<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:72583.wais]
OZONE TRANSPORT AND REFORMULATED GASOLINE: HOW FEDERAL REGULATIONS ARE
RAISING GAS PRICES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH,
NATURAL RESOURCES, AND REGULATORY AFFAIRS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JULY 6, 2000
__________
Serial No. 106-230
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
72-583 DTP WASHINGTON : 2001
_______________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Robert A. Briggs, Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on National Economic Growth, Natural Resources, and
Regulatory Affairs
DAVID M. McINTOSH, Indiana, Chairman
PAUL RYAN, Wisconsin DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia TOM LANTOS, California
LEE TERRY, Nebraska PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho HAROLD E. FORD, Jr., Tennessee
DAVID VITTER, Louisiana
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Marlow Lewis, Jr. Staff Director
Jonathan Tolman, Professional Staff Member
Gabriel Neil Rubin, Clerk
Elizabeth Mundinger, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on July 6, 2000..................................... 1
Statement of:
Lyons, Francis X., Regional Administrator, Region V, U.S.
Environmental Protection Agency; Michael Koerber, technical
director, Lake Michigan Air Directors Consortium; Jerry
Taylor, director, Natural Resource Studies, CATO Institute;
William L. McReynolds, sheriff, Racine County Sheriff's
Department; and Darwin Greenwald, gas station owner,
Mukwonago, WI.............................................. 34
Letters, statements, etc., submitted for the record by:
Greenwald, Darwin, gas station owner, Mukwonago, WI, prepared
statement of............................................... 77
Koerber, Michael, technical director, Lake Michigan Air
Directors Consortium, prepared statement of................ 50
Kucinich, Hon. Dennis J., a Representative in Congress from
the State of Ohio, prepared statement of................... 26
Lyons, Francis X., Regional Administrator, Region V, U.S.
Environmental Protection Agency, prepared statement of..... 39
McReynolds, William L., sheriff, Racine County Sheriff's
Department, prepared statement of.......................... 71
Ryan, Hon. Paul, a Representative in Congress from the State
of Wisconsin, prepared statement of........................ 5
Taylor, Jerry, director, Natural Resource Studies, CATO
Institute, prepared statement of........................... 57
OZONE TRANSPORT AND REFORMULATED GASOLINE: HOW FEDERAL REGULATIONS ARE
RAISING GAS PRICES
----------
THURSDAY, JULY 6, 2000
House of Representatives,
Subcommittee on National Economic Growth, Natural
Resources, and Regulatory Affairs,
Committee on Government Reform,
Racine, WI.
The subcommittee met, pursuant to notice, at 8:30 a.m., in
the City Council Chambers, Racine, WI, Hon. Paul Ryan (vice-
chairman of the subcommittee) presiding.
Present: Representatives Ryan and Kucinich.
Staff present: Jonathan Tolman, professional staff member;
Gabriel Neil Rubin, clerk; and Elizabeth Mundinger, minority
professional staff member.
Mr. Ryan. The hearing will come to order. This is a field
hearing in Racine, WI of the Subcommittee on National Economic
Growth, Natural Resources, and Regulatory Affairs. I am Paul
Ryan. I represent the 1st Congressional District of Wisconsin,
and I want to thank the witnesses right now for coming up and
coming out of your way to be here. Many of you traveled long
distances to make it here today, and we are really appreciative
of this.
This is Dennis Kucinich, the ranking member of the
subcommittee, who came up from Cleveland, OH this morning. So
Dennis, I just want to thank you very, very much for coming up
here today.
I will open with some brief opening statements and then we
will move on to the subcommittee testimony.
On the way to the hearing this morning--I live in
Janesville--I drove over, and the gas prices are going down. We
come over on Highway A and ES and D and 20 and you watch the
gas pumps on the way over here, and clearly southeastern
Wisconsin is seeing some relief in gas prices. Out at the
intersection of Highway 20 and Interstate 94, it is $1.72 for
regular unleaded, but $1.72 is still pretty darn high gas
prices, but that is down, however, from as high as $2.30 for
premium unleaded, $2.08 for regular unleaded that we have
experienced here in southeastern Wisconsin as little as just 2
weeks ago.
Although we have seen these reductions in the last few
days, it has not lessened the impact that it has had on our
families, on our seniors and our businesses since the first of
June.
Every day our office has been confronted by letters, e-
mails, faxes, and media reports from people who have been hurt
by the high gas prices. In fact, I think I got the biggest dose
of it from the 4th of July parades, where every other comment
was directed toward gas prices. When it takes about $40 or $50
to fill a gas tank, most people are really pinched. These high
gas prices have taken a big bite out of the paychecks of
working Americans and small businesses in southeastern
Wisconsin.
Economic studies of the effect of the high gas prices
indicate that without relief soon, they will create a drag on
our local economy and cause a ripple effect throughout the
upper Midwest. I hope that today's hearing leads to a better
understanding of the consequences of these exorbitant prices
for consumers and what we can do to get and keep gas prices
down.
Although rising gas prices are affecting an increasing
number of communities across the country, price spikes have
been plaguing southeastern Wisconsin since mid-May. The cost of
gas rose on the average of $1.48 a gallon in early May to $1.69
a gallon by May 12, and as I mentioned, to over $2 by the
middle of June.
The Environmental Protection Agency's Reformulated Gasoline
Program is of particular concern to this area. Half of the 1st
Congressional District lies within the EPA-designated ozone
non-attainment zone. Reformulated gasoline is the most
important issue for people in southeastern Wisconsin at this
time, from my opinion and just from the constituent response
that we have been receiving, and it has been an issue like this
for a good month and a half.
Small business owners and families in southeastern
Wisconsin want to know why they pay more for gasoline than any
other region in the country, and at the height of this crisis
was the fact that Wisconsin consumers were paying an average of
40 cents a gallon more for the price of gasoline than the
national average.
I, along with Congressman Jim Sensenbrenner, released a
report from the CRS--which is the non-partisan research branch
of Congress--which has been widely cited throughout the last
month and a half. Nowhere in this report is collusion and price
gouging listed as an underlying cause for high prices. That
indeed is the goal of the ongoing Federal Trade Commission
investigation.
But likewise, I have an internal report dated June 5, 2000
from the Department of Energy, a document written from a policy
director to Deputy Secretary Glauthier. This memorandum
summarized, as did the CRS report, that rapidly increasing gas
prices in the Milwaukee area are a supply problem--``high
consumer demand with low inventories.''
And the Department of Energy memo goes on to be more
specific: ``The Milwaukee and Chicago supply situation are
further affected by: (a) an RFG formulation specific to the
area that is more difficult to produce; (b) higher regional
demand; (c) high regional refinery utilization rates; (d)
limited alternative supply sources; (e) limited transportation
links; and (f) lower gasoline inventories relative to the rest
of the country.''
So a lot of research has been done on this topic since
these gas prices have been high. There are several convergent
factors that have contributed to this problem, and that is what
we are here to investigate today.
As many news accounts for the high gas prices have pointed
out, Wisconsin and Illinois use ethanol instead of MTBE which
makes the phase II RFG blend relatively more expensive than the
rest of the country. It is very important to note that MTBE is
no perfect solution; MTBE causes ground water pollution had has
clearly been detrimental to the ground water systems around the
country.
What seems odd to me is that given the unique regional
constraints, the knowledge of short supply, and the knowledge
that RFG II will require more gas than before, the EPA still
stands by the estimates that gas prices were only to increase 5
to 8 cents per gallon in Wisconsin. Clearly, there is an
inconsistency between what is reality and what the EPA has
claimed.
Perhaps since 87 percent of the country's RFG is blended
with MTBE instead of with ethanol, the EPA did not bother to
calculate the true cost of the impact on the Milwaukee/Chicago
area, given we have a different blend.
My second concern is that in southeastern Wisconsin that we
may be paying the price for other cities' pollution. It is my
understanding that because of regional wind patterns, much of
the ozone is blown into Wisconsin from places as far away as
Texas. It seems to me that in the case of ozone transport,
Wisconsin receives a lot more than we give.
The Lake Michigan Air Directors Consortium roughly
estimates that on bad days as much as two-thirds of the ozone
in the Gary-Chicago-Milwaukee area may come from outside the
region from areas such as southern Illinois, Kentucky,
Tennessee, and Missouri.
If one looks at the EPA's own data on the sources of
pollution, it is clear where the vast majority of the problem
is coming from. These three charts that are over there--there
are two over here to my left and one over to the right--these
charts are showing the ozone emission patterns. These three
charts show that the pollution program and the pollution
picture is a very unique one.
If one looks at the EPA's own data, you will see where the
vast majority of the problem is coming from. The majority of
the pollution, as seen on these charts, is produced by counties
in Chicago and in Gary, IN. You can see Cook County and Lake
County. If you look at the orange portions of the charts in
Indiana and Chicago, those are the highest pollution emitting
counties in our region.
Counties, however, such as Kenosha and Racine counties,
although in a non-attainment zone, are relatively insignificant
contributors to the overall pollution problem. Kenosha County,
for example, produces 1/100th of the amount of pollution that
Cook County, IL does.
As part of the EPA's Clean Air Program, when a county is
designated non-attainment for ozone, the EPA requires that all
gasoline sold should be reformulated gasoline. Consequently,
even counties such as Kenosha and Racine, which do not
appreciably contribute to the ozone problem, are required to
have reformulated gas.
Wisconsin is making strides at alleviating air pollution, a
goal all of us should share. But at some point it cannot do
anything more to clean its air unless other regions clean their
air first. Making the residents of southeastern Wisconsin
accountable for other people's pollution in other regions is
unreasonable. I recognize that the physics of ozone transport
is still very new and is very vaguely understood, but it is my
hope that the EPA takes this into account when tightening the
regulations around Milwaukee.
The cause for high gas prices seems very up front to me: it
is a problem of supply and demand and environmental regulation.
I do not understand why the administration's recent
investigations do not turn up these same results that their
earlier investigations did, even though these preliminary
reports from the Department of Energy, from the Congressional
Research Service, squarely outline this fact. I believe we have
had enough delay.
The goal of this hearing is not necessarily to point
fingers at people; the goal of this hearing is to find out what
kind of devastation these high gas prices have reaped upon
Wisconsin consumers and small businesses and local
municipalities, find the source of this gas price spike, and
try and come up with solutions.
It is my fear that as the gas prices inevitably go down--as
they are doing now that Saudi Arabia is producing more barrels
now; we will see gas prices going down--it is my precise fear
that we do not learn from this problem, that we simply push the
issue aside once gas prices go down. The goal of public policy,
indeed, the goal of sound science and reasonable regulation, is
to make sure that we clean up our air and we do it in the most
scientifically based, most reasonable and common sense way
possible, because all of us support the goal of clean air. We
simply want to make sure that it is done fairly, that it is
done scientifically, and that it is done reasonably.
So hopefully, what we can gain from this understanding is
that we learn from the mistakes that may have been made, that
we will find out from the Federal Trade Commission
investigation whether or not price gouging has occurred, and
that we hopefully learn a lesson from this so we can avoid this
kind of crisis from occurring again, because when it comes down
to it, this does hurt our local economy.
[The prepared statement of Hon. Paul Ryan follows:]
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Mr. Ryan. With that, I would like to yield to the ranking
Democrat on the committee, Mr. Kucinich from Ohio.
Mr. Kucinich. Thank you very much, Congressman Ryan. It is
a pleasure to be in your district and work with you on this
matter of great concern to the people in Wisconsin and also the
people of the Cleveland area I represent.
Coming in here today, I noticed that the prices at the
Speedway on Ohio and Washington Avenues were $1.65.9 for
regular, $1.75.9, and then $1.85.9. When I left Cleveland
today, they were $1.56.9, $1.58.9 and $1.68.9. So in some
cases, there is a 9 to 17 cents difference between Cleveland
and Wisconsin, and I can understand why you are concerned.
I also understand the frustration and the concern many of
the citizens who are here today and people are feeling about
this high price of gasoline. The effect of high gas prices
ripples through the economy affecting consumers and commuters.
And this area of the country has seen some of the worst price
hikes anywhere in the Nation. That is one of the reasons why,
when Mr. Ryan asked if I would come here, of course I wanted to
be here. I wanted to hear from witnesses but also share with
you some of the information that we gathered.
Unfortunately, there are no easy reasons as to why the
price of gasoline--especially clean-burning fuel, otherwise
known as reformulated gasoline--is so high. A few weeks ago,
the price of--we will call it RFG--in the Chicago-Milwaukee
area was about 50 cents higher than the price of conventional
gasoline. Therefore, many believe that the culprit in the price
rise was RFG. Mr. Chairman, you have joined the Governor and
others in asking a Federal court to review the Clean Air Act
rules covering RFG in southeastern Wisconsin.
It has become increasingly apparent to me that we may want
to, while we are looking at this, look elsewhere for some of
the problems with the high prices. Thirty percent of the
Nation's gasoline consumption is clean-burning RFG. And outside
of Chicago and Milwaukee, the average price of reformulated
gasoline is 2 cents lower than conventional gasoline. Thus, the
reformulated gasoline requirements, in and of themselves, are
not necessarily a major contributing factor.
Since June 15, when the Department of Energy and the EPA
asked the Federal Trade Commission to investigate possible
price fixing, the wholesale price of RFG has dropped by over 38
cents per gallon in Chicago and Milwaukee. So I think there is
a sense in which the pressure that Mr. Ryan, myself, Mr.
LaTourette, and others in the Congress have started to put on
the oil companies has, in fact, caused the prices to start to
come back down.
The Oil Price Information System reported that the
wholesale price differential between RFG and conventional
gasoline in nearby cities has dropped to less than 1 cent a
gallon in Chicago and 8 cents a gallon in Milwaukee. In other
words, the price differential at the pump is consistent with
the EPA's estimate that it would cost 4 to 8 cents more to
produce ethanol-based RFG. Thus, the RFG requirements, as
applied to this region, do not appear to be the culprit.
So the question remains why was the price for RFG in this
region 50 cents higher than the price for conventional
gasoline?
I mean, people in the Cleveland area--as you talked about
during the 4th of July--I was doing all these parades and
people are coming up to me shouting from the crowd: What about
the gasoline prices? And they know that there is something
going on here and this RFG just doesn't explain the whole
thing.
I think we should look closely--and Congress obviously is
looking closely--at the allegations of price fixing and price
gouging by companies that profited from the price increase.
Last month, Public Citizen released figures on the first
quarter profits that showed major oil companies had profit
increases as much as 473 percent over 1999 figures, and stock
prices for the largest oil companies since the beginning of the
year have risen 14 percent since January 2000, and
interestingly, the price for RFG dropped precipitously since
the Federal Trade Commission announced on June 15 that it would
be investigating the industry's pricing practices.
Also of interest is the fact that while refiners were
increasing their profit margins in the United States, they were
falling in Europe. Non-U.S. refining and marketing profits were
down by 57 percent in the first quarter of the year, but U.S.
refining and marketing profits were up 68 percent in the same
period.
Now, you take Exxon Mobil for example: its U.S. earnings on
refining and marketing skyrocketed by 194 percent in the first
quarter of 2000 as compared to the first quarter of 1999. But
it was not selling more gasoline, it was selling 6 percent less
gasoline by volume. Meanwhile, its non-U.S. earnings fell by 61
percent while its sales volume fell by 16 percent. I am
interested in why there is pressure on a refiner's profits in
Europe while the United States refiners are having a profit
bonanza. I look forward to the FTC's preliminary report on the
issue which is due out in a few weeks.
Now, Mr. Chairman, a lot of the statement that I have
relates to concerns that I have expressed about how the oil
companies have manipulated this condition where the consumer
demand is the highest in the summer and they waited for the
demand to be at its peak and just socked it to the consumers,
and then they turn around and blame RFG. I have a lot of
discussion about that; I am not going to take the time to go
through it, but I would ask for it to be included in the
record.
Mr. Ryan. Without objection.
Mr. Kucinich. And also, in response to this concern, a
number of Members of Congress--myself included--have in the
wings a bill which is going to go after what we believe are
windfall profits of the oil companies, because we have to
protect the consumers. I know that is why you are here, and I
applaud you for that, Mr. Ryan, and that is why I came here to
work with you, and we have to make sure that the oil companies
are not ripping off our constituents. I mean, I think that is
what is going on, and while I am going to be interested in
hearing from the witnesses about their concerns about RFG,
there is one final point I want to make.
There are health concerns which arose when the EPA
announced that they wanted to have reformulated gasoline. You
know, I come from Cleveland, which has a number of days where
they are not in attainment, and it is an industrial area which
has suffered greatly from air pollution. We are proud of our
industries but we are not proud of our air pollution. And we
have had serious health problems in Ohio as a result of ozone
and pollution in particular.
As a matter of fact, if you look at the U.S. maps of
epidemiological studies of increases in respiratory problems,
you will see the Cleveland area is one of the highest places in
the country right now. So you know, ozone is an invisible toxic
gas and is a prime ingredient in smog. And the American Lung
Association explains that
At levels routinely encountered in most American cities,
ozone burns through cell walls in lungs and airways. Tissues
redden and swell. Cellular fluid seeps into the lungs, and over
time their elasticity drops, susceptibility to bacterial
infection increases, scars and lesions form in the airways.
Breathing is rapid and painful. As ozone levels rise, hospital
admissions and emergency department visits do the same.
Children at summer camp lose the ability to breathe normally as
ozone levels rise--even when the air is clean by reference to a
Federal standard--and these losses continue for up to a week.
That is from the Lung Association.
Now, the people of Wisconsin, according to information that
my staff came forward with, have paid a real health care cost
for ozone pollution. In October 1999, a report prepared by ABT
Associates for Clear the Air: the National Campaign Against
Dirty Power estimated that in the 6-month period between April
and October 1997, Wisconsin residents experienced 150,000
ozone-related asthma attacks, 4,200 ozone-related visits to the
emergency room, 1,400 ozone-related respiratory hospital
admissions.
The same study estimated that in Racine County, alone,
there were 45 respiratory admissions, 135 visits to the
emergency room, 5,319 asthma attacks, and 6,900 other symptoms
attributable to ozone during the 6-month period.
Residents are paying 8 cents a gallon at the pump to
purchase cleaner-burning fuel, that is true. But we also have
to be aware that the reason for this is to make sure that
residents avoid expensive hospital visits and to improve the
quality of life by reducing the number of asthma attacks and
other ozone-related symptoms. I do not think the people of
Wisconsin or Ohio, or anywhere in this country, should have to
choose between clean air and affordable, reasonably priced
gasoline.
Unrestrained, the oil industry would be happy to sell us
polluting gasoline at extremely high prices--I mean, that is
what they would love to do so they could go along and attack
RFG and turn around and when it comes to profits say, Oh, I
don't know anything about it. Well, we understand. You know,
driving over here with the deputy, he said, what do these oil
companies think we are, stupid? We know what is going on.
Deputy Ericson, I appreciate that, because that is what I am
hearing in my district, too.
So I am pleased to know the FTC is going to be checking out
the oil industry's pricing practices. Government can make sure
that consumers are getting clean-burning fuel at a reasonable
price. Otherwise, consumers may be forced to buy conventional
gasoline but be paying twice: at the pump and at the hospital.
I want to thank Congressman Ryan, again, for holding this
hearing. I applaud your dedication to the people of your
district and I look forward to the testimony today, and again,
it is an honor to work with you, Chairman Ryan.
[The prepared statement of Hon. Dennis J. Kucinich
follows:]
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Mr. Ryan. Thank you. And I would like to submit to my
friend and colleague from Ohio that I think these ozone health
problems are even more of a reason for Gary and Chicago to
clean up their emissions as well.
Mr. Kucinich. I am with you.
Mr. Ryan. I would like to introduce our witnesses now, and
then we will swear them in and start testimony.
First we have Francis Lyons, who is the regional
administrator from Region V--which is this region--from the
U.S. Environmental Protection Agency. Then we will hear from
Michael Koerber, the technical director from the Lake Michigan
Air Directors Consortium; Jerry Taylor, the director of Natural
Resources at the Cato Institute; and Sheriff William
McReynolds, who is the sheriff here in Racine County; and
Darwin Greenwald, who is the owner of North Star Shell in
Mukwonago. Thank you, all you gentlemen, for coming.
Would you please stand and take the oath?
[Witnesses sworn.]
Mr. Ryan. We will try and conform with the 5-minute rule,
and I understand that everybody brought written testimony.
Without objection, we will have all the written testimony from
each of the witnesses included in the record. Please feel free
to stray from your written testimony in providing your oral
testimony, and we will have this light here which will show you
the 5-minute rule. And we will start with you, Mr. Lyons.
STATEMENTS OF FRANCIS X. LYONS, REGIONAL ADMINISTRATOR, REGION
V, U.S. ENVIRONMENTAL PROTECTION AGENCY; MICHAEL KOERBER,
TECHNICAL DIRECTOR, LAKE MICHIGAN AIR DIRECTORS CONSORTIUM;
JERRY TAYLOR, DIRECTOR, NATURAL RESOURCE STUDIES, CATO
INSTITUTE; WILLIAM L. McREYNOLDS, SHERIFF, RACINE COUNTY
SHERIFF'S DEPARTMENT; AND DARWIN GREENWALD, GAS STATION OWNER,
MUKWONAGO, WI
Mr. Lyons. Thank you very much, Mr. Chairman, Congressman
Kucinich, and members of the subcommittee for this invitation
to appear here today. I appreciate having the opportunity to
share what we know about the recent sharp increases in gasoline
prices, particularly in the Midwestern part of the country. I
will also explain the Environmental Protection Agency's
efforts, in coordination with the Department of Energy and the
Federal Trade Commission, to address this situation.
Mr. Chairman, first and foremost, we are very concerned
that consumers receive the air quality benefits of the clean-
burning gasoline, also known as reformulated gasoline, or RFG.
They should receive these benefits of this program at a fair
and reasonable price. In the following testimony, I will show
that the cost of producing RFG does not account for the
extremely high-priced differentials we have seen in the Chicago
and Milwaukee areas.
As EPA reviewed the various requests for waivers from the
RFG program, factors such as the pipeline, tank turnover, and
patents were examined. We do not believe that these factors
adequately explain the price differentials that we have seen in
the Chicago and Milwaukee areas.
Let me begin briefly with a history of the RFG program.
When Congress passed the Clean Air Act Amendments of 1990, it
put into place a number of programs to achieve cleaner motor
vehicles and cleaner fuels. These programs have been highly
successful in protecting public health by reducing harmful
exhaust from the tail pipes of motor vehicles.
In the 1990 amendments, Congress struck a balance between
vehicle and fuel emission control programs after extensive
deliberation. The RFG program was designed to serve multiple
national goals, including air quality improvement, enhanced
energy security by extending the gasoline supply through the
use of oxygenates, and encouraging the use of domestically
produced renewable energy sources.
Congress established the overall requirements of the RFG
program by identifying the specific cities in which the fuel
would be required, specific performance standards, and an
oxygenate requirement. The oil industry, States, oxygenate
producers, and other stakeholders were involved in the
development of the RFG regulations in 1991 through a successful
regulatory negotiation.
EPA published the final regulations establishing the
detailed requirements of the two-phase program in early 1994.
Thus, the oil companies and other fuel providers have had 6
years to prepare for the second phase of the program that began
this year. In addition, the oil industry has been involved in
an EPA RFG implementation advisory work group since 1997 and at
no time during those discussions did the companies raise
concerns about production, supply, or distribution problems
that might occur.
The first phase of the Federal reformulated gas program
introduced cleaner gasoline in January 1995, primarily to help
reduce vehicle emissions that cause ozone and toxic pollution
in our cities. Unhealthy smog levels are a significant concern
in this country with over 100 million people living in 36 areas
currently violating the 1-hour ozone standard.
The Federal RFG program is required by Congress in 10
metropolitan areas which have the most serious air pollution
levels. Although not required to participate, some areas in the
northeast, in Kentucky, Texas, and Missouri have elected to
join in or opt into the RFG program as a cost-effective measure
to help combat air pollution in their States. At this time
approximately 30 percent of the country's gasoline consumption
is cleaner-burning RFG.
The Clean Air Act Amendments of 1990 also required that RFG
contain 2 percent minimum oxygen content by weight. Neither the
Clean Air Act nor EPA requires the use of any specific
oxygenate. Both ethanol and MTBE are used in the current RFG
program, with fuel providers choosing to use either. Ethanol,
however, is used exclusively in RFG in the upper Midwest, such
as the Chicago and Milwaukee area.
Ambient monitoring data from the first year of the RFG
program in 1995 confirm that RFG is working. RFG areas showed
significant decreases in vehicle-related tail pipe emissions.
One of the air toxics controlled by RFG is benzene, a known
human carcinogen. The benzene level at air monitors in 1995 in
RFG areas showed the most dramatic declines, with a median
reduction of 38 percent from the previous year.
The emission reductions which can be attributed to the RFG
program are the equivalent of taking 16 million cars off of the
road. About 75 million people are breathing cleaner air because
of the RFG program. Since this program began 5 years ago, it
has resulted in annual reductions of smog-forming pollutants of
at least 105,000 tons and toxic air pollutants by at least
24,000 tons.
As required by the Clean Air Act, the first phase of RFG
program began in 1995 and the second phase in January of this
year. As an example of the benefits, in Chicago, EPA estimates
that the RFG phase II program will result in annual reductions
of 8,000 tons of smog-forming pollutants and 2,000 tons of
toxic vehicle emissions, benefiting almost 8 million citizens
in the Chicago area facing some of the worst smog pollution in
the Nation. This is the equivalent of eliminating emissions
from 1.2 million cars in the State of Illinois.
In early June, as gas prices rose, particularly in the
Midwest, EPA and the Department of Energy invited the Midwest
Oil Refiners to a meeting in Washington, DC. Simultaneously,
EPA, the Department of Energy, and the Energy Information
Agency sent two teams of technical experts to the Midwest to
investigate the situation and talk to the refiners,
distributors, pipeliners, jobbers, terminal operators, and
retail outlets.
Following those meetings--which occurred on June 12 and
June 13--EPA Administrator Browner and Department of Energy
Secretary Richardson sent a joint letter on June 15 to Chairman
Pitofsky requesting that the Federal Trade Commission conduct a
full and expedited formal investigation into the pricing of RFG
in Chicago and Milwaukee.
Since June 15, the wholesale price of reformulated gas has
dropped by over 38 cents per gallon in Chicago and Milwaukee.
The Oil Price Information Systems has reported that the
wholesale price differential between RFG and conventional
gasoline in nearby cities has dropped to less than 1 cent a
gallon in Chicago and 8 cents a gallon in Milwaukee.
In our discussions, representatives of oil companies listed
a number of factors which they believed contributed to the
price differential between RFG and conventional gasoline in the
Midwest. These included: the additional cost of producing RFG
phase II; temporary shutdown of the Explorer Pipeline; the
difficulty with replacing winter gas with summer blends; and
the Unocal patents. I would like to now just discuss briefly
each of these factors and show why EPA believes that even taken
together, they do not account for the high gasoline prices.
Mr. Ryan. Mr. Lyons, if I could, in the interest of letting
the other witnesses testify, if you could just briefly
summarize those other five factors.
Mr. Lyons. Yes, I will, Mr. Chairman.
On June 26--this relates to the production costs--on June
26 the average retail price of conventional gasoline across the
country was $1.64 per gallon. EPA has calculated that based on
the Energy Information Agency and OPIS surveys, that the
average retail price of RFG II everywhere, except in Chicago
and Milwaukee, was $1.65 a gallon, while the average retail
price in Chicago and Milwaukee was $2.08 per gallon.
EPA strongly disagrees, Mr. Chairman, that RFG is
responsible for increases in the gasoline prices in the
Midwest. We have consistently said that the RFG program would
account for perhaps 4 to 8 cents per gallon in the increased
prices, but it is important to bear in mind, Mr. Chairman, that
is based on the entire RFG program, phase I and phase II
included. Phase II, which began at the retail outlets on June
1, 2000, we estimate that is only a couple of pennies a gallon
due to the phase II.
An analysis by Bonner and Moore Management Science, a
nationally recognized firm that specializes in refinery cost
analysis, estimated that RFG I would add 3 to 5 cents more per
gallon to the average cost, compared to conventional gasoline,
and subsequent studies estimate that RFG II would add 1 to 2
cents to the average cost of RFG I, or 4 to 7 cents to the
average cost of conventional gasoline.
Let me just briefly, Mr. Chairman, address the temporary
shutdown of the Explorer Pipeline. EPA investigated the
situation with the Explorer Pipeline to respond to the waiver
request we had received and we would like to share our
findings.
The Explorer Pipeline has historically provided 10 to 15
percent of the RFG supply for the Chicago-Milwaukee area. The
outage of the pipeline in mid-March meant a loss of 108,000
barrels of RFG destined for the Chicago area. Chicago consumes
about 200,000 barrels of gasoline a day; thus, the RFG loss due
to the Explorer Pipeline outage was less than 1 day's RFG needs
for the Chicago area.
So again, Mr. Chairman, we do not attribute the temporary
shutdown of the Explorer Pipeline to account for the wholesale
price increases as well.
I am trying to summarize my testimony as much as possible,
Mr. Chairman.
If I could briefly address tank turnover. Tank turnover is
referred to the need to replace winter gasoline in terminal
storage with summer blends. Fuel providers have been doing this
for over 10 years to comply with summertime gasoline volatility
requirements. This normally begins in April and, as required by
regulation, the tanks at the terminals must meet all summertime
RFG requirements as of May 1. Nothing changed this year from
any other year, so we would not attribute that to account for
the spike in gasoline prices.
And finally, the Unocal patent. EPA has heard comments that
the impact of the Unocal patent might bear some responsibility.
While we understand that this matter may be in litigation,
refiners have told us in meetings with them that they are able
to produce RFG that is not subject to the patents. In our
discussions with refiners and with Unocal, no one has
identified any cost or supply issues related to the patent that
could in any way explain the price increases for RFG that we
have seen.
And finally, if I could briefly address the waiver issues.
In recent weeks, there have been many calls for EPA to waive
the RFG phase II requirements in Milwaukee and Chicago. The RFG
regulations provide for an administrative waiver under very
limited circumstances, extreme and unusual circumstances, such
as acts of God or natural disasters, where the refiner or
importer is unable to comply with the RFG requirements, despite
their exercise of due diligence and appropriate planning.
Various criteria for an administrative waiver under the
regulations have not been met in the Milwaukee or Chicago area,
so EPA has treated all of the requests for waivers as requests
for enforcement discretion. Enforcement discretion is normally
used in situations such as occurred recently in St. Louis
earlier this spring when a short-term shutdown of the Explorer
Pipeline led to actual and acute shortages in the St. Louis
area where the pipeline supplies 70 percent of the fuel
delivered to the St. Louis region.
For Chicago and Milwaukee, the supply of RFG continues to
be adequate and prices are going down. Our refiners have
strongly recommended that EPA not grant the RFG waivers. It is
highly uncertain what effect a waiver would have on supply and
prices, and refiners would need to make adjustments and switch
gears, imposing short-term costs and the possibility of
additional supply problems.
No RFG phase I currently exists right now and supplies of
conventional gasoline are tight as well. So waiving the RFG
phase II requirements, under these kinds of circumstances,
could exacerbate the supply and price situation in the Midwest
for both RFG and conventional.
In closing, Mr. Chairman, I would like to reiterate the
following points.
Clean-burning RFG is providing public health benefits to
almost 75 million citizens nationally and nearly 8 million in
the Chicago area alone.
EPA believes that the cost of producing RFG II does not
account for the extreme prices being paid in the Midwest. The
pipeline disruption, the tankage issue, the Unocal patents and
its implications, as well as ethanol use, have all been
analyzed. EPA does not believe that these factors adequately
explain the price increases we have seen in recent weeks.
We are concerned that consumers are paying these high
prices for RFG.
This concludes my prepared statement, Mr. Chairman.
[The prepared statement of Mr. Lyons follows:]
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Mr. Ryan. Thank you, Mr. Lyons.
Mr. Koerber.
Mr. Koerber. Thank you, Mr. Chairman, Congressman Kucinich.
My name is Michael Koerber. I am the technical director for the
Lake Michigan Air Directors Consortium.
The consortium is a non-profit organization formed by the
States of Illinois, Indiana, Wisconsin, and Michigan in 1989.
The main purpose of the consortium is to provide technical
assessments for and assistance to its member States on air
quality issues and to provide a forum for its member States to
discuss air quality issues. The consortium's major pollutants
of concern are ozone and its precursors, and the primary
geographic focus is the area encompassed by its member States,
in particular the Lake Michigan region.
Since 1989 the consortium has supported the collection of
air quality and meteorological measurements in the Lake
Michigan region, the development of a regional inventory of
ozone precursor emissions, and the application of mathematical
computer models. Our study of ozone in the Lake Michigan region
led to three major findings.
No. 1, ozone transport is a major problem in the eastern
half of the United States and in the Lake Michigan region. On
many hot summer days, southerly and southwesterly winds bring
not only heat and humidity into the Lake Michigan region, but
also polluted air. The air entering the Lake Michigan region on
these days can be as much as 0.08 to 0.10 parts per million
which is about three-quarters of the current Federal 1-hour air
quality standard for ozone of 0.12 parts per million.
The figure in my testimony shows the ozone concentrations
entering the Lake Michigan region on a hot summer day. As can
be seen by the color scale, these ozone concentrations coming
in from the west and the south are on the order of 80 to 100
parts per billion, or 0.08 to 0.10 parts per million.
Transport within the Lake Michigan region also determines
which areas locally receive the highest ozone levels. On days
with southerly winds, the highest ozone occurs in eastern
Wisconsin, as is seen in the figure in the lower left-hand
corner. On days with southwesterly winds, the highest ozone
occurs in western Michigan, as seen in the figure in the
middle. On days with light winds, the highest ozone occurs
close to the major urban areas of Chicago and Milwaukee, as
seen in the figure in the lower right-hand corner.
Our second major finding is that 1-hour ozone air quality
levels in the Lake Michigan region have improved in the past 10
years. The number of monitoring stations recording a violation
of the 1-hour standard has decreased from 25 to 6 over the last
10 years. The magnitude of the peak 1-hour violation has
decreased from about 0.19 parts per million to 0.13 parts per
million.
The figure on the left shows the monitoring stations which
currently violate the 1-hour ozone air quality standard, and
the figure on the right shows the monitoring stations which
violated the 1-hour standard 10 years ago. As you can see,
there has been a dramatic decrease in both the number as well
as the magnitude of 1-hour violations in the Lake Michigan
region.
Our third major finding is that additional efforts are
needed to provide for attainment of the 1-hour and 8-hour ozone
standards. Despite the improvement in 1-hour ozone air quality
levels, several sites in eastern Wisconsin remain above the 1-
hour standard. The figure on the left, again, shows the
monitoring stations in the Lake Michigan region which currently
violate the 1-hour standard.
Furthermore, current 8-hour ozone levels are above EPA's
new 8-hour ozone standard at many sites throughout the Lake
Michigan region, and this is shown in the figure on the right-
hand side.
In conclusion, ozone is a public health issue in the Lake
Michigan region, and the Lake Michigan States are committed to
working together to achieve clean air. Thank you.
[The prepared statement of Mr. Koerber follows:]
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Mr. Ryan. I think those are fascinating maps. I would like
to add that you asked that these maps also be included in the
record separately.
Dr. Taylor.
Mr. Taylor. Good morning. I would like to thank Congressman
Kucinich and Congressman Ryan for the opportunity to testify
today on the effect that Federal regulations have had on
gasoline prices in the Milwaukee-Chicago area.
My testimony argues that there is absolutely, positively,
without a doubt, not one bit of mystery about why gasoline
prices have gone up about $1 a gallon over the past year in
this area. The Milwaukee-Chicago market is suffering from a
shortage of gasoline, and this shortage is entirely responsible
for the surge in prices, and a little bit of economics 101
could explain exactly this matter.
As the EPA and the Department of Energy are fond of
pointing out, supplies of gasoline as of early June in this
area were about what they were in 1998, and that is absolutely
correct, but that is only part of the story. Demand for
gasoline in the Milwaukee-Chicago area has grown by about 4
percent over the past year.
Now, this might seem minor and inconsequential to anyone
who does not understand the economics of this industry, but it
is actually quite important, because demand for gasoline is
inelastic in the short run. That is, it takes a large increase
in the price of gasoline to reduce consumer demand even a
little bit. People do not drive less because the price of
gasoline per gallon goes up a nickel, a dime, or a quarter; it
has to go up a lot just to get us to drive a little less.
Economists, for instance, calculate that if prices go up by
about 1 percent, consumer demand will decrease in the short run
by only about 1/20th of 1 percent. Thus, if local gasoline
supplies are 4 percent below where they need to be to meet
unmoderated consumer demand--the figure most market analysts
believe to be correct for the Milwaukee-Chicago area--prices
would have to jump by about 100 percent in order to prevent
1970's-style gas lines and spot shortages.
Now, there is absolutely no dispute about these two facts:
one, that supplies are no higher than they were last year, and
two, that demand has increased. And the 4 percent demand figure
comes from AAA. That should pretty much set to rest the
question of whether economics can explain this, but there are
other mysteries.
What is responsible for the shortfall in supply? Three
things: OPEC, pipeline breakdowns, and environmental mandates.
First, because of OPEC production decisions, the cost that
refiners are paying for crude oil has risen by about 48 cents
per gallon of gasoline over the past year and a half, so that
neatly explains about half of the price increase.
Second, two of the main gasoline pipelines serving the area
have broken down, as has already been pointed out. The
alternative ways of getting gasoline into the region, trucks
and barges, are very costly and insufficient to fully make up
for the shortfall. Accordingly, economists at the Congressional
Research Service calculate that the pipeline problems are
responsible for about 25 cents of the dollar's worth of price
increase.
Third, the Milwaukee-Chicago area, beginning June 1--as has
been discussed--was forced to sell nothing but ethanol blended
reformulated gasoline, a fuel sold nowhere else in the Nation.
This has spawned several problems.
Problem one, whenever new gasoline mandates are imposed on
a market, an adjustment period almost always takes place.
Refiners and merchant facilities need time to figure out their
place in the marketplace, their role in it, profit
opportunities, and to learn the most efficient ways to deliver
the new products to consumers. This shakeout almost always
results in initial price shocks, as it did in California in
1996.
To argue that the industry has had 6 years of warning and
should have operated perfectly at the whim of Congress is
silly. Whenever new mandates, especially as breathtaking as
these have been, are imposed on an area, there will be an
initial shakeout. It will be temporary, but it will have price
implications and it always has in the past.
Problem two, thanks to pressure from the farm lobby, the
reformulated gasoline sold in this area is blended with ethanol
rather than MTBE. Because ethanol evaporates easily, unburned
evaporated fuel is a major contributor to smog. The gasoline
intended for blending must be specially prepared so as to
minimize ethanol evaporation rates.
This has sparked a host of complications. Because of its
unique characteristics, this fuel must be segregated from other
gasoline all the way up the transportation system, which drives
up costs and restricts the ability of refiners to deliver it to
market. And because manufacturing gasoline for ethanol blending
is so different from manufacturing conventional gasoline,
refiners find it costly and time-consuming to switch from
producing one type of fuel or another. Thus, the industry
cannot quickly move to address spot shortages due to a shortage
of ethanol-blended reformulated gasoline.
Now, I take a moment here to note that this has nothing to
do with the cost of production. To dwell excessively about how
much it costs, a few cents more, to produce ethanol, as if that
alone should dictate what ethanol-blended gasoline prices
should be, is economic silliness. There are a lot more things
that go into the cost of gasoline at the pump than the cost of
production.
Economists at the Congressional Research Service, like
economists everywhere who have spent any time looking at this
market, understand this and calculate that the problems of
ethanol-blended reformulated gasoline are responsible for about
25 cents out of that dollar price increase. Thus, we can
explain everything here of the dollar price hike per gallon of
gasoline in mid-June: 50 cents is due to OPEC, 25 cents due to
pipeline ruptures, and 25 cents due to environmental mandates.
That prices began dropping at June 15 is no mystery,
either. While we could argue that an investigation was launched
at that time and that obviously explains it, I could also argue
that the Baltimore Orioles began losing on June 15 and
attribute that to the reason why gasoline prices went down.
The main reason prices go down is when prices for something
go up as much as they have for this gasoline in this market,
profit opportunities are available to anybody who can get this
blended gasoline in here. Every barge and truck that was not
busy was corralled into bringing gasoline to market. Every
refiner that can switch production, switched from conventional
gasoline to this ethanol-blended reformulated gasoline. That is
what high prices do in an economy: it signals the producers
that profit opportunities can be made by meeting demand that is
being unmet.
So it is the natural course of economics, of supply and
demand, that explains why prices began to go down after they
peaked at about $2.30 a gallon. It would have been shocking had
they not gone down, because it would have meant that there was
absolutely no opportunity in the refinery business to shift
production. There was, and it is costly and it took time, but
it has occurred.
So while government cannot take the blame for or do much
about three-quarters of the price spike, it can take steps to
address the 25 cent price increase that has occurred
temporarily due to these environmental mandates. First,
Congress should repeal the reformulated gasoline mandate in its
entirety. It accomplishes absolutely nothing in the way of air
quality.
The fuel injection systems that replaced conventional
carburetors in cars built since 1983 included computerized
oxygen sensors to determine when the fuel-air mix is optimized
from an emissions perspective. This is all by way of saying
that by automatically mixing gasoline in such a way as to
minimize carbon monoxide emissions, fuel injectors accomplish
through technology what the mandated reformulated gasoline
attempts to accomplish via fuel design. They are redundant
approaches.
Eric Stork, the head of EPA's Mobile Source Air Pollution
Control Program from 1970 to 1978, told the New York Times
recently that reformulated gasoline was a good idea 30 years
ago but in cars built since 1983, the fuel is ``obsolete and
pointless.''
Second, refinery margins are tight because refining
capacity continues to shrink. Because of onerous environmental
regulatory burdens, the refining business is simply not
profitable. No new refineries have been built in 30 years and
plants continue to shut down even while demand increases.
Congress should relieve the regulatory burdens facing the
refining industry in two ways: First, it should heed the advice
of the National Petroleum Council, an official advisory body to
the Secretary of Energy, and shelve the new fuel mandates in
the works that could cause a national repeat of the Milwaukee-
Chicago experience.
Second, Congress should direct EPA to cease and desist from
spelling out in painful bureaucratic detail exactly how
companies go about meeting environmental standards. Instead it
should just simply set standards and allow companies to meet
them in any manner it chooses. Economists believe that this
simple change could reduce regulatory costs on refiners by
about 80 percent. This would go a long way toward attracting
important needed investments in this industry, investments that
are crucial to the supply of plentiful, affordable gasoline.
On a final note, the idea that the price fixing or price
gouging charge has residence because oil profits have gone up
recently is another example, I think, of not understanding
markets. Prices are means by which we allocate scarce goods. If
you are an infra-marginal supplier of gasoline in the
Milwaukee-Chicago area, you certainly made a lot of money. You
lost about that much money in 1998 when prices collapsed
through the floor, and nobody held press conferences about
that.
This is an industry that has historically been less
profitable than the average industrial sector in the United
States over the past 20 years, but the high prices were
absolutely necessary to allocate a scarce good. Even if
gasoline is only a few percent below where it needs to be to
meet unmoderated consumer demand is enough, given the
inelasticities of demand, to cause shortages if prices do not
go up.
There are only two ways of allocating scarce goods: we can
let prices do it, or we can let politicians do it. If we let
politicians do it by controlling prices and allocating and
rationing the stuff, we get price lines and we get pumps that
run dry. I believe despite the dislocations that occurred here
were painful to everybody, that they were preferable to those
that occurred in the 1970's which would be the national course
of results if we impose windfall profits taxes or try to second
guess market prices.
Thank you for the opportunity to testify, and I will
certainly look forward to answering any questions you have.
[The prepared statement of Mr. Taylor follows:]
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Mr. Ryan. Thank you, Mr. Taylor. I appreciate it.
[Applause.]
Mr. Ryan. I see some agree with you. For the audience, we
try to get all sides of the view here in our hearings, and I
think it is very important to hear from each side. Clearly,
there is disagreement as to the source of the price, and as to
the science of the regulation. That is the purpose of having a
hearing, to hear from all sides involved to try and get to the
heart of the matter, and I think it is very good that we have
such a rich composition of different viewpoints here on the
panel.
Now I would like to turn to you, Sheriff McReynolds. I know
you guys are all sharing one microphone there; if you could
just bring that in front of you, please indulge us, Sheriff
McReynolds.
Sheriff McReynolds. Good morning, members of the
subcommittee. Thank you for inviting me here today and giving
me the opportunity to explain how high gas prices affect our
community here in Racine County.
The Racine County Sheriff's Department has been serving the
county since 1836. Perhaps 164 years ago, Congress convened
field hearings like this one when the price of steel to make
horseshoes went up, but times have changed dramatically from
the days of horses and buggies. Today the sheriff's department
has a sophisticated fleet of motor vehicles, several patrol
boats, and even snowmobiles which, when in season, run
consistently 7 days a week, some 24 hours, and rely on gasoline
to keep moving.
As the modes of transportation that the sheriff's
department uses have changed in the past century, so has the
nature of crime here in Racine County. Today Racine County,
like many other counties in the United States, faces the
threats of gang violence and the crimes related to drug abuse
and drug usage, for example. The department has initiated a
successful and broad range of programs, not only to fight crime
but to prevent it as well. These include the Metro Drug
Enforcement programs, a Gang Awareness program, the community
oriented policing services, Deputy Friendly, and DARE, among
other types of programs to address this need.
Funding is critical to assure that the department can
successfully run these programs, investigate crimes, enforce
traffic laws, operate the county jail, and to maintain a law
enforcement presence and availability throughout Racine County
on a 24-hour basis. This is my first priority.
Funding for the sheriff's department comes from local
residents' tax revenue. The recent high gas prices are
straining and do have an effect on the Racine County Sheriff's
Department budget. We have calculated that the increase in fuel
prices for the department's motor vehicles will cost somewhere
over $25,000 in excess of budgeted amounts for 2000. And if I
may add that if the price holds at what it is today for what we
pay, this budgeted amount will be overrun by over $46,000. In
the $25,000 estimate we did try to conclude that maybe prices
will continue to go down. This is money that should be spent on
policing and preventing criminal acts.
Fire departments, city police departments, public works
departments all depend on cars and trucks and gasoline to get
their jobs done. For both the quality of life and the safety of
Racine County, I hope that none of these services is forced to
cut back because of the impact high gas prices have on their
budgets. The extra money needed for gas this year has to come
from somewhere. One way to make up for the increase is to cut
back on vital programs or to direct our patrol cars to drive
less; the other way, naturally, is raise taxes. Neither of
these are good options.
Businesses pass cost increase to consumers. My business,
the consumers are the residents of Racine County, and increased
costs are passed down through tax increases.
From a personal perspective, I think it is unfair that
local taxes should have to increase to pay for more expensive
gas because of new Federal regulations, such as the EPA's
reformulated gas mandate. In my view, it is double taxation. As
an individual, I not only am paying more for gas because of EPA
regulations, but I am paying more in local taxes to support
these essential community services that must also pay higher
gas prices.
On a separate note, I think it is important to note that
the State of Wisconsin excise tax on motor vehicle fuel is 26.4
cents per gallon; the Federal Government tax on motor vehicle
fuel is 18.4 cents per gallon. For Wisconsin residents, that is
an extra 44.8 cents per gallon. If the average retail price per
gallon of gas is now around $1.70 in our area, over one-quarter
of that price is tax. If I am paying more at the pump because
of fuel excise taxes and for new clean air regulations, I also
have to pay more in income and property taxes to pay for the
higher costs of services due to higher gas prices. Does that
mean I am getting taxed three times now?
I am willing to pay for a clean environment, but the EPA
must understand that its actions in Washington, DC, have
ramifications throughout the local communities. There must be
ways to help these agencies with responsibilities to the
public, such as mine, to mitigate these costs or give us relief
from the reformulated gas mandate.
I am seeing the regulation burden firsthand as a result of
increasing fuel costs for the Racine Sheriff's Department. I
think the public needs to be aware of all the unintended
consequences associated with each new formula of gasoline
called for by the EPA. As I see it, their safety depends on it.
Mr. Chairman, thank you again for this opportunity to
present my views before this distinguished committee.
[The prepared statement of Sheriff McReynolds follows:]
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Mr. Ryan. Thank you, Sheriff.
Now we will go to Mr. Greenwald. Your station is in
Mukwonago. Correct?
Mr. Greenwald. Correct.
Mr. Ryan. Mr. Greenwald, please.
Mr. Greenwald. I would like to thank you, Congressmen Ryan
and Kucinich for the opportunity to express to you the various
factors that I am aware of that have caused increases in
gasoline prices at my gas stations and its effect on my
business. I feel I am here to put a human face to the policies
that are made by the EPA in Washington, DC, and how their
ramifications are felt down to the local consumer.
I own two gas stations, a Citgo station and a Shell
station, in the Village of Mukwonago, which is located in
Waukesha County, WI, which are located on the non-attainment
border and are required by the EPA to sell reformulated Tier II
gasoline. Six miles down the road from my stations in the
Village of East Troy, which is in the county of Walworth, WI,
the stations are allowed to sell conventional gasoline.
The wholesale cost of gasoline began skyrocketing in May
2000. This was a result of the decrease in supply of gas as the
gasoline terminals prepared for the Tier II reformulated
gasoline, as required by the EPA. The terminals were draining
their supply of the old reformulated gasoline and cleaning them
out in preparation for the Tier II gas to be ready for the June
1, 2000 deadline.
The decrease in supply of reformulated gasoline was so
great that during the months of May and June 2000, I was not
able to get gasoline for my Shell station from their terminal
in Milwaukee. Instead, I had to pay extra freight costs in
having the gasoline delivered to me from the Chicago terminals.
This happened to me seven times in May and June. The additional
cost of shipping this gas from Illinois resulted in an increase
in my cost of over 1\1/2\ cents a gallon. This is in addition
to the higher base price of gasoline from Chicago, resulting in
the wholesale cost of gas to me being 2\1/2\ to 5 cents higher
than what it would have cost me if I was able to get it out of
Milwaukee.
This was being caused by a decrease in supply due to the
EPA's Tier II mandate; I had not had a problem with this in the
past.
Another factor in the rising price of reformulated gasoline
is that the Tier II gasoline costs more to produce. I have read
where the EPA estimated the cost to produce the Tier II gas at
5 to 8 cents a gallon.
It is also my understanding that the EPA has not released
any cost benefit analysis for the new reformulated gasoline,
and that the EPA has not shown any scientific analysis it used
to justify the formula changes and the higher costs. This leads
me to believe that the EPA did not really do their homework on
the additional cost but just sent down the mandate and let the
chips fall.
I believe there are other factors that have caused prices
to increase, such as the higher cost of crude oil, breakdowns
of supply pipelines, rising cost of ethanol, the cost of
refiners paying Unocal after they won the court case against
six of the Nation's largest refiners for infringement on the
patent of the formula for the new reformulated gasoline--which
is also something else that bothers me, how the EPA can require
that only a certain type of gasoline can be used and it can
only be made the way Unocal makes it. This would be like the
government saying you can only own a computer if it has
Microsoft software on it.
I realize the EPA and many blame big oil for the price
gouging. I have a hard time seeing these leaders of oil
companies getting together in a smoke-filled room and deciding
to gouge the Milwaukee and Chicago markets. There is always
someone who will try to lower the price to beat the
competition. I know that is the way it works in Mukwonago and
with every other station owner I know. I cannot imagine getting
together with my competitors in Mukwonago and trying to gouge
our community. The meeting would never happen, and even if it
did happen, it would not have any lasting effect.
Whatever the cause is, I know for sure that the effect of
the EPA's mandate had been devastating to my business. Both of
our stations are fairly new: the Citgo is 3\1/2\ years old and
the Shell is 1\1/2\ years old. Both are trying to get
established in the already competitive market. It used to be
that my competition was the other stations in town; now with
the EPA changing the rules in the middle of the game, my
biggest competition is with the stations across the county
line.
Over the past 2 months I have seen them sell their
conventional gas for up to 30 cents a gallon cheaper than I
was. They were selling it for less than I was paying for it.
People flocked across the county line to get their gasoline.
Numerous times every day, people stopped at my station to
purchase maybe $1 or $2 worth of gas just to get enough so they
could go down the road to buy the conventional gas. Many of my
regular customers, even friends, left and said they would be
back when things settled down.
At the conventional gas stations, their lines at the pumps
would often overflow out into the streets. People are filling
their vehicles and numerous gas cans with conventional gas,
creating mobile bombs on the road. There are even times when
police have to direct traffic around these conventional gas
stations. One station owner was quoted on the news saying that
his conventional gas sales were up over 200 percent; at the
same time, my sales were down 38 and 39 percent at both
stations, as shown on the chart provided.
During the month of May, business is supposed to begin to
pick up for the summer, but as you can see by this chart, this
year the opposite has happened, and June 2000 was the worst
month in over 14 months.
One loophole in the EPA's mandate is that they can require
us to sell the reformulated gasoline, but they are not
requiring anyone to purchase it, and this is putting me out of
business. To make matters worse, the gas that we have been
selling for the most part has been sold at a break-even point
or even at a loss. Much of the last part of May and the month
of June, we sold gas at both stations making a gross profit of
only 2\1/2\ to 3\1/2\ percent. When you consider that when
someone pays with a major credit card, I have to pay a 3
percent processing fee, I am, at best, breaking even on those
sales.
Forty-seven percent of the purchases made at the Citgo
station were with a credit card, and 53 percent at the Shell
station, so on all those sales I either broke even or lost
money.
If we were to try and match the prices of the conventional
gas, we would be out of business by now. We have tried to be as
low as possible on our gas prices, hoping to hang onto some of
our customers, and attempt to make up for the loss of the
income with convenience store sales, but it is not enough. It
is interesting to note that back when we were selling gas at 89
cents a gallon, our gross profit margin was higher than it is
now.
Our business continues to spiral downward. We have tried
talking to our local bank to get some help, but with both
stations being so new, there is not much equity built up in
them, and they, too, seem hesitant about the future of the gas
business in our town. We have been forced to reduce expenses to
a bare minimum, to a point that has even hurt sales by not
having enough products on the shelves to sell. We have cut
inventory dramatically; we have gone from 37 total employees in
April to 25 at the end of June, many of whom are not even
regularly scheduled. I used to have a manager at each station
but now I manage both stations, in addition to working 46 hours
at the register and doing the landscaping.
This crisis in our business has not only affected me and my
family, but it has affected each employee who is now or has
recently worked for us. Our vendors are upset because I and
many of the other stations around us are not buying as much as
we used to, and so they are losing sales. Some companies who
deliver to us have added fuel surcharges to their invoices, and
the effect goes on.
I feel we have two of the nicest gas stations you will ever
see. We have invested a lot of time and money into making these
stations not look like your typical gas stations. Out of
concern for the environment, we spared no expense in putting in
the most up-to-date gas containment and leak detection
equipment we could find. The name of our company is 5 Star
Stations, Inc., and we have tried to build stations that live
up to the 5 Star title. I feel strongly that we can compete in
the open marketplace and do well if on a level playing field
with our competitors.
One of the buzzwords we hear a lot today is ``equal
rights.'' Well, I would like equal rights as well. I want the
right to run my business without the EPA and the Federal
Government coming in and giving an unfair advantage to my
competitors by telling me I have to pay 30 cents a gallon more
for my gas than they do so they can undercut me and try to put
me out of business.
I want the right to be able to sell the type of gasoline my
customers want. Many customers inquire about reformulated
gasoline at our stations. I have not had anyone say: Good, I am
going to buy my gas here because you have reformulated
gasoline. The response has always been: Where do I have to go
to get the good gas? When I tell them that the EPA says we have
the good gas, they usually have an unfavorable comment as well.
I have never had a single customer comment favorably to me
about the use of reformulated gasoline; I do not know of anyone
who is glad we have had this forced upon us.
In my opinion, there are only two options for solving this
problem. The first is to require reformulated gasoline
nationwide. I do not see how the EPA believes that the air is
cleaner 2 miles down the road across the county line than it is
where we exist. Wherever you create a border area for
reformulated gasoline, you will have someone like me. I used to
wish it was a statewide mandate, but then I realized the people
on the Wisconsin, Illinois and Minnesota borders would be in
the same position I am.
If the EPA is correct in stating that Tier II gasoline is
only 5 to 8 cents a gallon higher, this will still not solve
the problem. I will still lose customers for a 5-cent
difference. Think about it yourself: if you were to come to a
gas station that is 5 cents a gallon cheaper than one that you
normally go to and you know that you will get better gas
mileage using the cheaper gas, what would you do? You would
probably do what most people do and start buying your gas where
it is cheaper and runs better in your car.
If this reformulated gasoline is the answer to our ozone
concerns, then make it nationwide. If not, if it is just a
placebo that really is not making any difference, then the EPA
needs to go with the second option and lift the reformulated
gasoline mandate in Wisconsin. I strongly prefer this option.
There may be areas of the country that need it or it may be
doing some good, but it is not here. The six reformulated
gasoline counties in Wisconsin do not live in a vacuum,
mountains do not surround us. Our air is constantly moving. It
is blowing in from places like Chicago and Gary, IN. The air
that they are monitoring does not originate in Milwaukee; the
EPA needs to focus their attention on the source of the alleged
problem--which is not here--and leave us alone.
The fact that we in Waukesha County are in a reformulated
gasoline area and we have an ozone level of 84 parts per
billion, according to the Wisconsin DNR Bureau of Air
Management, and that Door County, WI--which is almost entirely
surrounded by Lake Michigan, which causes higher ozone
readings, just like the monitors in Milwaukee--their county has
the highest ozone level in the State, with 97 parts per
billion, and they do not have the reformulated gas mandate
forced upon them.
This is only one of the reasons that cause me to question
the legitimacy of reformulated gasoline in our area. It seems
there are many other valid reasons to lift the mandate,
including air quality studies done by independent firms.
My biggest error in going into business was building these
stations in the town I have grown up in and lived in most of my
life. I should have built them 6 miles down the road, across
the county line. As we did the site analysis and had
projections done for both stations, we did not calculate in or
expect the EPA to come in and try to put me out of business.
Thanks to the EPA and the Federal Government, my American dream
has turned into a nightmare.
I plead with you, Chairman Ryan, and members of the
Subcommittee on National Economic Growth, Natural Resources,
and Regulatory Affairs, to do the right and fair thing and to
do whatever it takes to permanently--not temporarily but
permanently lift the reformulated gas mandate before my family
and I become another statistic of a small business gone under
at the hands of the Federal Government and the EPA.
Thank you.
[The prepared statement of Mr. Greenwald follows:]
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Mr. Ryan. Thank you, Mr. Greenwald, for your insight and
your individual story and your analysis.
What we will do is we will each do 5 minutes--Dennis and I
will do 5 minutes of questioning each and we will just go back
and forth. How does that sound, Dennis? Does that sound all
right?
Mr. Kucinich. Sounds great.
Mr. Ryan. Mr. Lyons, I would like to start with you. In
your testimony you claim that the RFG mandate, in its isolated
vacuum--or I will let you use your own words--had nothing to do
with the type of price spike we had. When I spoke with your
boss, Carol Browner, last week, she claimed that they work in
concert with the Department of Energy and their experts in
analyzing these markets. Is that correct that you work with the
Department of Energy in analyzing the data that the DOE
produces, that the Energy Information Agency [EIA] produces in
trying to analyze the markets that you are involved in?
Mr. Lyons. Mr. Chairman, if I could just clarify. I do not
believe I testified that the RFG had nothing to do with the
price differential. We have consistently maintained that the
RFG program at the production cost level, we would expect to
see something in the neighborhood of 4 to 8 cents, and we
believe that is exactly what has happened. We have never
maintained that that necessarily means a corresponding retail
differential of 4 to 8 cents per gallon, we have always said
production costs of 4 to 8 cents. What that might mean on the
retail end, frankly, Mr. Chairman, no one from my agency is
qualified to say that.
Secretary Richardson and Administrator Browner have asked
the FTC to look into that; that is more in their area of
expertise, not ours. We have never said the production costs of
4 to 8 cents must translate into a corresponding retail cost,
and in fact, the data bears that out.
If I might, Mr. Chairman, yesterday the wholesale prices in
the Milwaukee area were 108.57 and the corresponding retail
cost was 174.27, so indeed, there is quite a differential
between wholesale and retail. But we have never said that 4 to
8 cents must translate into retail. We have asked the FTC to
look into it because, frankly, Mr. Chairman, we could not
account, based on our significant discussions with the oil
industry and the refineries, what would account for the
different differentials. We have heard from a number of the
panelists suggestions of a number of things, and the Department
of Energy and the Environmental Protection Agency was not able
to reconcile those different factors with the price
differentials that we were seeing, and, therefore, asked the
FTC to look into it.
I have not come here, Mr. Chairman, to point fingers, I
have not used the word ``gouge,'' I have not used the word
``collusion.'' I have simply maintained that we are willing to
stipulate that the RFG program may have accounted for 4 to 8
cents differential, but the price increases we have seen have
been in Chicago in the neighborhood of 50 cents per gallon, and
we are at a loss to explain that, and so have asked the FTC to
look into it.
Mr. Ryan. Let me ask you a brief question, if you could
give me a very brief answer. We want to keep to the time limit.
In doing this analysis on what RFG would cost at the wholesale
level, did the EPA look at how reformulated gas might affect
the supply in this region?
Mr. Lyons. Mr. Chairman, yes. This was looked at back in
1994 when the regulation was developed. And I might add, we
have heard the word ``EPA mandate'' used a lot today.
Mr. Ryan. It is a congressional mandate, for the record.
Mr. Lyons. This is a congressional mandate, this is part of
the Clean Air Act; EPA did not impose this midstream or
anywhere else. This was a congressional mandate that was passed
in 1990 by the Congress, went into place in 1995, phase II in
the year 2000. Our estimates were based on significant
discussions with the industry itself.
Mr. Ryan. So the last supply estimates were done in 1994?
Mr. Lyons. Well, we certainly looked at the supply issue
this spring when the price spikes began to happen. We looked
into it; we had heard from a number of refiners who said that
their supplies were adequate, so that is why we are at a loss
to explain this. We looked at the pipeline breakage; that, we
were not able to determine, would account for this. I am sure
that it accounts for some of the price spike, Mr. Chairman, but
not the numbers that we were seeing.
Mr. Ryan. See, this is a cause for my concern, because your
own Department of Energy contradicts what you just said. The
Department of Energy, in a memorandum on June 5, says that the
problem we have here in the Milwaukee and Chicago region is
largely a supply problem. It goes on to say, through a very
elaborate study and memo, that there are several reasons
brought forth with the reformulated gas mandate that has given
a supply shock.
Now, I am not here to point fingers at the EPA solely to
suggest that the EPA manufactured all of this. OPEC has a lot
to do with this as well, and when the base price of crude oil
goes up, as has been happening, that clearly increases the
price of gasoline for the entire country. The problem with us
here in Wisconsin is that it did not just happen--we did not
get the national average, we got a huge price spike, 40 to 50
cents more for a gallon of gasoline in southeastern Wisconsin
than the rest of the country.
And the Department of Energy--which is a department that I
do realize the EPA relies upon for expert analysis--has said
that there is a supply shock, there is a supply problem
associated with this mandate. The Congressional Research
Service, a very non-partisan objective think-tank within
Congress, says that the RFG situation in the Milwaukee-Chicago
area can be accountable for, at the retail level, between 25
and 34 cents to a gallon of gasoline because of the unique RFG
situation that we have here.
I understand your analysis shows that at the wholesale, RFG
in a vacuum on its own only adds 4 to 8 cents per a gallon of
gas, but we do not live in a vacuum. The retail level is not a
vacuum. We have several factors that on their own are not
excessively high: the Unocal patent, the pipeline problems, the
fact that Mr. Greenwald had to truck in his gasoline from a new
place in Chicago rather than the typical place from Milwaukee,
and the fact that we have our refineries at top utilization
rates, meaning they are basically topped out, and the fact that
the kind of gasoline we have to use here in Wisconsin is a
boutique fuel, so to speak. It is unique to this area. We
cannot get the gasoline from Minnesota or from Iowa because
they do not have the same kind of gasoline.
So it is a supply problem and that is not my words, that is
your own Department of Energy which said in the beginning of
June that it is a supply problem. So all of these factors, when
combined, when brought together by the reformulated gas
deadline and mandate, according to the Congressional Research
Service and the DOE, have given us this problem.
I along with Senator Herb Kohl, Russ Feingold, and Jim
Sensenbrenner, asked for a waiver, a temporary waiver on May
23. We saw that these unique situations were occurring here in
Wisconsin, that there are a lot of factors, not just EPA
factors, but a lot of factors, and that if this regulation were
to actually occur on June 1, as it was scheduled to occur, we
would have this huge price spike.
On May 26, the Environmental Protection Agency rejected our
waiver, suggesting there was no supply problem. Then on June 5,
the Department of Energy wrote in their own memorandum that, in
fact, there was a supply problem, a very large supply problem
which was a convergence of several factors brought together by
this unique RFG mandate. The Congressional Research Service
followed up with exactly the same request.
My basic question is this. In St. Louis you were able to
use what you referred to as enforcement discretion in granting
them a temporary reprieve or waiver from the reformulated gas
mandate for a number of weeks due to their supply shocks from
the Explorer Pipeline which does provide gasoline to this area
as well. Why did the EPA reject the waivers here in Wisconsin
and Chicago and not use the same kind of enforcement discretion
that was used in St. Louis?
Mr. Lyons. Mr. Chairman, the factors that contributed to
the St. Louis shortage was a pipeline breakage from a pipeline
that serviced the St. Louis area for a much, much higher
percentage--I believe 70 percent of the fuel in the St. Louis
area.
Mr. Chairman, I agree with you there are a number of
factors, and we have heard some of them today, that have
contributed to a shortage and I have never maintained that
there has been no shortage or tight supply. What we have said
consistently is that the supply has been adequate to meet
demand and was not a tight enough supply and did not rise from
an acute enough situation, an extraordinary circumstance that
would justify granting such a waiver under the regulations, and
that is why that request was denied.
I might add, Mr. Chairman, that we received a letter from
May 25 of the year 2000 from the American Petroleum Institute
specifically expressing concern about the waiver application
and requesting that the EPA in fact deny that waiver
application. We have received a number of similar letters from
other refiners who have said it would give an unfair advantage
to competitors who, for whatever reason, may not have planned
ahead. The American Petroleum Institute asked us not to grant
the waiver, and in fact, it was the following day that that
waiver was denied.
Mr. Ryan. Yes, well, that also is a compelling point. I
think for the interest of this waiver discussion, waivers
earlier, I suspect, would have had a much, much more profound
effect; waivers now, now that conventional gas in this area is
nonexistent because of the EPA standards, would actually
probably produce a price spike because if we all of a sudden
got a waiver off of RFG on to conventional gas, we would not
have any conventional gas in the area, and we would, in fact,
experience a price spike. That is why I think the waivers
earlier on made more sense than they do right now.
But I see that my time has expired and I would like to turn
to Mr. Kucinich for some questioning.
Mr. Kucinich. Thank you very much, Mr. Chairman, and again,
I appreciate the chance to be here. I want to thank the
witnesses. I have to say that as a Member of Congress, I have
always been appreciative of the information provided to my
office by the Cato Institute. I always find it quite
informative, and occasionally I find something that is of great
use for my office.
I am concerned about some of the testimony on page 9 of Mr.
Taylor's comments for the record, and it said, ``Spectacularly
high industry profits are not evidence of gouging.'' Well,
before we saw this sharp increase in the price of gasoline,
even before that, Mr. Chairman, oil companies had profit
increases as high as 473 percent, 371 percent, 257 percent over
1999 figures, and they were making high profits before the
latest rounds of increases.
The thing that concerns me in this latest round of
increases, I have a copy here of a subscription circular from
an industry publication called Octane Week, and I am going to
submit it for the record.
Mr. Ryan. Without objection.
Mr. Kucinich. Without objection. Anyhow, they go on--you
know, this is their promotion--``There has never been a more
critical time to read Octane Week. As refiners gear up for the
2000 gasoline season, EPA issues the toughest sulfur diesel
specification imaginable. And while this might be the most
challenging season in years, with the new phase II RFG summer
spec gasoline proving to be tough to produce, its differential
over conventional gasoline shows this might be the most
lucrative season in years.'' So the oil industry was getting
ready to play RFG during a period of peak demand in order to
sock it to the consumers.
Now, I understand it is the position of some that there are
inelasticities of consumer demand for gasoline. Well, the truth
is that the oil company knows that, and if demand is going to
be constant at a period when people want to go places during
their summer vacations, they are going to pay. Many people will
pay it, and the oil companies can anticipate even higher
profits. I mean, we are not talking about charitable
institutions here, we are talking about oil companies, and in
some cases, you are talking about oil companies in an industry
where there has been less oil companies because of mergers, so
there has been growing monopolies in oil as well.
So you know, I am not here to become moist-eyed about the
oil companies and about how tough they have it. They have
really been sticking it to consumers and with all due respect
to the Cato Institute, I think the EPA ought to have a chance
to answer this suggestion that Congress would be best advised
to eliminate the reformulated gasoline mandate in its entirety,
that it accomplishes absolutely nothing in the way of air
quality, according to one witness.
Now, would the EPA like to respond to that?
Mr. Lyons. Thank you very much, Congressman Kucinich, I
certainly would.
I think it is stating the obvious to say I strongly
disagree with any suggestion that the RFG program has not been
extremely successful in increasing the air quality of our
Nation in the areas where RFG is used. In fact, the American
Lung Association of metro Chicago has found that RFG has done
more to reduce air pollution in the Chicago area than any other
program that we have had.
If I can just be permitted to cite a couple of statistics
to you, because I think it bears directly on this question. In
phase I of the RFG program--which was instituted in 1995--the
program reduced smog-forming emissions from automobiles by 17
percent and toxic air pollutions from auto emissions by 17
percent. Monitored levels of benzene--which is a known human
carcinogen--were reduced by 50 percent from automobiles under
phase I of the program.
Under phase II of the program, we expect further smog-
forming emissions to be reduced by 27 percent over conventional
gasoline and toxic air pollutants by an additional 22 percent
over conventional gasoline, and phase II is expected to reduce
the risk of cancer to humans from automobile emissions by 19
percent.
The RFG program, Mr. Chairman, has gotten us the equivalent
of removing 16 million automobiles from the Nation's roadways
and reducing 105 tons of smog throughout the Nation. Sixteen
million automobiles removed from our Nation's roadways is a
very favorable statistic. I think it bears in mind when we talk
about 4 to 8 cents, or we could quibble about the amount that
that might translate into retail. I would suggest, Mr.
Chairman, that a 4 to 8 cents production cost would not rise to
the level of a----
Mr. Kucinich. I would like to cut in here a minute and just
ask the EPA. According to the oil companies, Americans have to
choose between clean air and cheap gas, and over the past 30
years we have enacted numerous environmental laws and
regulations over their objection that we cannot afford the
massive costs associated with them. Are there instances where
the issue of cost was raised by the industry yet, in reality,
it was not so costly to comply with the regulations?
Mr. Lyons. Mr. Chairman, we have frequently seen numerous
times over the 30-year history of the Environmental Protection
Agency when a new environmentally beneficial regulation is
proposed that there are those who would pit that regulation
against the cost of putting that regulation into play, and
those who would pit environmental regulation over gas prices, I
think, miss the point. Americans are entitled to clean and
healthy air.
This regulation was arrived at after heavy consultation
with the industry itself back in 1994, and it was approved by
Congress after extensive debate and deliberation over the cost-
benefit analysis, what the health benefits would be, the
environmental benefits would be, and what the corresponding
incidental minor cost adjustment would be, and it was
ultimately determined by the Congress and by the President that
it was well worth that minor expense.
And so I cannot make the point strongly enough. This is not
an EPA mandate that was imposed midstream, this is a well-
thought-out, well-deliberated, well-crafted program that was
contrived back in 1990 by the Congress, signed into law by the
President. No one should be surprised by this; the oil
companies have known for 6 years now that June 1, 2000 was
coming; it was their responsibility to plan adequately for
supplies.
Mr. Chairman, you mentioned the Department of Energy study.
We concede that the supplies were tight, but not tight enough
so as to meet the requirements of granting such a waiver.
Mr. Ryan. Well, in reclaiming time, I wonder where that
threshold is a tight enough threshold. The markets were tight
enough to give us a huge spike in gas prices.
Now, as far as the point of price gouging, I want to
differentiate myself with my colleague from Ohio. It clearly
could be happening, but I do not think either of us know that
for sure. I for one do not know whether or not price gouging is
occurring. That is why I, along with every other member of the
Wisconsin congressional delegation, Republicans and Democrats,
met with Robert Pitofsky before the DOE and the EPA did, asking
him to investigate whether or not price gouging is occurring,
not just in the RFG counties but in the other counties as well,
and we were able to secure that investigation before the June
15 date in which the Secretary of DOE and Administrator Browner
did.
The point I am trying to make is we do not know, we simply
do not know. I am simply not enough of an expert to know
whether or not collusion or gouging occurred. That is precisely
why we have experts such as the Federal Trade Commission to do
that.
Mr. Kucinich. Would the gentleman yield?
Mr. Ryan. Sure.
Mr. Kucinich. Just to quote Shakespeare, ``Something smells
rotten in Denmark.''
Mr. Ryan. But the point is there are other factors as well,
and it is not myself as a member from Wisconsin who is simply
saying that, it is the Department of Energy, it is the
Congressional Research Service, it is the maps that are before
us that are pointing to many other factors that are causing the
price of gas to increase which do not talk about price gouging.
It could clearly be the case that gouging may be occurring and
adding to the price increase of gas, but clearly, from the
Department of Energy's own analysis and the CRS, there are many
other factors out there, and to simply brush those other
factors aside and point at price gouging and wait for the FTC
to give us an answer in my opinion is just totally
irresponsible.
Mr. Taylor, you were involved in this last question and
this last discussion. Just in the interest of fairness, I would
like to give you an opportunity to respond to the discourse
that has just taken place.
Mr. Taylor. I appreciate that, Congressman Ryan.
First, for Mr. Lyons, there were a number of remarks that,
frankly, are rather jaw-dropping. The first is the allegation
which is commonly made that business anticipates that
regulations will cost a tremendous amount of money, EPA says
they will not, it turns out it does not, and it proves once
again, according to some, that industry is either making this
stuff up or that industry is somehow nefarious, that industry
is incompetent when it comes to counting beans.
The real story here is fascinating, and I cannot resist
from telling it for a moment. When industry calculates the cost
of a regulation, it assumes that it will be enforced fully and
that the standards being imposed will be met fully, and they
then calculate the cost of what that will mean.
When EPA issues a regulation, they do not necessarily
calculate cost based on full implementation, based on total
compliance. A classic example of this was 2 years ago when the
administration issued a rule to reduce particulate matter
emissions in urban areas. Particulate matter, for those who are
not immersed in this jargon, is basically dust and fine
particles.
EPA said it would cost $4 billion to comply with the rule;
industry economists said $60 billion. Well, where is the truth?
The truth is, as it turns out, is that EPA anticipated
virtually very little compliance and a lot of waivers; industry
calculated full compliance. And when EPA was put up against the
wall a year later, they increased their estimate to $40 billion
based on an increased assessment of compliance.
So this is the reason why sometimes industry estimates cost
will be X whereas an agency estimates cost will be Y and the
numbers might turn out differently, because generally EPA rules
and regulations and mandates and standards are not fully
enforced, and thus, the costs are a lot less than anticipated
by industry.
Now, as far as Mr. Lyons' charge that there have been
reduced emissions in RFG areas and somehow that proves that RFG
has something good to do with it, this is silliness. There are
a lot of things which go into urban air quality, there are a
lot of sources of emissions, and emissions have been reducing
across the country steadily year-in, year-out, whether it is in
an RFG area or a non-RFG area. There are co-founding variables,
in other words, and it would be silly to simply assess where
air quality is moving and attribute all that improvement to
RFG, particularly since it has not been refuted anywhere, that
I can tell, modern fuel injector systems do what the fuel is
designed to do already.
In other words, the technology is already there, and this
from Eric Stork--no employee of the oil company--the former guy
at EPA who ran these programs in the 1970's. He has no reason
to make this up.
The argument that oil industries had 6 years to get
involved in making things work smoothly in Milwaukee and
Chicago is another bit of silliness. The industry is not a
welfare organization, it does not work simply to make
Congressmen happy or to make the EPA happy; industry is there
to make a profit and Congress has ensured that there are
virtually no profits in the refining business. There has not
been a new refinery built in 30 years, they keep shutting down,
even though demand is going up. That should tell you about how
little money there is to be made generally in this business.
They do not invest simply to make us happy, they invest to make
a profit, and if Congress is going to ensure that no profits
can be gained, they will not invest.
And the argument that supplies were not tight enough to
induce increasing prices is the statement of someone who still
does not get the inelasticity question. If supplies are only 2
percent lower than they otherwise would be, that is 50 cents at
the pump. Now, anybody who has taken an economics course
understands that. That is why people at the DOE understand that
and people at EPA, which generally are scientists and other
analysts, do not.
Now, as far as Mr. Kucinich, I think as he realizes,
profiteering can only occur if there is collusion. After all,
as Mr. Greenwald pointed out, in business you make profits when
you can underprice your competition and still make a profit. So
only if industry gets together and colludes can any
profiteering really be going on here, because otherwise there
is still competition. Mobil still wants to make money, as do
other companies, and to set prices without colluding is to
voluntarily choose to make less money than they might otherwise
would. So that is why collusion is a necessary ingredient to
this profiteering.
Is there any evidence of collusion? I have not seen a bit
of it. Mr. Kucinich, I have not heard any evidence suggested by
EPA, DOE, or anyone else that any back door meeting has ever
occurred. You say that something is rotten in Denmark. For 30
years, Mr. Kucinich, this industry has faced these
investigations of collusion. For 30 years, FTC, DOE, special
White House panels, special congressional investigations, all
through the mid-1970's has been charged with collusion. Never
once has a single shred of evidence of collusion ever arisen.
The reason why is that too many of us really do not understand
this question of inelasticity.
Even a small change in supply or demand in either direction
will send prices moving dramatically in either direction. A
small change in supply, a small reduction in supply compared to
demand will send prices shooting through the roof; a small
increase in supply without a corresponding change in demand
will send prices collapsing through the floor.
Two years ago, as Mr. Greenwald mentioned, gasoline was
selling at 89 cents a gallon. If industry had the power to
gouge us or profiteer at will, believe me, that would have been
the time to do it. They laid off hundreds of thousands of
employees, they returned no profit whatsoever. If you talk to
your stockbroker and ask him what kind of investment are oil
companies over the past 20 years, they will tell you not as
good as a lot of them, believe me.
It is amazing to me that somehow we are to believe that
industry has all along had this power to collude at will and
set prices but they only chose to do it this year and they only
chose to do it to Milwaukee and Chicago. It is amazing. That is
my reaction.
Mr. Ryan. I will yield to Mr. Kucinich now for 5 minutes.
Mr. Kucinich. The FTC is conducting its investigation on
issues of price gouging, collusion, price fixing, whatever you
want to call it, and I think we will wait for those returns to
come in. I would maintain that absent any formal meeting that
takes place--and I am not about to say that I have any
information on that and I do not know that anyone does--you do
not have to have a formal meeting to be able to just go out and
look at--as soon as someone raises their price of having one
price chase another. You do not have to meet for that.
Mr. Taylor. Have you ever been in business, Mr. Kucinich,
and been involved in these decisions?
Mr. Kucinich. Yes, I have, and the witness, when I direct
the questions, will answer it. I am not here to answer your
questions, sir.
I am here to say on behalf of the people I represent that
we believe that the oil companies have taken advantage of
market conditions to be able to sock it to the consumers during
the summer when they know the demand is the highest and to
withhold from the market gasoline in order to make sure that
people are going to pay more. That is what I believe; that is
what people that I represent believe.
And a lot of them, frankly, do not have stock in the oil
companies so they may not know as much as you do about oil
company stocks, but they do pay twice what they have been
paying before. At least it is costing them $30 to $40 to fill
up their tanks; that is what they understand, and they
understand that they are being taken advantage of.
Now, you know, I am here to hear what you have to say--and
I am listening. I listened to Mr. Greenwald say there were long
lines for conventional gas, and I heard the gentleman from Cato
state that raising the price of RFG would avoid such lines. You
know, they raised it so high that RFG sat in tanks, but what
happened was that the environment suffered because no one
purchased the RFG, Mr. Greenwald, and consumers suffered by
waiting in long lines or paying higher gas prices, and the oil
industry made high profits, because they could abuse their
position of selling a product with inelastic demand.
So you know, I am impressed by the testimony by Cato but I
do not think that it covers the entire situation. It seems to
me that the price increase for RFG did not put any more RFG in
anyone's tanks. In fact, the price hike meant a lot of RFG, as
I mentioned, sat unused at the gas stations and consumers who
needed gas were forced by high prices to buy dirtier
conventional gasoline. I would ask the gentleman from Cato it
does not sound to me like this result really helped anyone but
the oil industry, do you agree, and I would be happy to hear
your response.
Mr. Taylor. No. It was exactly what it was supposed to do.
Mr. Kucinich. I am sorry, I did not hear that.
Mr. Taylor. The price increase accomplished exactly what it
had to accomplish which is reduced consumption of the scarce
commodity. There was not enough RFG to go around, given demand.
There was a shortfall of about 4 percent in mid May and about 2
percent by early June. Prices, because of the inelastic demand
for this product, had to go up a lot just to reduce consumption
a little. The fact that they went past Mr. Greenwald's store
and went to the other one to buy the conventional gasoline
meant that the high prices did exactly what they had to do: it
had to ration the scarce good.
The reason why lines formed, nonetheless, is because in
border areas consumers----
Mr. Kucinich. I have never heard Cato make a statement on
behalf of rationing before.
Mr. Taylor. No, I am not. I am saying that prices ration
scarce goods; that is what prices do. Now, when politicians
ration scarce goods, they generally mess it up; when markets
ration scarce goods, it usually works as intended, and in this
case it did. There was not enough gasoline to go around; that
is why prices had to go up, people avoided buying the product,
they went to competitors' stores that did not sell RFG, and
that is one of the reasons why lines formed there, there was a
border area.
Mr. Kucinich. I am sorry, but I have heard the gentleman
argue both sides of this question and it is very impressive. On
one hand you have said that gasoline, you have inelastic
demand, and there is a point at which in your prepared
testimony you stated that people are going to keep buying it up
to a point. On the other hand, you are saying that people will
not buy it, there is a shortage, and that helps to provide for
prices to go up because there is a shortage. Which is it?
Mr. Taylor. Gasoline demand is inelastic, but not zero. In
other words, as economists will tell you, if you increase
prices by 1 percent, demand will decrease by 1/20th of 1
percent. In other words, consumers do not react very quickly or
very efficiently to higher prices. Now, that is what makes
gasoline different from apples or frozen food or something like
that. If the price of apples goes up, maybe I will buy an
orange instead; it is easy to transfer. But gasoline is not
like that.
Now, high prices can affect consumption, but the price hike
has to be very steep. In other words, if there is a 4 percent
difference between supply and demand, prices have to go up 100
percent. According to what economists tell us about consumer
demand for gasoline, it is different than consumer demand for
other things, and what do you know, there is about a 4 percent
shortfall between supply and demand in this market, according
to everybody who has examined the data that I am familiar with,
and that correlates quite efficiently with the 100 percent
price increase. It seems to me the market realties of consumer
demand for gasoline explain everything we need to explain.
Mr. Ryan. We are going to give Mr. Kucinich another 5
minutes simply because he has a flight to catch.
Mr. Kucinich. And I appreciate that. We have 5 minutes. Is
that right? OK.
Again, to the gentleman from Cato, you testified that the
oil industry did everyone a big favor by raising prices when
you said, ``Prices had to go up substantially to bring demand
in balance with supply. If they had not, then the Milwaukee-
Chicago area would have undergone a replay of the 1970's, when
long gasoline lines and dry service station pumps traumatized
the nation.'' That was in your prepared testimony.
However, Mr. Greenwald testified there was no threat of
long lines, because consumers fled to nearby stations that sold
conventional gasoline.
Now, would you, sir, explain why this region would have
seen long lines even though conventional gasoline is available
nearby?
Mr. Taylor. Well, the reason why long lines did not form in
the Chicago-Milwaukee area is because prices went up and
moderated demand by about 2 percent. When EPA and DOE asked
refineries and asked merchant facilities do we have enough
supply, their answer was yes. Well, of course their answer was
yes because prices had gone up enough to reduce demand by about
a couple of percent, which balanced the market.
Now, given what we know, if prices did not go up, and let's
say they only went up by a nickel, we know that that would
reduce demand by only a smidgeon. If there was 2 percent or 4
percent less gasoline in the market than there is demand for
it, there is not enough gasoline to go around. That just
follows. If there is not enough gasoline to meet demand, given
price, then shortages will exist.
Now, why were there lines in the border area where they
were selling conventional gasoline? In that particular
circumstance, of course, drivers avoided the high price--which
the high price was designed to do, reduce demand--they went to
a borderline area, bought this gasoline. You did not see gas
lines anywhere else except at these borderline service
stations.
So in other words, there is no mystery here. If you do not
believe that high prices affect demand, then I am not sure what
to say. If you do not think that the prices had to be this high
to affect demand, again, I am not sure what to say.
Mr. Kucinich. Well, I would say that consumers kept buying
the gas. They became very upset about it because it started to
affect materially their quality of life, because we can have a
nice little esoteric discussion about supply and demand here,
but the reality outside of this chamber happens to be that
people have their lives affected by these high prices and they
want to know what is happening, and I have to give the
gentleman from Cato credit because he is making an attempt to
try to explain the position of the oil industry, when in fact,
the oil industry has not anywhere come before----
Mr. Taylor. Excuse me, Mr. Kucinich. I am not explaining
the position of the oil industry.
Mr. Kucinich. No, excuse me.
Mr. Taylor. You made an accusation.
Mr. Kucinich. Mr. Chairman.
Mr. Ryan. We will have order. You have to respond to his
questions.
Mr. Kucinich. You may not be familiar with congressional
hearings.
I thank you for your testimony. It is time right now--I
have to go catch a flight. I would hope that the EPA at some
point in the rest of the hearing would be able to speak to
whether or not they are advocating replacing the RFG program
and they have a particular program that they would advocate to
bring about similar improvements in air quality.
I want to thank the Chair for giving me this opportunity.
It is nice to work with you. We do not always agree on things
but we are here to try to answer questions that I am being
asked by my constituents, and frankly, that is why I am here,
to represent people in the 10th Congressional District from
Ohio and across this country.
Thank you, Mr. Chairman. I applaud the work you are doing
for your constituents.
Mr. Ryan. Thank you, Dennis. I really appreciate you coming
by.
[Applause.]
Mr. Ryan. I just want to thank Congressman Kucinich for
traveling up here from Cleveland. He spent a good portion of
the day leaving his family and his district to fly up here from
Cleveland, so I just want to thank you very, very much for
doing that.
We are going to continue on with questions, but I wanted to
give him ample time to get his questions in before he had to go
catch his flight.
We will come back to this issue with the EPA and with Mr.
Taylor, but I would like to involve the other witnesses as
well, and specifically I would like to get into the ozone
transport issue that you have identified, Mr. Koerber. Mr.
Koerber, looking at your maps, and actually looking at your map
on page 3, on No. 2--and I know everyone does not have these
maps, but the testimony is available outside--looking at the
1997 to 1999 graph where you explain that the 1-hour ozone air
quality levels in the Lake Michigan region have improved in the
last 10 years, that the number of sites measuring a violation
of the standard have decreased from 25 to 6, and the magnitude
of peak violation has actually decreased. What is the lowest
point of your Wisconsin point which is 0.128, where is that? Is
that Milwaukee?
Mr. Koerber. That is actually in Kenosha County near
Pleasant Prairie.
Mr. Ryan. No. That is the one that you have down on the
border there. Correct?
Mr. Koerber. Correct.
Mr. Ryan. And then the one up on top?
Mr. Koerber. Sheboygan, I believe.
Mr. Ryan. That is Sheboygan. So in between Sheboygan and
the Illinois-Wisconsin border. Correct?
Mr. Koerber. Right.
Mr. Ryan. So from the 1997 to 1999 region, the 1-hour
standard has not been hit in the area below Sheboygan and above
the Wisconsin-Illinois border. Is that correct?
Mr. Koerber. Right. That is the only area that currently
violates the 1-hour ozone standard in the Lake Michigan region.
Mr. Ryan. It is the 1-hour ozone standard that determines
non-attainment. Correct?
Mr. Koerber. That is the current basis that EPA used. As
you may be aware, a couple of years ago EPA adopted a new ozone
standard, an 8-hour ozone air quality standard, which has been
challenged and subsequently appealed to the Supreme Court.
Mr. Ryan. That is right; that is a court challenge that is
coming out in the near future. The 8-hour map is the one you
have on the bottom of the page. Correct?
Mr. Koerber. Right.
Mr. Ryan. And the most recent one, 1997 to 1999, I believe,
is the one you have on the right?
Mr. Koerber. Right.
Mr. Ryan. And the one on the left is the up above 1-hour
standard. Correct?
Mr. Koerber. Right.
Mr. Ryan. So under the current EPA 1-hour standard, all of
the areas above the Wisconsin-Illinois border and below
Sheboygan are within attainment--correct--according to the 1-
hour standard from the 1997 to 1999 period? Am I reading your
map correctly?
Mr. Koerber. Between Sheboygan and the State line, going
from north to south, those are in non-attainment.
Mr. Ryan. Those are in non-attainment.
Mr. Koerber. Those counties are considered to be in non-
attainment.
Mr. Ryan. I understand that. But where the meters or the
measurements triggered a non-attainment measurement, that is
the Wisconsin border and then Sheboygan, not in between.
Correct?
Mr. Koerber. A number of counties between Sheboygan and the
State line are also classified as non-attainment, even though
monitors in those counties may not currently be showing a
violation.
Mr. Ryan. Right. OK, thank you. Since there are only a
handful of days, usually one or two a year, when counties such
as Racine and Kenosha exceed the 8-hour standard--which is not
in place now--and they have not exceeded the 1-hour standard in
the last 3 years--which is in place right now--is it safe to
say that if Racine County and Kenosha County were not
sandwiched in between Milwaukee and Chicago, say in the western
part of the State, over by Janesville or Prairie du Chien, that
they would not be in the non-attainment area? Meaning, is it
safe to say that if Racine and Kenosha were not between
Milwaukee and Chicago, it would be in attainment?
Mr. Koerber. I think that is a question for Mr. Lyons,
because EPA is actually in the business of classifying areas,
but for me to respond to your question, I would agree with you.
It is a matter of geography. The approach that the States have
taken, the Lake Michigan States, is to recognize that we have a
regional air quality problem which requires a regional
solution, so involving a number of counties throughout the
region need to adopt emission control regulations in order for
the entire region to meet the ozone air quality standard.
As you mentioned earlier in your opening remarks, the local
contribution might be about one-third of the ozone problem that
we are seeing in this area which means two-thirds is coming in
from outside, so clearly there is a very heavy regional
contribution that needs to be addressed, and EPA has a number
of programs in place with requirements for controls on power
plants, industrial boilers, their new Tier II low sulfur
standards for motor vehicles, a number of programs focused on
reducing the regional contribution. Programs like RFG are
focused more on the local contribution, specifically the VOC
emissions within the local urban areas, Chicago, Milwaukee,
Gary.
Mr. Ryan. So given your data and looking at the statistics
on your maps and your modeling, you can basically say that
those who live in Racine and Kenosha Counties, sandwiched in
between Milwaukee and Chicago, are essentially through the
mandates paying for the pollution that is being created, based
on your wind charts--I know it is a crude term--are paying for
the pollution that is being emitted from Cook County, IL, Lake
County, IN, and those areas.
Mr. Koerber. They certainly are a recipient, but it also
needs to be recognized that they are a source. Because they are
within the Lake Michigan region, they do contribute locally to
the problem. They do not contribute as much, I certainly agree
with you, Mr. Chairman.
Mr. Ryan. And if these two counties, Racine and Kenosha,
were not within the region, if they were in western Wisconsin,
they would not be designated in non-attainment. Correct?
Mr. Koerber. Correct. It is a matter of geography here.
Mr. Ryan. So it is a matter of geography. I think that is
just a very compelling point that because Racine and Kenosha
are where they are, they are not a significant contributor to
the ozone pollution as measured by the EPA, but because of
where they are, they are designated in the non-attainment zone
and thereby required to have reformulated gas. That is
essentially a summary of what we just discussed here?
Mr. Koerber. The term ``significant'' that you mentioned
has come under challenge over the last several years. I do not
know exactly what their contribution is. Certainly they emit
less so they contribute less than, say, Cook County, the
Chicago area, but because they are within the region, they do
have some contribution. It is less than Cook County, but there
is some.
Mr. Ryan. And Kenosha County is 1/100th of Cook County and
Racine is around the same area?
Mr. Koerber. I do not have the specific numbers in front of
me, but I do not doubt that.
Mr. Ryan. I think that is what we calculated from your
maps.
Mr. Koerber. OK.
Mr. Ryan. Let me get to you, Sheriff McReynolds, briefly.
Those are probably your cars right out there that we hear out
the window now. What kind of impact did you foresee in your
budgets? When you do your budgeting--and you probably can speak
to the police department and the fire department, because I
know you are very familiar with how they do business--when you
are putting together your transportation budget for Racine
County Sheriff's Department, do you factor in price
fluctuations in gasoline? And clearly, you did not factor in
this kind of price spike to gasoline. I would just like to ask
you to repeat from your testimony what kind of hit this did to
your budget for the gasoline prices.
Sheriff McReynolds. Well, one thing during the budget
process that we figure in and that we did notice and look back,
from the year of 1998, comparing 1998 to 1999, the gas usage
for our operation--and I should clarify that, the gas usage
that we found for Racine County, and that would be some other
vehicles, not just the sheriff's department--went up about
19,000 gallons from 1998 to 1999, so we did adjust in our
budget for 2000 for that, but what we did not do is adjust for
the spike that we were experiencing in the year 2000.
Now, also looking at it, we actually, in discussing this,
we were kind of surprised at the number of gallons that we had
been using compared to other years, because our automobile
usage has not increased. I mean, the number of cars we have out
on the road every day has not increased, our number of staff
people has not increased.
Mr. Ryan. What do you think the cause for that is?
Sheriff McReynolds. Well, you know, I do not have any
scientific evidence, but I do not think that we are getting the
mileage that we were at one point. That is just a gut feeling
from my opinion; I cannot substantiate that with any good
figures. But we have seen increased gallons going up every
year, so we do adjust for that but we do not adjust for the
spike.
Mr. Ryan. With this hit to your budget, what will you have
to do now to compensate for that? Are you going to have to cut
back on driving, on policing certain areas, or what are you
going to try and attempt to do to solve this?
Sheriff McReynolds. What will happen, we are not going to
advocate that we are going to cut down on patrol time, that we
are going to do less investigations. We will start looking at
this about October 2000, and what will happen is one of our
line items in our budget that we have saved money on will have
to be used to offset the cost in gas prices and the increase.
The thing that will happen, though, is that looking at 2002
budget, if this would continue at the rate it is, something
will have to suffer within our operation. And a lot of times
when those types of cuts occur, it is the preventive side of
our operation that gets cut, it is your Deputy Friendly
programs, your DARE programs, those types of programs which I
think are essential but really non-essential when you are
taking care of responding to calls and serving the public.
Mr. Ryan. Mr. Greenwald, you mentioned that--did you not
say an East Troy station was the one you were comparing to? I
actually drove by there quite a bit and saw those lines, and I
think the radio was broadcasting that there was cheap gas over
in East Troy.
You mentioned that it was 30 cents cheaper in East Troy
which is in Walworth County, a non-RFG county, than what you
had to sell it for. Clearly, as Mr. Taylor mentioned, demand is
not totally inelastic, it is not zero, so a 30-cent difference
and then the perception that the mileage difference exists has
changed consumer behavior. How long can you sustain that kind
of a difference? How long do you think--did you calculate how
long you would have been able to sustain that, and what do you
think, in a nutshell, your consumers were saying and what was
their impression as to the cause for that, and what does this
do to you in your business as far as sustaining that kind of
differential?
Mr. Greenwald. As far as sustaining it, it has been very
difficult. We have not made any projections; all we know is
that I guess the answer is not long--we are talking months, not
years, that we could last at that present rate. The consumers,
we have had some at the beginning who came in and were actually
mad at me, feeling that I was making this big profit off of
them. I had to explain to them that it is not me, and most of
them seemed to understand that. But in the meantime, like I
said in my testimony, most of them had the comment that, well,
when things settle down, hopefully we will be back, but that
does not help the immediate need.
When you are talking for us a tank load of gas would
roughly cost around $10,000--now the cost has gone up to around
$15,000. Well, when you get maybe two loads a week--we used to
get them every other day, sometimes even more--now you get them
twice a week and you are not making anything on it, it does not
take long to go in the hole.
I think maybe initially there was a shortage of
conventional gas--or of reformulated gas, but when the price
difference took place, actually the opposite happened. There
was a surplus, from what I understand, of reformulated gas
because nobody was buying it. They had time to bring it in and
let it sit in the tank, but at the same time, conventional gas,
they could not keep up. If my Citgo station was across the
county line, I would not have been able to get gas for a week
from Milwaukee, because the tanks were drained out; they would
have had to go to Madison or Illinois.
So by putting in reformulated gas, it has not, I do not
think, made any--I have a hard time seeing where it would make
a big decrease in the environment because people are still
going somewhere to buy conventional gasoline. We have always
had problems from day one of people wanting the conventional
gas. And to think that we are making the big profit or big oil
is making the profit. Congressman Kucinich mentioned these
``astronomical profits'' and this was during the time when gas
was $1.25 and sometimes less than $1. You know, when milk
prices go up, I do not see a big study, the Congressmen getting
after the farmers saying you guys are gouging us out there, but
yet in the oil industry that seems to be the mentality, that
that type of thing is going on.
Things are getting better. As you mentioned, prices have
started coming down and people are starting to come back, but
we are not anywhere near where we were a year ago. Our stations
are new, our projections show that every year business should
be building, and that is not happening now. It was doing that
up until around the June turnover time, then business just
dropped off the charts.
Mr. Ryan. If I could ask you to pass the microphone down to
Mr. Lyons, and we will involve you, because I know Dennis
wanted to get you back involved in the mix of things, and sorry
to make you guys keep passing the mic around.
Mr. Lyons, the reason I wanted to ask Mr. Greenwald to just
answer before your questioning is I think there is a real life
example, a case in which 2 miles--is it 2 miles that separated?
Mr. Greenwald. Two miles to the border, 6 miles to the
station.
Mr. Ryan. Six miles to the station, 2 miles to the border.
You saw a difference in price of 30 cents per gallon of
gasoline, a distance of 6 miles between these two stations
where the non-RFG Walworth County gasoline station in East Troy
was 30 cents lower than the RFG gasoline station in Mukwonago.
Do you believe that that differential is because of price
gouging?
Mr. Lyons. Mr. Chairman, I really do not know what would
account for that differential. I strongly believe that the RFG
program, in and of itself, does not account for that price
differential, as I have stated earlier. It would account for a
small portion of that price differential, but I cannot account
for what would completely account for that, no.
I might add you have to draw the line somewhere. The lines
have been drawn at the Milwaukee-Chicago-Gary, IN non-
attainment area, and Mr. Greenwald's gas station is located in
a border area of that non-attainment area. Unfortunate as it
is, I believe that his situation represents somewhat of an
anomaly similar to what you would have with tobacco taxes or
alcohol taxes in State border areas or county border areas, but
we do have to draw the line somewhere, and the way the line has
been drawn is with Milwaukee, Chicago, and Gary, IN. That line
actually is based on a census tract which involves a non-
attainment area that goes back to the Clean Air Act Amendments
of 1990
I might add it was the Governor of the State of Wisconsin
that requested that the Milwaukee area be included within that
Chicago-Gary, IN area rather than be separated out.
Mr. Ryan. And that is, I think, one of the reasons why the
Governor and the State assembly and others are proposing a
lawsuit to try and get Wisconsin out of the Chicago attainment
area, based on the newer evidence revealed by the charts that
we have just been seeing to give us our own attainment area.
But given the fact that we are in the same attainment area,
I would like to ask a question which I think is very
compelling, posed by a professor from a local university here,
from University of Wisconsin-Parkside, Dr. Frank Egerton, who
makes a compelling point in something that I think has been
handed out here, that if the air quality in southeast Wisconsin
can be improved by placing greater control in Illinois and on
their air that blows into Wisconsin, that would be great he
says. Let me ask you this--and for Mr. Koerber as well--if the
air quality was significantly controlled and improved in
Illinois, meaning specifically Cook County and possibly Gary,
IN which is Lake County, IN, would that improve our air here in
Wisconsin?
Mr. Lyons. I believe it would, Mr. Chairman, and in fact,
EPA has proposed new tighter NOx standards for NOx emissions
and has required the State of Illinois and the State of
Indiana--this actually was proposed over a year ago; it was
stalled in litigation for 1 year; the courts have now recently
lifted that stay and have ordered the State of Illinois and the
State of Indiana, among others, to submit a plan under what is
known as the NOx SIP call. That would have significant NOx
reduction both in Illinois and Indiana, as well as across the
border into Wisconsin, and I think this area would benefit
greatly from that.
However, Mr. Chairman, this area still has its own
emissions and the NOx is a regional component of the smog and
ozone problem. You still need VOC, volatile organic chemical
emissions reductions locally right here in this area in order
to ultimately come into attainment, and the VOC reductions
come, in large part, due to the RFG program.
Mr. Ryan. But we are producing 1/100th of Cook County, so
it seems to me that the statistics bear out that given the way
the regional wind patterns are directed, given the fact that we
produce 1/100th of the emissions coming from Cook County and
Lake County, IN, that that is where the brunt of the burden
ought to be borne. I think that is one of the reasons why many
of us would like to see a separate attainment area for
Wisconsin.
I think it is just very unfortunate that those of us in
Racine and Kenosha Counties are saddled with this kind of
designation, this kind of mandate simply because of where we
are located geographically, and that if we were located over by
Janesville or Lake Geneva, we would not have this mandate,
given the current makeup of the VOCs in Racine and Kenosha
Counties.
Mr. Taylor, I would like to actually turn to you for a
second. I know there was a good back and forth going on there,
and you have done a lot of studying on this. I would like to
ask you for your comments, and what I would like to get to is
what are the reforms that are out there that we can do to go
after the emissions, go after the source of the pollution
rather than necessarily the recipients of the pollution, and
what in your opinion is your response. I know Mr. Kucinich and
you went back and forth and I know you wanted to comment about
that, and I wanted to give you that opportunity as well.
And if anybody else wants to comment on some of those
questions, I would be happy to offer that opportunity to any
other witnesses.
Mr. Taylor. Regarding the back and forth with Congressman
Kucinich, Mr. Chairman, I am unusually sensitive to suggestions
of motive. It is one of the reasons I do not like oftentimes
being involved in politics, and twice Mr. Kucinich made a
suggestion that my motives were less than pure. He suggested
that maybe somebody does not know as much about oil companies
as I do because they do not have stock. I do not own any stock
in oil companies but I do look at a business page and
understand that they are not a particularly profitable
industry, say, compared to the telecommunications industry.
And second, I do not represent big oil, I do not represent
oil companies, I have no idea what their opinions are, they do
not talk to me, I do not talk to them. The opinions that I am
offering today are the opinions of every economist who has
spent more than 20 minutes looking at the data regarding the
market in this area, and I get rather sensitive to suggestions
that----
Mr. Ryan. If I could just ask, please. Mr. Kucinich is not
here to defend himself, so if you could just stick to the
topic.
Mr. Taylor. All right. Now, regarding the issue of
pollution, I thought it really ironic. One of the reasons that
we all celebrate the Clean Air Act is theoretically it allows
us to protect ourselves from other polluters in other areas. In
other words, if I were to say, well, why do we not just allow
Chicago to worry about Chicago's own pollution, why do the feds
tell Chicago how to reduce pollution, why not just leave it to
Chicago? Well, someone would say, well, if we did that, then
Chicago would just pollute all the nearby areas at will; they
would maybe not optimize their control practices, and they
would impose pollution burdens on Kenosha and other cities and
towns. That is why we need a Federal law to make sure that
local communities do not impose pollution burdens on somebody
else who does not want them.
Well, here we are 30 years after the Clean Air Act, and
what is happening? Places like Chicago are imposing their
pollution burdens on other neighboring communities and getting
away with it. Everything the Clean Air Act was supposed to
address when it comes to urban ozone is being unaddressed today
by the EPA.
What should we do about that? I think one thing we could do
and should allow are communities to sue neighboring communities
that are imposing these environmental burdens. Today most
courts will not accept a suit from, say, the city of Racine
against the city of Chicago based on pollution burdens it is
imposing, because the Clean Air Act preempts such suits. In
other words, the Clean Air Act is implicitly suggesting that
the Federal Government has all property rights in this area,
Racine has no property interest here, and that the right place
for adjudication of this dispute between, say, Racine and
Chicago, is in the halls of Congress.
Far better, I think, to allow Racine to exercise its own
prerogatives and to initiate suits against those who are
polluting it and imposing burdens. We could allow this sort of
regime in such a way, I think, as to alleviate much of the need
of the Clean Air Act, because the Clean Air Act is not
accomplishing what it is supposed to accomplish. Just the
virtue of the fact we are having this debate tells us that the
Clean Air Act is not living up to what it is advertised to do.
Mr. Ryan. Yes, Mr. Koerber.
Mr. Koerber. If I could, a bit of history, Mr. Chairman.
Twelve years ago, the State of Wisconsin sued Federal EPA over
ozone transport. That led to, among other things, the Lake
Michigan Air Directors Consortium and the regional approach
that we are trying to take with our four States to address this
problem within this air shed. We are trying to account for the
differential contributions of areas like Racine and Kenosha
versus Cook County, Chicago area, Gary, IN. So that clearly is
a factor that has gone into the policymaking in assigning the
relative contributions in developing control strategies.
But as Mr. Lyons noted earlier, the general approach to
adopt NOx controls on power plants and industrial boilers
regionally and to adopt VOC controls locally has been shown
through our studies to be the most effective approach for this
area to achieve the 1-hour ozone quality standard, and
preliminarily, to also meet the 8-hour ozone air quality
standard.
Mr. Ryan. Mr. Lyons.
Mr. Lyons. Yes, Mr. Chairman. A lot has been stated and I
will not be able to respond to each of the points, but
certainly I would agree with Mr. Koerber that we work very
closely with his organization and our State partners in
ensuring a regional approach in reducing smog in the ozone non-
attainment area. We feel very strongly that a regional approach
is the only way that we will ever achieve the goals that we
need in the NOx area. And again, I would like to re-emphasize
the VOC reductions need to come locally and the RFG program is
a significant part of that.
I would also add that, Mr. Chairman, you are very much
correct that Chicago and Gary produce a much higher amount of
smog than this area here, but I might note that they have
reduced their smog in almost a corresponding fashion: the
larger the emissions, the larger the reductions there will have
to be, and they are making significant progress in that area. I
think that those benefits will be seen here in Kenosha County.
Mr. Ryan. Let me ask you this, just on behalf of the
Illinois delegation, I think, did they not appeal to you for an
emissions credit from the RFG mandate?
Mr. Lyons. Yes, they did, Mr. Chairman, and the agency
right now is proposing to approve a portion of that credit. It
is not as significant as the State of Illinois initially
proposed but it is something more than the EPA was initially
proposing to do. So that is still under review right now, but I
believe that the end result will be a credit. That might have a
minor effect on production costs, very minor. It is really kind
of a tempest in the teapot, I think.
Mr. Ryan. Well, I would like to summarize and say I think
we reached the purpose of this hearing, and the purpose of this
hearing was to hear all sides of the debate, hear from who is
being affected by high gas prices and hear from all different
sides of the debate as far as what has been going on.
We in the Wisconsin congressional delegation, meaning
myself and other members from the Wisconsin congressional
delegation, have repeatedly appealed to the EPA for waivers
early on in the hopes that we could have some more time to have
a smooth transition into the reformulated gas mandate. Those
waivers were denied, and I think that I would agree with Mr.
Lyons now that if those waivers were actually given today we
would have a supply shock, because we do not have conventional
gas here in southeastern Wisconsin.
The problem, as I have seen it, from listening to the EPA,
from reading internal documents and studies, from the
Department of Energy, the Congressional Research Service, and
many others, is that this regulation and the timing of it, in
conjunction with all of these other factors, the Unocal patent,
the transportation costs and problems, the supply disruption
from the pipeline--which is still not at full capacity--all of
these factors combined, on their own are not a large total, but
all these factors combined and brought together by the
imposition of this mandate on June 1 balkanized the market in
Illinois and Wisconsin.
And what I mean when I say balkanized the market, it placed
us out of touch, it said that the gasoline in Wisconsin, the
gasoline in Illinois is different than everywhere else, we
cannot tap into reserves over in Minnesota, over in southern
Illinois, in Iowa, we have a unique situation here. The
situation was defined unique by the Department of Energy.
The price that has been affixed by the most recent studies
suggests that the RFG mandate, in its unique situation,
accounts for about 25 to 34 cents a gallon of gas. Thirty cents
was a gallon of gas difference between Mr. Greenwald's pump and
that which was in East Troy. Maybe that hits the mark right
there.
The point that was frustrating, I think, from consumers in
southeastern Wisconsin, from those of us trying to get this
temporary regulatory relief, is that your estimations, your
models were way off the mark. The models that we were told was
that the price of gasoline would be absolutely minimal at the
pump, at the retail level, when phase II of RFG came into
place. What then occurred was a 40 to 50-cent change, meaning
that we were paying 40 to 50 cents more for a gallon of gas
than the rest of the country.
Was price gouging the cause for that? Well, the
Congressional Research Service and the Department of Energy say
no. Is price gouging a part of this? It certainly could be, and
I think that is why we asked for the experts at the Federal
Trade Commission to determine that, but to suggest that that is
the only answer, when in the face of all this other evidence,
when in the face of the internal documents with the Department
of Energy, the Congressional Research Service, when in the face
of the fact that we have what is typically referred to as a
balkanized market, is irresponsible, I believe.
So hopefully from this we will learn a couple of lessons.
We will learn the lesson that it is unfortunate that Racine and
Kenosha Counties are between these areas that if they were over
where Janesville is, so to speak, we would not have the
reformulated gas spikes. It is unfortunate that we as a country
have become more dependent on foreign oil to the point where we
are now 50 percent dependent on foreign oil. It is unfortunate
that when trying to clean up our air, we cannot pinpoint the
source of the pollution and treat it at the source; rather, in
many ways we miss that and go and treat the pollution where the
wind blows and where it ends up being.
So hopefully from this hearing we will have gained more
insight as to the different explanations that are out there and
hopefully the Environmental Protection Agency in the future,
when it is doing its cost estimates, will not do simply a
national average estimate of what is going to happen in the
country as a whole, but it will look at the individual regions;
it will look at the individual unique situations in regions
like Milwaukee and Chicago.
The cost estimates from the EPA did not incorporate what
would happen in individual regions. Rather, it just said
nationwide. That is unfortunate. And had we been given the same
kind of enforcement discretion such as the one that St. Louis
got, whose prices did not spike as high as ours, I think we
could have avoided this kind of crisis that we have incurred.
So the goal now is as prices are declining--which is a good
thing--they are still high but they are declining, the goal now
is to try and learn from this, and I hope the lesson that the
EPA learns is do regional analyses, look at the separate
regions, and hopefully for those of us who are in public
policymaking, who are truly interested in cleaning up our air,
that we do it in the most common sense, scientifically based
method that is attainable for us.
So no one is right 100 percent in this issue, I think.
There is a lot of finger pointing that is going around here.
Hopefully we have gained some more insight into this issue, and
I want to thank those of you who have traveled large distances
to get here. Specifically, Mr. Taylor, I know you came from
Washington, DC; Mr. Lyons and Mr. Koerber, I know you have
traveled a good distance to come here; and Mr. Greenwald,
thanks for coming over from Mukwonago; and Sheriff McReynolds,
I know it is a few blocks but I know you are a busy man, and I
appreciate you taking your morning out to share with us your
insight.
I appreciate those of you for coming, and right now I will
adjourn this hearing.
[Whereupon, at 11:14 a.m., the subcommittee was adjourned.]
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