehicle miles traveled per square mile. South Dakota and the PADD IV states have some of the lowest traffic densities in the country. It stands to reason, therefore, that vehicle emissions in South Dakota are among the most dispersed and dilute in the country and that the benefits of requiring our gasoline supplies to meet a uniformly low national sulfur standard are dubious. Data provided by EPA in its Regulatory Impact Analysis do not display the impacts or benefits for each state. The best data otherwise available, however, bear out this hypothesis.
Last year, the American Automobile Manufacturers Association (AAMA) had posted on its Web site a 1997 AAMA study on the impacts of gasoline sulfur on Tier 0, Tier 1 and LEV/ULEV vehicles. Extending the results of this study to South Dakota's 1997 vehicle miles traveled yields the following projections. First, simply changing from Tier 0 vehicles to LEV/ULEVs will reduce South Dakota's annual vehicle NOx emissions by 3,064 tons. Second, taking the next step and reducing gasoline sulfur content from 330 ppm to 40 ppm may provide an additional 843 tons of annual NOx reductions. Standing alone, these reductions of NOx are minimal compared to other states. When spread out over South Dakota's 75,898 square miles they probably challenge the limits of detection.
This exercise also suggests that about 78% of the benefits of the proposed rule, i.e. - 3,064 tons out of 3,064 + 843 tons, can be achieved through vehicle improvements alone without reducing gasoline sulfur. This compares favorably with EPA's analysis that in 2020 the American Petroleum Institute/National Petrochemical & Refiners Association regional standard proposal will provide 78% of the NOx reductions of the proposed rule. It appears that when more than half of today's vehicle fleet is of Tier 0 technology the lowest hanging fruit can be harvested by encouraging turnover of America's automobile fleet rather than increasing the price of gasoline through sulfur reduction. The EPA gasoline sulfur proposal has little to offer South Dakota and much to take from us.
Furthermore, at least one study on which EPA has relied is probably not applicable to South Dakota. In adopting the new ambient air quality standards for ozone, EPA pointed to a study of hospital admissions for respiratory conditions in New York City and other cities in New York State. It was concluded that respiratory hospital admissions increased with levels of haze air pollution, particularly ozone. In one year of that study, 1988, the average hourly ozone concentration encountered in New York City was 69 ppb. The maximum hourly level was 209 ppb. Until the recent ambient air quality standards were adopted, South Dakota had no reason even to monitor ozone. What few data we do have show hourly averages in the range of 40 ppb and a maximum hourly level of 80 ppb. Wyoming recently established an ozone monitoring location. The June, 1998 through February, 1999 data from that site show averages of hourly concentrations in the range of 26 to 50 ppb and a maximum hourly concentration of 81 ppb. Vehicle emissions in South Dakota are likely to improve from fleet turnover alone. With already good ozone levels of about half those encountered in the New York study, it is difficult to credibly predict any measurable public health benefit associated with the further step of lowering gasoline sulfur.
NO DOWNWIND HARM
Attachment 5 is a June 6, 1996 letter I received from the Ozone Transport Assessment Group (OTAG). That group was formed to analyze and model the transport of ozone from other states into non-attainment areas. That letter states
Based on our preliminary assessment of emissions and air quality data, it is our conclusion that states like Nebraska, North Dakota, and South Dakota will not need to install additional controls.
Presumably, this exemption from additional controls also applies to states further west in PADD IV who were excluded from OTAG at the outset. 37 states participated in OTAG, and the conclusion was that South Dakota was not contributing to ozone levels downwind. This conclusion is true today and will be true in the future.
REFINERY CLOSURES ARE EXPENSIVE
Attachment 6 is a graph showing monthly average wholesale gasoline prices in three cities supplied by PADD IV and corresponding prices in all of PADD III. The three PADD IV cities are Billings, Montana; Casper, Wyoming; and Rapid City, South Dakota. The significance of this chart is that it spans the August, 1991 closure of Amoco's PADD IV refinery in Casper. Amoco closed this refinery rather than invest capital necessary to comply with current diesel sulfur standards. The gray band across the chart shows the relative gasoline price penalty paid in the PADD IV cities over time. This penalty increased about the time Amoco's refinery closed. The average penalty before closure was 6.4› per gallon. The average penalty since closure has been 12.0› per gallon. In December of 1998, the difference was approaching 13› per gallon, an increase of about 10› since June of 1987. For Rapid City, South Dakota alone, this unnecessary increase in gasoline prices represents an economic penalty to consumers of $10,000,000 per year! This does not include any effect the Amoco closure has had on diesel fuel so necessary to farming. When suppliers shut down, prices go up. We simply do not need another refinery closure until EPA finds a way for its rules to repeal the basic laws of economics.
I am aware, Mr. Chairman, of a recent study performed by MathPro, Inc. concluding that a 30 ppm gasoline sulfur standard will not force refinery closures in PADD IV. The study is very disturbing. The study concludes a national standard "would likely increase the market price of gasoline in PADD 4". That conclusion is exactly what is wrong with EPA's proposal and, yet, the study's casual tone infers that this certainty should be welcomed with open arms. Higher prices are not welcome in any case, and we certainly should not accept them without counterbalancing public health benefits.
Refiners I have spoken with have commented that reading the study reveals at least three points casting doubt on MathPro's reasoning that PADD IV average refining margins are high enough to guard against any refinery closure. First, the refining margins calculated in the study were not based on any data from real PADD IV refineries. In fact, much of the data in the study was not even specific to PADD IV. Although the study's margin determination methodology may be the best available, the results are still only estimations, perhaps gross estimations, at best.
Second, MathPro based its conclusion regarding the survivability of PADD IV refiners on a roughly estimated "average" margin. It is not, however, the "average" refiner that is likely to close down. Refiners with below average margins are most likely to close, and they do exist in PADD IV. The MathPro study itself cites the example of one publicly traded PADD IV refiner whose cash operating margins were roughly two-thirds those estimated in the study. Another refiner I have contacted had cash operating margins during the study period about one-half to two-thirds the margins in the MathPro report. If these refineries close, the loss of their production will affect consumer prices just as dramatically as the closure of an average or wealthy refinery. In California, five small refiners stopped producing gasoline after 30 ppm gasoline sulfur standards were adopted in spite of a two year compliance extension. The extreme price increases accompanying the Bay Area Tosco refinery closure further demonstrate the meaning of losing gasoline supplies in a competitive market. MathPro's reliance on "average" conditions does not accurately describe what is likely to happen.
Third, MathPro assumes that PADD IV refineries, using new and commercially undemonstrated technology, will be able to remove sulfur at costs lower than those estimated by both the refining industry and EPA. There are no large refineries in PADD IV. It does not seem logical that small refineries with limited capital resources will bet their futures on untried solutions.
I stress this portion of my statement as it is important to understand that according to refiners in our area the costs of sulfur removal, by and large, will not be passed on to the public until a refinery closes. At that point, it will be too late for corrective measures to bring prices into line. Unlike crude oil price increases which affect all refiners equally in terms of cost per unit of production, gasoline sulfur removal is capital intensive and will impact each refiner differently depending on the refinery's existing equipment, the quality of its crude oil and other factors. Gasoline sulfur removal will motivate all refiners to increase product prices, but it seems likely that a competitive market will halt price increases when the refiner with the lowest sulfur removal costs receives an adequate return on its investment and decides to increase market share rather than raise prices further. At that point, other refiners in the same market will not recover their remaining sulfur removal costs. If those unrecovered costs are large enough, a refinery will close and prices will rise further. The graph, Attachment 6, showing the effect of the Amoco refinery closure on prices in PADD IV cities demonstrates this point dramatically.
CHEAPER ALTERNATIVES
In terms of finding the least expensive means of improving air quality, the proposed rule appears to turn logic on its ear. The rule threatens significant costs for regions of the country which have no air quality problem. Furthermore, it forces a multi billion dollar wholesale retooling of the nation's refineries by 2004 for the benefit of emissions control technology that will take decades to become predominant in our automobile fleet. The median age of America's automobile fleet is about 8 years and rising. This fact means that today one-half of the fleet is still Tier 0 vehicles produced before 1994. One may presume that perhaps twenty years will be required to turn 100% of the fleet into Tier 2 vehicles. In fact, EPA's Regulatory Impact Analysis predicts the entire fleet will be Tier 2 vehicles by 2030 or in 26 years. In addition, EPA's proposed rule phases in Tier 2 vehicle production over four or more years.
These facts imply that after the first year, about 1% to 2% of the fleet will be Tier 2 vehicles, but all the gasoline must be low sulfur. Regional standards are one way of deflecting this front-end imposition, on clean air and economically fragile regions, of gasoline costs designed for a small fraction of the vehicle fleet.
The issue of reversing the effects of sulfur on Tier 2 catalytic converters, however, appears to be blocking the concept of regional standards. The concern is based on the idea that vehicles traveling from low sulfur areas to high sulfur areas under a regional program will return home with ineffective catalytic converters. The reversibility debate revolves around whether catalytic converter efficiency will be restored when low sulfur gasoline is, once again, placed in the vehicle's tank. Vehicle manufacturers argue the high sulfur effect is irreversible. Refiners argue the opposite. EPA has come down on the side of the vehicle manufacturers in this debate.
This debate, however, is for naught. It is clear that reversibility, or the lack thereof, need not be an issue. Rather than make the entire nation cater to the needs of a small fraction of the vehicle fleet, it is more sensible, particularly in the early years of the program, to require owners to properly maintain their Tier 2 vehicles by replacing catalytic converters as necessary. Areas with ozone attainment problems are required to have inspection and maintenance programs, and Tier 2 sulfur-damaged vehicles operating in those areas should be easy to identify.
If this is not possible politically, ask the vehicle manufacturers and the refiners to fund jointly a program that replaces sulfur-damaged Tier 2 catalytic converters. Both industries claim they can do no more to resolve this sulfur issue. Refiners claim lower gasoline sulfur is too expensive and that sulfur's effects are reversible. The vehicle manufacturers claim sulfur tolerant technology is not possible. If refiners are forced to pay for catalytic converters because their gasoline has too much sulfur, at some point lower gasoline sulfur levels will become economical. If refiners are correct about reversibility, it will cost them nothing. If vehicle manufacturers are forced to pay for catalytic converters because their technology is not sulfur tolerant, they will be prodded to develop technology that is sulfur tolerant. While I have no studies or specific data evaluating this idea, vehicle maintenance must be less expensive than nationwide gasoline sulfur removal for the foreseeable future.
In any case, substituting proper vehicle maintenance for uniformly low and costly gasoline sulfur standards places the costs of regulation both on those causing the problem and on those who will benefit from the solution. Endangering refineries in PADD IV imposes costs on motorists and farmers who neither cause the problem nor benefit from the solution.
CONCLUSION
Mr. Chairman, I present this testimony today to clarify for the Subcommittee the negative effect of uniformly low gasoline sulfur standards on South Dakota and the neighboring region. Although they cause no air quality problems in other states, our citizens will pay significant costs and will receive no benefit under the proposed rule. The closure of a refinery in PADD IV is more than possible, and the economic harm from such an event will be unwarranted. In short, South Dakotans do not have the air quality problems prompting this rule, they do not need low sulfur gasoline, and they certainly do not want to pay for it. Thank you for the opportunity to be here today. I will be happy to answer any questions the Subcommittee might have.