July 1, 2002

ENERGY CONFERENCE COMMITTEE BEGINS; ISSUES “SORTED”

The first meeting of the Energy Conference Committee, working out differences between the House and Senate on energy legislation, was held last Thursday. The hearing was broadcast on C-Span, and is being re-broadcast at various times, for those who are interested in watching the entire proceedings.

The first meeting was mostly organizational, with some posturing as members were allowed to make opening statements. Rep. Tauzin (R-LA), chairman of the conference committee, announced that he and Sen. Bingaman (D-NM) had divided the issues into two groups – Tier 1 being the most contentious issues, and Tier 2 those where there was less difference between the two versions. The ethanol mandate (Renewable Fuels Standard, or RFS) and oil drilling in ANWR are both included in Tier 1. Staff will be working on both issues during the Independence Day recess and on into July, but it is expected that Tier 1 issues will require much more Member involvement.

Rep. Tauzin stated that it is imperative for the committee to reach agreement on, and for Congress to pass, comprehensive energy legislation this year. That is not surprising – rarely does a conference committee chairman want to fail to reach an agreement. It is unclear how serious the other members of the conference committee are in their agreement with him, though.

The opening hearing produced a tiff between Tauzin, Sen. Kerrey (D-MA), and Rep. Young (R-AK). Kerrey suggested that the Senate conferees would not be willing to take back to the Senate a bill that includes oil exploration in ANWR. Tauzin pointed out that he and Senate Majority Leader Daschle (D-SD) had agreed that everything would be “on the table” in the conference committee. And Young then suggested a quid pro quo – “This is a 2-way street.” He suggested that, if ANWR were taken off the table, he would insist that ethanol be taken off the table too. We had anticipated that these two separate issues might become entwined, so the exchange was not surprising.

The other issue affecting the RFS is its cost to the Highway Trust Fund – an estimated $5.1 billion drain due to the ethanol tax incentive – and overall tax loss. Rep. Oberstar (D-MN), ranking member of the House Transportation and Infrastructure Committee (chaired by Rep. Young), noted this drain. Sen. Baucus (D-MT) noted that none of the tax provisions in either bill have budget “offsets” – (about $36.5 billion in the House version, and $15 billion in tax incentives plus the $5.1 billion foregone revenue from ethanol). He urged a “balanced approach” on tax issues, presumably meaning a compromise somewhere between $20 and $36 billion.

RELATED DEVELOPMENTS

The Bush Administration released its official “Statement and Position” document, outlining its views on the various provisions being considered by the Conference Committee. As expected, despite recommendations from the FTC and the Council of Economic Advisors, the Administration came out in support of the ethanol mandate and urged its adoption. The administration also argued that the tax provisions in the final bill should not greatly exceed the $9.5 billion they had proposed earlier. This may mean problems for the small refiner tax credits for low-sulfur-diesel upgrades supported by SIGMA, which are in both House and Senate versions, if an effort is made to pare back the total tax “cost.”

Interestingly, the early maneuvering related to next year’s Highway Reauthorization bill has gotten mixed up in the energy debate. Rep. Petri (R-WI), chairman of the Highway and Transit Subcommittee, has said he would like to see annual authorizations between $40 and $50 billion, but that was unlikely without an increase in the motor fuel tax – which hasn’t increased since 1981 (the highway portion), and which will be worth only 13.5 cents in inflation-adjusted money at the end of that 5-year period (2008) compared to 1996. The connection to the energy debate? Petri would like to transfer the 2.5 cents per gallon that currently goes into the General Fund to the Highway fund, to offset the losses to the ethanol tax credit. Sen Baucus introduced a bill to do just that on June 26 (not yet numbered). Incidentally, Transp. Secretary Mineta told road builders that a gas tax increase would be one way to increase the size of the Highway Trust Fund, but he doesn’t expect the administration to consider that option.

DIESEL FACA MEETS

The second meeting of the special advisory committee to EPA on low-sulfur diesel took place on Thursday and Friday. This so-called “FACA” is the one on which Alan Wright of Pilot Oil is representing SIGMA and three other marketer groups. While our principal issues have will not be considered by the FACA, there are still other issues of concern being discussed in the FACA which justify our continued participation.

It should be remembered that low-sulfur diesel is part of a larger program designed to reduce the emissions from heavy-duty engines. Low sulfur diesel is part of the mix primarily because sulfur poisons the catalysts which are central to the technology for reducing those engine emissions.

The first day of the meeting consisted largely of discussion of EPA’s progress report on how the two industries (engine manufacturers and refiners) are progressing toward meeting the 2006 deadlines. That report seemed to indicate that everything is “hunky-dory”; neutral observers have suggested it is overly sanguine about progress. For example, for the engines part of the report, EPA talked only to the manufacturers of the emissions controls – companies which have a vested interest in concealing any problems that might exist – and did not talk to engine manufacturers, who privately expressed less confidence in the program. Data studied was exclusively on light-duty engines, which are substantially different from heavy-duty engines, and included vehicles up to about 50,000 miles – whereas heavy-duty vehicles can frequently travel 500,000 miles or more.

Our suspicions of the engine data is magnified by what we do know about the diesel data. There, EPA reported that 1) production of 15 ppm sulfur diesel is “feasible” with current technology; 2) new technologies are being developed; 3) virtually all refiners are in the process of planning their compliance; and 4) some refiners are ahead of schedule, and will be making 15 ppm sulfur diesel by 2003.

We don’t dispute any of those four “facts,” but at least two of them are completely beside the point. First, new technologies are coming too late to be helpful – because refiners are having to make decisions now, based on technology available now, in order to complete refinery upgrades in time for the 2006 deadline. More significantly, EPA refused to take ANY kind of look at what volumes of ultra-low-sulfur diesel the industry is likely to be able to produce. There has never been a question that refiners could produce some 15-ppm diesel. But different blendstock streams go into making diesel, and some of them start out very high in sulfur. To make 15-ppm diesel, some of those blendstock streams will have to be diverted elsewhere. We believe that will likely mean reduced production of on-road diesel when the 15-ppm mandate goes into effect. And EPA’s report totally ignored the whole question.

MORE ON DIESEL SULFUR

The marketer issues that SIGMA is most concerned about on low-sulfur diesel – fueling, trading, mis-fueling, marketer liability, and the phase-in – will be addressed by EPA separately from the FACA, as we reported last week. EPA’s Jeff Holmstead sent a written reply to our request, dated June 24 (last Monday). EPA will have two workshops in the late fall or early winter and will release “Question and Answer” documents following each meeting based on the workshop and/or on questions raised at them. One of the workshops will be on engine issues, the other on those fuel implementation issues. EPA says it may repeat the cycle over the next two or three years as needed. In preparation for the fuels workshop, Alan Wright and representatives of SIGMA and NACS will be going to Ann Arbor, MI, July 23 to meet with EPA staff. PMAA and NATSO are also invited to that meeting, but had not yet committed to participate as of our press deadline.

LEGISLATIVE APPOINTMENTS

Congress is in recess next week – an excellent time to make an appointment and meet with your Representatives and Senators in their home offices. And just around the corner is the SIGMA Summer Leadership Meeting in Washington, July 16-17, which provides another opportunity for such meetings!

Whenever you meet with them, SIGMA can be of help to you. We will be preparing packets of materials on the issues most important to marketers, for your use. Part of those packets is a listing of all SIGMA members who market in that Congressman’s District or Senator’s State, with outlet counts – something that can add credibility to your presentations. You need to let us know so we can help.

At present, we have the following individuals signed up requesting us to make appointments for them in Washington during the Summer Leadership Meeting: David Atwater, Ed Burke, Joseph Cote, Jerry Cummings, Jon Day, Art DeBlois, Karl Goodhouse, Joseph Maggi, Chuck Moore, Cooper Morrison, Juritta Neal, Mike Ports, Paul Reid, Tom Robinson, Kent Roberts, Bill Shipley, Jon Stewart, and Greg Tornberg. If your name is not on this list, and you want us to make appointments for you, please contact khoff@sigma.org or call the SIGMA office at 703-709-7000.