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I. Introduction
Good
morning, Mr. Chairman and members of the Subcommittee. My name is Bill Douglass. I am Chief Executive Officer of Douglass Distributing
Company, Inc., headquartered in Sherman, Texas. Our company operates 10 convenience stores and a distributorship
that sells gasoline and diesel fuel in the Dallas-Fort Worth area.
I sincerely
appreciate the invitation to present testimony before you this morning on the
issue of national energy policy legislation and motor fuels. I appear this morning on behalf of the
National Association of Convenience Stores (“NACS”) and the Society of
Independent Gasoline Marketers of America (“SIGMA”).
II. The
Associations
NACS is an international trade association comprised of more
than 1,700 retail member companies operating more than 100,000 stores. The convenience store industry as a whole
sold 124.4 billion gallons of motor fuel in 2001 and employs 1.4 million
workers across the nation.
SIGMA is an association of more than 270 independent
gasoline marketers operating in all 50 states.
Last year, SIGMA members sold more than 48 billion gallons of motor
fuel, representing more than 30 percent of all motor fuels sold in the United
States in 2002. SIGMA members supply
more than 28,000 retail outlets across the nation and employ more than 270,000
workers nationwide.
III. Focus on
Motorists
My
testimony this morning will focus on one simple message. As this Subcommittee, and this Congress,
debates national motor fuel policy, NACS and SIGMA urge you to consider the
impact this legislation will have on our members’ customers -- your
constituents.
The average
motorist does not know or care whether gasoline contains MTBE or ethanol; they
simply want competitively-priced gasoline and diesel fuel to power their
automobiles and trucks. In general,
motorists favor environmentally-friendly fuels, and favor strong environmental
protections to assure that the use of motor fuels does not harm air quality and
does not pollute our nation’s water supplies.
These
motorists’ interests are closely matched by the interest of independent motor
fuel marketers, like myself. My company
sells motor fuels, but we do not make either the gasoline or the diesel fuel we
sell. Consequently, from a business
perspective, I have little interest in what my refiner-supplier puts into these
products, be it ethanol or MTBE. My
primary concern is supply. My
customers, and therefore my company, benefit from plentiful supplies of
gasoline and diesel fuel from diverse sources, thereby assuring a competitive
marketplace for motor fuel.
Furthermore, like our customers, we also support the production of motor
fuels that do not harm air quality and the strong and effective enforcement of
regulations to prevent petroleum releases from underground storage tanks. We support these issues for the benefit of
our communities as well as for the benefit of our business.
Therefore,
as you consider a fuels title to national energy policy legislation this year,
I strongly urge you to keep in mind the interests of your constituents, and our
customers, the motoring public. NACS
and SIGMA believe that this Subcommittee will have served its constituents well
if it puts aside special interest pressures and instead develops energy policy
legislation that focuses on expanding overall motor fuel supplies, easing the
pressures on the motor fuel distribution system, and reducing motor fuel price
volatility.
IV. Key
Components of Fuels Legislation
For these
reasons, NACS and SIGMA strongly support efforts in Congress to adopt national
energy policy legislation in 2003. To
accomplish these objectives, we urge this Subcommittee to include, at a
minimum, the following core provisions in the motor fuels title of a 2003
energy bill.
First, we
support the repeal of the reformulated gasoline (“RFG”) program’s oxygenate
mandate contained in Section 211(k) of the Clean Air Act. Numerous studies have concluded that
oxygenates, including MTBE and ethanol, are not necessary for the production of
clean-burning gasoline. The oxygenate
mandate is not environmental protection; rather, it is political protection for
the MTBE and ethanol industries and should be repealed. Doing so will enhance the ability of
America’s refiners to efficiently produce gasoline for America’s consumers.
Second, we
support an orderly phase-out of MTBE as a gasoline additive in a manner that
does not impact overall gasoline supplies negatively. The contamination of ground water supplies by MTBE has been documented widely. To address this problem, NACS and SIGMA
support a nation-wide phase-out of MTBE over a period of years Doing this at the federal level will avoid
the further segmentation of the market as individual states proceed with their
own bans. A phase-out over several
years will permit the orderly transition from MTBE to other fuel components and
mitigate the impact on overall gasoline supplies. In addition, we also strongly support increased enforcement of
federal petroleum underground storage tank laws to help prevent any future
petroleum releases. I will return to
this subject later.
Third, we
support the adoption of legislative provisions to slow, and ultimately reverse,
the “balkanization” of the gasoline and diesel fuel markets into islands of
“boutique” motor fuels. Twenty years
ago, our nation had the most efficient fuel distribution system in the
world. Today, with the proliferation of
boutique fuels, the distribution system is under constant stress which has led
to spot supply shortages, wholesale and retail price volatility, and consumer
complaints. Congress must tackle this
important issue in order to improve gasoline and diesel fuel supply and reduce
price volatility. Any federal
initiative that does not substantially restore fungibility to the motor fuel
supply and distribution system will only contribute to the continued supply
dislocation and price volatility witnessed over the past several years.
V. Consideration
of an Ethanol Mandate
During the
consideration of energy policy legislation last year, there was spirited debate
over the proposed adoption of a mandate to include ethanol in much of the
nation’s gasoline. NACS and SIGMA
strongly opposed, and continue to oppose, an ethanol mandate. We simply cannot support a provision to
replace one mandate -- the oxygenate mandate -- with another -- an ethanol
mandate.
The details
of this issue have been debated for several years as representatives of the
ethanol industry and the MTBE industry have competed for federal market
support. NACS and SIGMA are not
concerned with the rivalry between these two industries, but we are very
concerned about the impact the proposed resolution could have on consumers.
The ethanol mandate proposed last Congress places the motor
fuels market in serious jeopardy. Our
central concern is the delivery of product to all markets throughout the
country in a cost-efficient manner.
Because ethanol is predominantly a regionally produced product, it must
be shipped from its Midwest-production facilities to all markets. The problem is that our pipeline system
cannot transport the product. This
forces the market to rely on rail and truck deliveries, a much more expensive
method of liquid product transport. In
addition, it adds yet another level of potential disruption to the system. These factors alone could lead to increased
regional supply shortages and even greater price volatility.
NACS and SIGMA do not oppose increased market opportunities
for ethanol; in fact, our members are the leading retailers of ethanol-blended
gasoline. However, we believe it would
be a mistake for the federal government to mandate its use on a national basis.
NACS and
SIGMA recognize, however, that there is substantial political support in the
House and Senate for the adoption of an ethanol mandate. Therefore, if Congress is intent on adopting
a renewable fuels standard (“RFS”) as part of an energy bill, we urge that the
following modifications be made to the fuels title offered by the House to the
Senate last fall. These suggested modifications will benefit overall gasoline
supplies and environmental protection, reduce the number of boutique fuels,
maintain the competitive position of independent marketers, and ease the
introduction of the RFS.
VI. Commingling
of Divergent Compliant Fuels
First,
Congress should adopt a legislative provision to permit the commingling of
divergent compliant fuels. Currently,
EPA regulations specifically prohibit the blending of ethanol-additized RFG
with MTBE-additized RFG during much of the year. In addition, the regulations generally prohibit the blending of
any two compliant fuels if the resulting mixture would have a higher RVP
(generated by the presence of ethanol) than allowed in a specific market. These prohibitions balkanize the gasoline
markets and increase supply shortages during market disruptions, while having
little or no environmental benefit.
Furthermore, the requirements make it considerably more difficult for a
marketer to proactively sell ethanol-blended gasoline. There are a couple of scenarios that last
year’s proposed fuels title would create that could be improved by allowing the
commingling of compliant fuels.
If the
oxygenate requirement is repealed, MTBE is banned, and an ethanol mandate is
created, there will be at least two primary varieties of reformulated gasoline
sold across the nation—oxygenated gasoline with ethanol and non-oxygenated
gasoline. Existing regulations would
permit the blending of these fuels in the tanks of motorists’ cars, but not in
the underground storage tanks (“USTs”) of gasoline marketers. This limitation will impair the ability of
marketers to efficiently sell RFG and will make it more difficult for marketers
to offer ethanol-blended RFG to their customers.
Another
complication raised by the implementation of the ethanol mandate is the loss of
fungibility for conventional fuel.
Currently, many states and localities impose volatility controls on
gasoline to control for pollution.
Ethanol-blended conventional gasoline is afforded a one-pound volatility
waiver to accommodate for the increased volatility contributed by the
ethanol. However, if marketers begin
selling ethanol-blended conventional and non-ethanol blended conventional, the
mixture of the two products will result in non-compliant product.
In both conventional and RFG markets, therefore, a marketer
must drain his storage tank in order to sell ethanol-blended product. If that same mixture is not available at a
later date, the marketer would again be forced to drain his tank in order to
refill it with non-ethanol product.
This places an undue burden on the marketer by hindering his ability to
provide uninterrupted service to his customers and will cause temporary supply
shortages at certain retail outlets.
Permitting the blending, or commingling, of these fuels in marketers’
USTs will increase marketer flexibility to respond to shortages of one fuel or
another, will reduce price volatility caused by such shortages, and will reduce
stresses on the gasoline distribution system.
Some may argue that allowing a marketer to commingle
products will increase the environmental impact. I submit that any impact on the environment is likely to be
minimal and will be far outweighed by the benefits to supply and price
stability. Even today, divergent
compliant fuels are being commingled in consumer’s gasoline tanks throughout
the country. It will be rare that a
marketer will be forced to commingle product in his tank, certainly less
frequently than a consumer will fill his or her vehicle with divergent
product. In fact, most of America’s
gasoline retailers are branded marketers, locked into supply contracts, who
will not be faced with this situation except in extreme supply situations. Unbranded marketers, which comprise
approximately 30 percent of the market, are also unlikely to switch terminal
suppliers except in tight market conditions.
The provision NACS and SIGMA are advocating will simply provide extra
flexibility to avoid unnecessary market disruptions and price spikes when these
market conditions develop.
VII. Underground
Storage Tank Reform
Second,
Congress should adopt comprehensive federal leaking underground storage tank
(“LUST”) program reforms. Last year’s
House and Senate energy bills both contained modest provisions on UST
reform. NACS and SIGMA urge that these
provisions be expanded to accomplish comprehensive UST reform. The Senate Environment and Public Works
Committee recently approved unanimously S. 195, Senator Chafee’s UST reform
bill. In addition, this Committee’s
Environment and Hazardous Materials Subcommittee is considering similar
legislation.
This year’s
energy bill should not contain half-measures on UST reform. Whether the issue is full enforcement of
existing UST rules, preventing future MTBE leaks, or providing States with more
funding for their UST enforcement and remediation programs, comprehensive UST
reform legislation should be an integral part of a 2003 energy bill and, at the
very least, must not be compromised by
the enactment of half-measures.
VIII. Seasonal
Variation Protection for RFS
Third, the
Senate’s 2002 RFS proposal required the use of ethanol throughout the
year. This provision should be
deleted. Use of ethanol during the
summer months will require refiners to produce sub-RVP blendstocks, further
reducing the overall supply of gasoline, create spot shortages, and promote
retail and wholesale gasoline price volatility. If Congress is intent on mandating the use of ethanol in
gasoline, then Congress should permit industry to meet that goal in the most
cost-effective manner that causes the least disruption to gasoline
supplies. Mandating that a certain
portion of the RFS be satisfied during the summer months runs counter to this
goal.
IX. Credit and
Trading System
Fourth,
NACS and SIGMA are concerned deeply about the proposed RFS credit and trading
system contained in the 2002 Senate energy bill fuels title. Given the concentration of market power in
the gasoline refining and ethanol production industries, there is cause for
concern that some parties may attempt to “hoard” RFS credits in order to
disadvantage their competitors. For
example, if a Mid-West refiner with national marketing interests uses more
ethanol than it needs for compliance and generates RFS credits, what incentive
would that refiner have to sell these credits at a reasonable, competitive rate
to an East or West Coast refiner that is a competitor? If that East or West Coast refiner cannot
physically obtain ethanol or locate affordable RFS credits, it will be in
violation of the RFS program.
NACS and
SIGMA urge this Subcommittee to consider the adoption of a provision to
incentivize refiners who are “long” on RFS credits to tender these credits to
other refiners at a reasonable price. One solution might be to penalize refiners that are “long” on RFS
credits in the same way refiners that are “short” on credits are to be
penalized if there is unmet demand for RFS credits in the marketplace . Whatever solution Congress arrives at,
assuring a competitive and open market for RFS credits must be examined.
X. Other Issues
Many other
issues are under consideration with respect to a fuels title in an 2003 energy
bill. NACS and SIGMA have adopted the
following positions on several of these additional issues.
First,
independent marketers support the adoption of a provision to shield MTBE users,
manufacturers, and refiners from product liability claims that MTBE is a
defective product. The 2002 Senate
energy bill contained such protection for ethanol producers. Such protection should be afforded to MTBE,
as provided in the House counter-offer.
It must be noted that such liability protection will not shield
marketers from potential liability for MTBE releases -- which generally is
governed by negligence law. Instead,
this provision would simply move MTBE release claims out of the product
liability area of law.
Second,
NACS and SIGMA support strongly a federal solution to address the problems
associated with the proliferation of boutique fuels. To date, virtually all stakeholders have criticized the
balkanization of the motor fuels markets, but there have been no studies
completed to provide policy recommendations to halt, or reserve, the
introduction of boutique fuels. Last
year, the House included a provision in its energy bill requiring a federal
study into this issue. We continue to
support a federal assessment of the problem.
However, the timing of such a study will not serve to assist this
Committee in developing a national energy policy.
Therefore, I am pleased to inform the Committee that one of
the associations I am representing today, the National Association of
Convenience Stores, has commissioned a study into this very subject that will
be completed next month, in April 2003.
This study is taking an in-depth look into the current market conditions
generated by today’s overlapping federal, state and local fuel regulations and
is assessing the impact of potential changes to these regulations on overall
fuel supplies, product fungibility, cost and environmental impact. NACS looks
forward to sharing the results of this study with this Subcommittee as soon as
it is available and we hope that it will prove a useful tool as you work to
complete an energy bill this Congress.
XI. Conclusion
Mr.
Chairman, members of the Subcommittee, thank you for this opportunity to
comment on America’s national energy policy.
NACS and SIGMA appreciate the chance to share our concerns and
recommendations with you as you prepare a new energy bill. I hope to have provided some insight into
the impact certain policies will have on the petroleum marketplace and some
provisions that could help mitigate those impacts. We look forward to working with the members of this Subcommittee
to craft energy policy legislation that meets the goals outlined in this
testimony.
I would be
pleased to answer any questions that my testimony may have raised.
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