March 11, 2002

SENATE ENERGY BILL FINALLY INTRODUCED; MANY FUELS ITEMS

Early last week, several key Senators reached agreement with a coalition of environmental groups, the American Petroleum Institute, and ethanol interests on a “compromise” fuel position. On Tuesday, it was introduced onto the Senate floor as an “amendment in the nature of a substitute” to an unrelated bill, and is now being debated.

Those who are parties to the “deal” are trying to present it as a “done deal”. But the fact is, the bill has not yet been voted upon by anybody. To become law, it must get through the amendment process unscathed and pass the Senate, where there are reports that up to 400 amendments might be offered. Then there will be a need to work out a compromise of differences with an already-passed House bill, have that compromise approved by both the Senate and House, and be signed into law by the President. In other words, the battle has just barely begun – it is FAR from over.

We emphasize that point because SIGMA is strongly opposed to at least one provision of the bill. Buried in “Section 819" of the proposal is a mandate for the use of 5 billion gallons per year of ethanol and/or biodiesel. SIGMA and our members are calling on all Senators to oppose this provision. If it remains in the bill following Senate debate, we are urging Senators to vote against the entire energy package. (A “call to action” was issued last Thursday to members who get this newsletter by e-mail; if you get it by fax, the call to action is attached today. The request for action is still valid – but please act quickly!)

“RENEWABLE FUEL PROGRAM”

The Senate energy proposal would establish a “Renewable Fuels Program” (RFP), beginning in 2004 with a mandate for 2.3 billion gallons and going to 5 billion gallons by 2012. (Actual ethanol consumption in 2001 was only 1.77 billion gallons.) Responsibility for meeting this mandate would be assigned to motor fuel suppliers on a “percentage of fuel” sold basis, with the Dept. of Energy each fall projecting total motor fuel consumption for the following year, and EPA then calculating the percentage that would have to be ethanol or biodiesel.

There would be a credits and trading program, meaning companies that blended a higher percentage of ethanol than required could sell those “rights” to companies that blended less. This practical effect of this provision, and apparently its intent, will be to allow most ethanol to be consumed in the Midwest, near where it is produced, with the high cost of ethanol subsidized by suppliers (ultimately by consumers) in other parts of the country, where little ethanol will be used.

As originally introduced (and as it still stands), the entities subject to the RFP would be “refiners, importers, distributors, and blenders.” The term “distributors” includes jobbers, marketers, and even terminal operators and trucking companies. SIGMA worked with API, the Renewable Fuels Assn. (RFA), and other supporters of the bill to have the “marketers” provision removed. We pointed out that, beyond the problems for our members, it would wipe out the intended flexibility for major oil companies as well – if a Northeast branded jobber were required to blend 5% ethanol, despite the fact that his supplier was relying on heavy Midwestern sales to offset non-ethanol northeast sales, it could cause real dislocations and contract violations. All groups have worked honorably with SIGMA to resolve this problem, knowing that we would still oppose the underlying proposal. Marketers will still be regulated under the bill, in much the same way they are regulated in the RFG program, but will not be principals subject to the percentage ethanol mandate. (Marketers who want to ethanol blend on their own, and want to earn credits, can become part of the program as blenders.) We understand this correction will be introduced as part of a package of technical amendments for adoption by unanimous consent later this week.

Other parts of the RFP include a provision to prevent all of the ethanol blending to be done in wintertime, when it is easiest to do so (at least 35% must be done April-Sept.); small refineries (those under 75,000 barrels/day)are exempted until 1/1/08, although they could opt in if they wished to earn blending credits; and there is a cumbersome provision to allow EPA to waive in whole or in part the first year’s program if the DOE expects serious negative consumer impacts. Individual states could also delay by one year their participation in the program, upon petition by the governor.

MORE ON ENERGY BILL

There are numerous other fuels provisions in the Energy Bill being debated in the Senate, and amendments will be offered on many of them. Key issues affecting marketers include:

Other Ethanol Provisions

States would continue to be allowed to opt out of the 1-psi waiver for ethanol-blended gasoline, but the proposal to drop the 1-psi waiver entirely was removed from earlier drafts of the legislation . . . there would be a liability “safe harbor” for refiners and marketers for future use of renewable fuels, should they later prove to be environmentally damaging.

MTBE Provisions

The use of MTBE would be banned 4 years after enactment, but states could individually opt out of the ban . . . MTBE producers would receive monetary adjustment assistance . . . the bill contains 2 pages of legislative “findings” which API attorneys think would be helpful in absolving refiners and marketers of some liability for MTBE environmental liability (even though legislative “findings” do not have the force of law), but there is no liability “safe harbor” as we had hoped, and as the ethanol lobby got built into this proposal.

RFG Provisions

The oxygenate standard for RFG would be repealed, with extensive “anti-backsliding” provisions, meaning that gasoline could not get dirtier as a result of the oxygenate repeal . . . All areas in the “Ozone Transport Region” (basically, the northeastern U.S.) would be allowed to opt into RFG without regard to their status as attainment or non-attainment, unless EPA determines there is an insufficient supply of RFG.

Tank Provisions

EPA and the states would be given an extra $200 million to deal with MTBE releases, similar to a Capps (D-CA) provision in the House bill but applicable to any MTBE release, not just from underground tanks . . . A second provision would spend $50 million the first year and $30 million each of the next 4 years for state and EPA enforcement activities (we’re worried this could lead to “overfiling” enforcement actions by EPA, but are assured that is not the intent) . . . and there are 2 “pork barrel” provisions for University studies which nobody is taking credit for inserting (we’ll understand better once the bill is enacted and the universities step forward!): one would study remediation of MTBE, including bioremediation, in bedrock formations, and the other would be a “resource center” for MTBE remediation of contaminated soil.

And these are just the provisions in the fuels section of the bill! The bill also covers oil exploration, electricity, and a wide range of other energy issues.

ECONOMIC “STIMULUS”

Congress passed economic stimulus legislation – a 13-week extension of unemployment benefits, but also $25 billion in tax breaks, including retroactive reinstatement of the Work Opportunity Tax Credit (WOTC) and the Welfare-to-Work Tax Credit. They expired as of last Dec. 31; they are both extended 2 years, to 1/1/04. Also in the bill: repeal of the mandate that had required terminals who sold taxable kerosene or diesel to also offer untaxed (dyed) product; the underlying tax-or-dye program remains in place. Finally, there are some broadened provisions for accelerated depreciation over the next 3 years included in the bill. The vote? 417-3 Thurs. pm in the House, and 85-9 Fri. am in the Senate.

SIMON APPOINTED TO NPC

SIGMA Board Member Sam Simon of Atlas Oil Company has been appointed by Energy Secretary Abraham to the prestigious National Petroleum Council, a body established in 1946 to advise, inform, and make recommendations to the Secretary of Energy on any matter relating to oil and natural gas. The appointment was made in February; his first meeting will be April 9-10, 2002. Congratulations! . . .

MISCELLANEOUS

SIGMA attorney Jeff Leiter met Friday with EPA’s Marianne Horinko, who is deputy administrator for solid waste and has jurisdiction over the Office of Underground Storage Tanks. We remain concerned that EPA has not yet taken a position on Sen. Chafee’s UST bill, but were told it is a matter of priorities based on the fact that no hearings have yet been scheduled on the bill. It was an amicable meeting, and we continue to enjoy good accessibility to make our views heard . . .the Dept. of Transportation is developing hazmat security recommendations for transporters. Although not yet finalized, marketers may wish to review what we know so far, and consider changes to your trucking and shipping procedures. A detailed memo from our attorneys is available by clicking here.

SIGMA ITEMS

The Spring Convention in San Antonio is just around the corner – be sure you have your hotel reservation! (Cutoff date is March 22 – 2 weeks away.) Also, make dinner reservations early – we’re in town during Fiesta Week! A restaurant list is available by clicking here . . . Deadline for Statistical Survey forms is this Friday, and the Membership Directory is about to go to the printer, so be sure you’ve completed all update forms. Thanks!

URGENT CALL TO ACTION!

The United States Senate is currently debating the long-awaited Energy Bill. Many provisions in the bill will have an impact on gasoline marketers, but none more so than a proposal to mandate the use of 5 billion gallons per year of ethanol (or other so-called "renewable fuels" such as biodiesel). This proposal is a certain prescription for volatile fuel prices, supply shortages, and a public relations disaster for marketers that will dwarf the price spikes of the past couple of years.

WHY SHOULD YOU CARE? As proposed, every supplier will be required to utilize a certain percentage of ethanol or buy “credits” from other suppliers who used more than their mandated amount. Your suppliers will have 4 choices: 1) produce less gasoline if supplies of ethanol aren’t sufficient; 2) buy ethanol at whatever price is available, and pass the increased cost on to you; 3) buy ethanol credits from (presumably) Midwest suppliers at whatever price those credits are offered for, and pass the increased cost on to you; or 4) use ethanol part of the time, and credits part of the time, and pass on to you the headaches of keeping your system ethanol-ready at all times.

We need you to call or fax the Senators from EVERY state in which you operate and urge them to "OPPOSE THE 5 BILLION GALLON RENEWABLE FUELS ETHANOL MANDATE IN THE ENERGY BILL". Time is too short to mail a letter -- action on the bill will be this week and next. PLEASE MAKE YOUR CONTACTS TODAY OR TOMORROW! On this website homepage, click on "Your link to Capitol Hill" near the bottom of the left column to look up Senators by name. Or click here, which will bring up a map you can click on to give you the Senators from that state, their phone and fax numbers, and e-mail addresses. You can even make your contacts directly from that page by e-mail! We've made it as easy as possible.

In your calls or faxes, use your own words and your own arguments, but here are a few points that might be helpful:

* The mandate requires the use of ethanol without regard to its price -- neither its absolute price, nor its price in relation to the price of gasoline. Since one single company currently controls more than 50% of ethanol production, this would be a "license to print money" for them.
* If all the ethanol plants in the country currently in existence or currently under construction ran at 100% of capacity 100% of the time, they could only produce 2.73 billion gallons of ethanol per year. (This is information from the Renewable Fuels Association, the ethanol industry's own lobbying voice!) There are high barriers to imports of ethanol. So where are the remaining 2.27 billion gallons per year of ethanol going to come from? From 'pie-in-the-sky' future ethanol plants that aren't even yet on the drawing boards?
* For the past several years, the ethanol industry has enjoyed a tax incentive equal to 54 cents per gallon (compared to gasoline), significant protection from foreign competition in the form of huge tariffs on imports, and even mandated use of ethanol in some states and cities in the Midwest. Yet with all these protections, the industry last year managed to produce and sell only 1.77 billion gallons of its 2.3 billion gallons of stated production capacity. There are only two possible explanations. Either the industry's production capacity is not anywhere near its "stated capacity" (maybe only 77%?). OR, seemingly more likely, the ethanol industry is unwilling or unable to price competitively with gasoline even with significant governmental help. WHICHEVER IS THE CASE, IT DOES NOT BODE WELL FOR MOTORISTS IN THE FUTURE IF THERE IS A NATIONWIDE ETHANOL MANDATE.
* SIGMA (and presumably your company) is not opposed to the use of ethanol in fuel. Many of our members sell ethanol blends. We have even supported maintaining the ethanol tax incentive. We are, however, opposed to a government mandate that a certain amount of ethanol must be used. Our position is: provide incentives for alternative fuels, if needed, but then let market forces work. The market is much better than Congress at deciding which fuels work in which conditions!
* An ethanol mandate would be harmful to air quality in many areas of the country, particularly during the summertime ozone season.
* The proposed ethanol mandate will surely increase the cost of production of gasoline and diesel fuel dramatically. That will mean taking money out of the pockets of consumers every time they buy gas and giving it to the few companies that produce ethanol. (There is no shortage of corn. There is a shortage of ethanol production capacity to meet this mandate. The benefits of price spikes always goes to the “choke point” in the system - the point where there are shortages. Thus, the supposed benefits to farmers of this proposal are mostly imaginary.)