CRS Report: 95-850 - Implementation of the Reformulated Gasoline Program

The Clean Air Act (CAA) was amended in 1990 requiring the sale of cleaner-burning reformulated gasoline (RFG) in the nine worst nonattainment areas. Since the program began on January 1, 1995, legislation has been introduced to delay or repeal the requirement. RFG must contain oxygenates and should result in a 15 percent reduction of volatile organic compounds (VOCs) and air toxins. While the CAA was being debated, affected parties (e.g., automobile manufacturers, oil industry, and agricultural interests) did not agree on whether and how gasoline should be reformulated.

Some consumers do not accept the RFG program based on complaints that MTBE causes negative health effects, fuel prices increased, and engines do not perform well using RFG. Reported health effects include headaches, dizziness, nausea, sore eyes and throats, and respiratory irritation. Research about MTBE health effects has been inconclusive; however, most studies have failed to find acute health effects. Some other gasoline components are known or probable human carcinogens, so it is difficult to isolate the risk of exposure to MTBE in RFG. Some contend that media attention and the distinct odor of RFG may have increased health reports. RFG is expected to benefit health by helping areas achieve cleaner air. On average, RFG decreases fuel economy by 2-3 miles per gallon because oxygenates have lower energy content than gasoline. There are reports of much higher fuel economy losses for some vehicles. There are also reports that small engines do not perform well using RFG.

From a distribution viewpoint, implementation of the RFG program was uneventful. There were no supply interruptions, and wholesale RFG costs are about 5 cents per gallon more than conventional gasoline. Legislation to suspend or repeal the RFG program would reduce the demand for high-oxygen content fuel. An effective MTBE ban would increase the demand for ethanol, likely resulting in higher RFG prices and distribution problems because ethanol-blended fuels are difficult to transport because of their technical properties.

In December 1994 and January 1995, a few areas that had voluntarily opted in to the program no longer wished to participate. EPA proposed an opt-out policy that allows most areas where RFG is not needed to meet air quality goals to opt out 30 days after a Governor's request. Opt-outs and proposed legislation create uncertainty for the RFG program. They may discourage additional investment in RFG infrastructure by diminishing the demand for RFG and oxygenates. Opt-outs and proposed legislation also raise the question of how nonattainment areas will achieve CAA compliance without RFG. Areas that cannot attain air quality goals because they do not require RFG create an ozone health risk for residents and may be subject to CAA sanctions.

Two issues related to RFG remain unresolved (i.e., the role of ethanol in the RFG program, and RFG imports from Venezuela). A recent Federal court decision struck down an EPA rule that provided a preference for ethanol over MTBE as the oxygenate to be used in RFG. Also, last year after Congress passed an appropriations limitation, EPA withdrew a proposed rule that would have made Venezuelan gasoline more competitive in the U.S. RFG market. The House Appropriations Committee report accompanying H.R. 2099 contains language instructing EPA not to pursue either of these rules during FY 1996.

Cars have become increasingly cleaner since the Clean Air Act (CAA) was enacted in 1970, but mobile sources (i.e., cars, trucks and buses) are still responsible for about 50 percent of air pollution in urban areas. Also, despite cleaner cars, more cars are being driven more miles, leading EPA to predict in 1990 that by the year 2000, the increase in automobile usage would offset the gains in pollution control technology and mobile source emissions would begin to increase for the first time in decades. The Clean Air Act Amendments of 1990 (CAAA) contained numerous provisions aimed at reducing mobile source emissions by imposing lower tailpipe emission standards for new cars and trucks, and requiring the use of cleaner fuels in many polluted areas.

On January 1, 1995, gas stations in dozens of ozone nonattainment areas began selling cleaner reformulated gasoline (RFG). There were relatively few problems supplying the new gasoline in these areas despite predicted disruptions. There were, however, a few unanticipated surprises implementing the RFG program. First, public reaction was extremely negative in some areas. For example, in Wisconsin, consumers placed thousands of calls to an EPA toll free hotline complaining about the new gasoline in the first few weeks. Most of the complaints alleged negative health affects, higher prices, poor performance of the new fuel with respect to gas mileage, or the performance of small engines such as those powering lawn mowers. Another unexpected event was the number of areas that had previously chosen to voluntarily participate in the RFG program that sought to opt out as the January 1, 1995 deadline for the sale of RFG grew near.

In the first 6 months of the 104th Congress, legislation has been introduced to delay, or repeal, the RFG requirement. H.R. 1015, introduced by Rep. Kleczka has four cosponsors. A companion bill, S. 462, was introduced by Sen. Feingold. Both bills would temporarily suspend the RFG rules until EPA demonstrates that RFG does not cause adverse health effects, or until EPA revises the rules to eliminate any health effects. In either case, EPA would be required to submit a report to Congress detailing the steps it had taken in lifting the temporary suspension. A similar bill introduced by Sen. Kohl and cosponsored by Sen Feingold (S. 477) would allow EPA to suspend the RFG rules in States where bona fide health concerns have been raised. In States where the sale of RFG would be suspended, EPA, HHS, and the State would be required to investigate health complaints and report to Congress on the results of the investigation. H.R. 1052, introduced by Rep. Neumann, has six cosponsors. The bill would amend the CAA to repeal the RFG provisions entirely.

In addition to the bills that have been introduced thus far, there are two issues related to RFG that remain unresolved (i.e., the role of ethanol in the RFG program, and RFG imports from Venezuela). These issues, along with others, were examined at a June 7, 1995 hearing on the RFG program before the Oversight and Investigations Subcommittee of the House Commerce Committee. In addition, the report accompanying H.R. 2099, the House-passed appropriations bill governing EPA's FY 1996 funding, contained language about ethanol, Venezuelan gasoline, and health effects from RFG, but the House did not adopt any restrictions. The report states that because of a lack of hard scientific evidence about the health effects of RFG, the Committee "is reluctant to impose any specific legislative restrictions on the use of RFG." Despite this reluctance, the report language is unambiguous in providing direction to EPA not to pursue any further action on the ethanol and Venezuelan gasoline issues.

Congressional attention has focused not only on specific legislative issues related to RFG implementation, but on whether an RFG program is necessary, or effective. Many areas are using RFG to demonstrate compliance with a CAA requirement that ozone nonattainment areas achieve a 15 percent reduction in ozone-forming volatile organic compounds (VOCs) by November 1996. If RFG is less effective at reducing ozone pollution than predicted, or if the use of RFG is discontinued, some areas would fail to achieve required air quality goals.

This report discusses implementation of the RFG program under the CAA during the first 6 months of the program. It also examines regulatory and legislative issues that may be considered during the remainder of this Congress.

The CAAA contained two primary requirements for cleaner gasoline. The first, known as the oxygenated fuels program, began during the 1992-1993 winter season and required all gasoline sold in 39 carbon monoxide (CO) nonattainment areas to contain 2.7 percent oxygen. The higher oxygen content helps reduce CO emissions, especially during the winter months when most CO violations occur. The other fuel program, known as the reformulated gasoline (RFG) program requires cleaner-burning reformulated gasoline to be sold in the nine worst ozone nonattainment areas beginning January 1, 1995.(1) In addition to the 9 areas required to use RFG, about 40 other cities have voluntarily adopted the RFG program.

RFG, like oxygenated fuels, must also have a higher oxygen content; however, RFG differs from conventional gasoline and oxygenated fuels in other ways. RFG must be formulated to achieve the greatest degree of reductions in the emission of ozone-forming volatile organic compounds (VOCs) and toxic air pollutants, whereas oxygenated fuels are aimed primarily at reducing CO emissions.

RFG must have an oxygen content of 2.0 percent by weight, and the benzene content cannot exceed 1.0 percent by volume, nor can it contain heavy metals. Aromatic content cannot exceed 25 percent by volume unless benzene content is lower than 1.0 percent by volume. In addition to these basic requirements for RFG formulation, RFG is also subject to a performance standard. RFG should result in a 15 percent reduction of VOC and toxic air emissions from baseline levels between 1995 and 2000. After the year 2000, phase II of the RFG program will be implemented, resulting in a 25 percent reduction of VOC and toxic air emissions from baseline levels. RFG may not result in a net increase of nitrogen oxide (NOX) emissions.

Because the volatility of gasoline contributes to VOC emissions, RFG's volatility must be lower than that of conventional gasoline. Volatility restrictions apply in summer months when higher temperatures cause fuel to evaporate more quickly. RFG's Reid vapor pressure (RVP) level must be 8.1 psi in the northern States and 7.2 psi in the southern States where summer temperatures are higher.(2) The RVP reduction alone is responsible for most of the VOC emission reductions achieved by RFG.

The new RFG program was one of the more controversial issues debated while the 1990 amendments to the CM were being considered. Although there was general agreement that clean air goals could not be met without reducing emissions from automobiles, there was no clear consensus on how to make such reductions. Possibilities included tighter emissions standards imposed on automobile manufacturers, changing the formula of gasoline to make it burn cleaner, encouraging a switch to cleaner alternative fuels, or imposing strict vehicle inspection and maintenance programs on drivers. Ultimately, each of these strategies was incorporated into the amended CM, but only after lengthy debate over how various industries would be affected by the strategies.

During his 1988 election campaign, President Bush began advocating alternative fuels as a means of attaining cleaner air. The oil industry opposed the use of alternative fuels because they compete with gasoline as a motor fuel, and increasing their use was expected to create a loss of motor fuels market share for the oil industry. As a proactive move to prevent alternative fuels legislation, the oil industry developed its own reformulated gasoline that would help reduce automobile emissions. Although the oil industry demonstrated that it was capable of making cleaner gasolines, the industry continued to fight the RFG requirement because of added costs to the industry.

The auto industry shared the oil industry's goal to minimize new Federal regulations affecting automobile emissions. However, the auto industry's position on alternative fuels and RFG was conflicted. On one hand, the introduction of cleaner fuels might reduce the auto industry's share of the burden for reducing vehicle emissions by placing some of the burden on the oil industry. On the other hand, the auto industry feared that required fuel changes would force expensive technological changes in automobiles to make them compatible with new fuels.

The use of grain-based alternative fuels such as ethanol was supported by the agricultural community because it provided an economic benefit for corn growers. Although agricultural support was important to passing RFG provisions as part of the CAA, the ethanol industry did not support the subsequent RFG rule written by EPA because it did not allow ethanol to easily compete as an oxygenate in the RFG market.

Some consumers do not accept the RFG program based on four major complaints. First, they assert that MTBE, one of the chemicals used to oxygenate fuel, causes negative health effects. Second, supply shortages may have led to price increases for RFG above prices for conventional fuel. Third, the use of RFG causes a loss of fuel efficiency in some vehicles. Finally, RFG may cause engine problems when used with small engines such as those powering lawn mowers.

The extent of the negative reaction to the RFG program was unanticipated, particularly in the Milwaukee area. Milwaukee residents placed several thousand complaints to a hotline set up to field questions about RFG during the first 2 months of the program. About 25 percent of the calls were from people who had experienced headaches, burning eyes, dizziness, and nausea since being exposed to RFG. The rest of the callers commented on higher gasoline prices, and decreased engine performance.

Residents of Fairbanks and Anchorage, Alaska made similar health complaints when they started using oxygenated fuels in November 1992. The use of MTBE in fuels was so controversial in Alaska, that opponents successfully lobbied for congressional action. The FY 1994 EPA appropriations (P.L. 103-124) contained a provision that prevented EPA from using its funds during that year to enforce the oxygenated fuel requirement in Alaska. In October 1993, after Congress passed the enforcement ban, Alaska formally banned MTBE in its oxygenated fuels program. During the 1994-1995 winter season, the oxygenated fuels program was reinstated in Anchorage using ethanol as the oxygenate rather than MTBE because fuel oxygenated with ethanol has not generated reports of negative health effects. The program is still not being implemented in Fairbanks. An American Petroleum Institute (API) survey showed that before discontinuing the oxygenated fuels program, Alaska received about 350 complaints, 100 of which were health related.

In New Jersey, a citizens group called Oxy-Busters opposes the use of oxygenated fuels. The group has received considerable media attention in the State and nationally. The group is promoting a petition seeking to ban MTBE. Missoula, Montana has also banned MTBE because of perceived health effects.

Congress is concerned about potential health risks from exposure to RFG. The report accompanying House-passed H.R. 2099 describes reported illnesses linked with RFG. The report States:

During the FY 1995 appropriations process, the Committee directed EPA to study the effects of RFG in nonattainment areas where average daily winter temperatures are below zero degrees Fahrenheit (i.e., Alaska). EPA allocated some of its funds to assess potential health effects of MTBE in extremely cold weather, however, MTBE was so unpopular in Alaska, the funds were used instead to examine the effects of gasoline blended with 10 percent ethanol. The ethanol tests looked at issues of vehicle operation and health effects of fueling vehicles with 10 percent ethanol blends. Although the studies have been completed, final reports are not yet available (4)

H.R. 1015 and S. 462 would suspend the RFG program until EPA could demonstrate that RFG does not cause adverse health effects, or until the Agency could revise its rules to eliminate any adverse health effects. If passed, this legislation could result in a very long, or potentially permanent suspension. Previous research about the health effects of MTBE has been inconclusive. However, most studies have failed to find evidence of acute health effects due to exposure to RFG containing MTBE. It would be difficult, if not impossible to conduct additional research that would demonstrate that RFG "does not cause adverse health effects" at all, meeting the criterion included in the bills. Scientific research is designed to prove a hypothesis rather than to prove a negative hypothesis (e.g., RFG containing MTBE does not cause health effects). Studies to date have not drawn conclusions about subtle health effects, or about health effects on portions of the population that are more susceptible to respiratory problems, including children, the elderly, and those already suffering from other illnesses.

S. 477 would allow EPA to suspend the RFG requirement in any State where a State health official certified that "bona fide'' health concerns have been raised. No instructions are provided in the bill for how a health official would determine that a health concern is "bona fide". Like the other proposals, the suspension would remain in effect until EPA and HHS, in conjunction with State health officials certify that RFG does not cause human health problems. However, S. 477 would require that a study be conducted to investigate health complaints associated with the use of RFG in any State where the requirement has been suspended. The investigation would result in a report to Congress including recommendations for alternative RFG formulations that would comply with the CM without causing health problems. The bill does not provide any funding for such an investigation.

Reported health problems attributed to reformulated gasoline include headaches, dizziness, nausea, burning or itching eyes, sore throats, and respiratory irritation. Although large numbers of reports have been received in only a few States, isolated reports of health effects have been received in many other States. A survey of State health departments conducted by the Wisconsin Department of Health found that of the 20 States responding to the survey, none received more than 10 health complaints related to RFG between November 1994 and February 1995.(5) The CM required RFG to be sold beginning January 1, 1995, but it was being supplied as early as November 1994.

The timing of the health complaints is not wholly consistent with the use of MTBE. MTBE was first added to premium gasoline as an octane enhancer in the 1970s. Denver and Phoenix started the first oxygenated gasoline programs in the late 1980s. Five other cities were using oxygenated fuels before the Federal program began in 1992 (Tucson, Las Vegas, Reno, Albuquerque, and El Paso). EPA estimates that in 1990, almost one quarter of the gasoline used in the United States contained some MTBE. However, historically MTBE has been added to gasoline at much lower concentrations than required to meet the oxygen content for oxygenated fuels (about 15 percent by volume), or RFG (about 11 percent by volume).

Two areas with the greatest number of reported MTBE-related health problems (Wisconsin and Alaska) have cold climates. Some have theorized that extreme cold temperatures may affect the rate of reported illness from exposure. Studies to date have not adequately tested this theory.

Only a few studies of health risks of gasoline oxygenated with MTBE have been conducted to date. EPA reviewed available research and concluded in November 1993 that:

EPA's report summarized other assessments of health risks from MTBE that had been conducted prior to November 1993. For example, in 1992, the Centers for Disease Control and Prevention (CDC) were the first to research health complaints in Alaska related to MTBE. They found elevated blood levels of MTBE among commuters during the period in which the oxygenated fuels program was in effect, demonstrating both exposure to MTBE and uptake of MTBE during routine automobile use. They also found that there was a correlation between high blood levels of MTBE and health complaints, however, the study design did not allow CDC to determine whether there was a direct causal relationship.(7)

EPA also reported an epidemiological study in New Jersey conducted by the Environmental and Occupational Health Sciences Institute which compared the symptoms of 237 State garage workers in northern New Jersey (where MTBE was being used as an oxygenate) and southern New Jersey (where oxygenated fuels were not required). They did not find any differences in symptoms or complaints between the two groups. However, when the same researchers surveyed New Jersey residents who were identified as experiencing multiple chemical sensitivity, or chronic fatigue syndrome, they found that these individuals reported more MTBE symptoms than the control group.

In response to health complaints received in Milwaukee after the start of the RFG program in January 1995, the Wisconsin Department of Health and Social Services investigated potential health concerns. The study was released on May 30, 1995. It concluded:

The study compared several variables among residents of the Milwaukee area, the Chicago area where RFG was also being sold, and Wisconsin residents who did not live in areas where RFG was being sold. The study found that having had a cold or flu was the strongest predictor of symptoms among the Milwaukee respondents, but not in Chicago or elsewhere in Wisconsin. The study explained this finding by suggesting that symptoms reported by Milwaukee residents could have been a result of having a cold or flu rather than because of exposure to RFG.(9) Another possible explanation is that individuals experiencing health problems are more vulnerable to the effects of RFG containing MTBE. The study also showed that respondents who were aware of RFG were more likely to report symptoms.

Although consumer complaints have focussed on acute symptoms, researchers have also assessed long-term effects of MTBE exposure. Another study conducted in Italy on the carcinogenicity of MTBE has been used to support the claim that MTBE exposure is linked to a higher incidence of cancer. As reported in the press, the researcher stated that the use of MTBE in gasoline produces significant increases in Iymphomas and leukemias in female rats, and increased lymphoma and testicular cancer in male rats.(10) Although media reports of the study were first made in 1994, it has not yet been publicly released, and is not available to CRS. In addition, the levels of MTBE exposure that produced a higher incidence of cancer in the study were much higher than typical human exposure during vehicle use, or refueling.

MTBE is currently classified as a "possible" human carcinogen based on studies of exposure to laboratory animals. Animal studies show an increased incidence of tumors in rats and mice at very high exposure levels.

In general, the chemical composition of gasoline is a public health concern because of widespread exposure. An estimated 111 million people in the United States are exposed to gasoline components when they refuel their vehicles at self-service stations.(11) Conventional gasoline is a mixture of over 1,000 components that have varied over time. Because those exposed to gasoline fumes may be exposed to all of the chemicals contained in the fuel it is difficult to determine the risk associated with any individual gasoline constituent; several constituents have known health effects. For example, some primary gasoline constituents are known or probable carcinogens, including benzene, butadiene, formaldehyde, and acetaldehyde.

Changing the composition of gasoline may decrease emissions of one pollutant while increasing emissions of another. For example, the use of gasoline oxygenated with ethanol reduces emissions of carbon monoxide, but increases acetaldehyde emissions.

Based on the known risks of some gasoline components, and the uncertain risks of oxygenated fuels, in December 1994, EPA concluded:

Those who believe that using MTBE in RFG does not cause any adverse health effects offer several explanations for the high incidence of reported illnesses. First, the extensive media attention paid to potential health effects may have sensitized the public. EPA notes in its study, that publicized hotlines were available in Fairbanks, Missoula, and Denver, when the oxygenated fuels program began, and that the presence of the hotlines, along with media reports of adverse health affects, makes it difficult to interpret the meaning of the reports received. Another explanation provided by those who believe that MTBE does pose a health risk is that the presence of hotlines and media reports enabled individuals to identify the source of their symptoms and to make appropriate health reports.

Another potential reason given by some for the increase in health reports is that MTBE has a distinct and highly detectible odor, and that individuals who recognized the change in fuel formulation were more likely to report health complaints. Compared to gasoline, MTBE alone is recognized on average at a threshold that is 10 times lower in concentration. A study conducted by the Institute of Arctic Biology at the University of Alaska, Fairbanks, concluded that the gasoline produced for Alaska's 1992 oxygenated fuels program differed from gasoline refined in any other area.(13) The higher recognition of MTBE odor in Alaskan gasoline, as reported by residents of Fairbanks and other areas, arose because the gasoline originated from North Slope crude and was refined using a different process than gasoline refined in other States. Similarly, a Wisconsin study which showed that individuals surveyed in Chicago, and Milwaukee (both RFG areas) noticed an unusual smell associated with the gasoline they purchased with a greater frequency than those purchasing gasoline in other parts of Wisconsin where RFG is not sold.(14)

Potential adverse health effects of the RFG program should be weighed against the health benefits of improving air quality. The goal of the RFG program is to reduce VOC emissions, which are a precursor to the formation of ground level ozone, also known as smog. Ozone has known health effects, which include irritation and inflammation of lung tissue, shortness of breath, chest pain, coughing, congestion, nausea, throat irritation, and increased susceptibility to respiratory infections. Studies have shown an association between elevated levels of ozone and increases in hospital admissions for respiratory problems in several cities. Young children and those suffering from respiratory conditions such as asthma and emphysema are more vulnerable to the effects of ozone pollution, but healthy adults are also affected by exposure to ozone. Long-term effects such as accelerated aging of lung tissue and an associated increase in premature mortality have also been documented.(15)

Another area of concern with the implementation of the RFG program was the price level and supply availability of the new fuel. The introduction of RFG went relatively smoothly. There were no supply interruptions. The market established a price premium for RFG currently amounting to about 5 cents per gallon above the wholesale price of unleaded regular gasoline. Markets continually fluctuate, and the 5 cent differential will likely vary over time. Pump prices reportedly reflect this differential, although there is, as yet, no data series on RFG retail prices.

RFG was introduced at a time when, coincidently, demand for conventional gasoline increased. Total gasoline demand reached 7.6 million barrels per day (mbd) during the first 5 months of 1995, representing a 4 percent gain compared to the same period of 1994. High fuel demand coupled with other factors, such as low inventories, and higher crude prices on world oil markets, have resulted in higher gasoline prices. In May 1995, gasoline prices were about 10 cents per gallon above last year's levels. Increased supply, lower crude oil prices globally, and perhaps some other factors in the market place, have subsequently caused prices to decline by a few cents per gallon. But it should be kept in mind that petroleum prices are determined by market forces, and change constantly.

RFG, which comprises about 25 percent (2.0 mbd) of national gasoline consumption, likely contributed to increased average pump prices due to higher costs in both production and distribution. The higher distribution costs result from the need to keep RFG segregated from other gasolines.

Prices of both RFG and conventional gasoline have risen, but consumer complaints about increased fuel prices have not been widespread. Supply disruptions, which were an early concern as the RFG program was being planned, never materialized and still show no indication that they might arise.

One of the biggest supply concerns was that RFG could not be supplied fast enough before the start date of the program to avoid temporary shortages. In a similar situation, when marketers were required to begin selling low-sulfur diesel fuel on October 1, 1992, short term supply shortages led to price increases up to 30 cents per gallon. This problem was substantially avoided for RFG by requiring the wholesalers to begin supplying the fuel to retailers by December 1, 1994, a full month in advance of the retail sales requirement. In addition, because RFG is not permitted to be commingled with other gasolines, suppliers had to have clean storage tanks available to receive RFG. Thus, RFG began to phase into markets requiring the new fuel during the late fall of 1994. By December 1994, RFG was being supplied at a 2.1 mbd rate.(16) As local and regional stocks were built and demand stabilized, supply continued to flow at a 2.0 mbd rate through the first 5 months of 1995. A number of areas that had previously agreed to participate in the RFG program opted out in December and January, reducing RFG demand and helping balance it with supply.

RFG is a new commodity and comprehensive price data are not yet publicly available. The new fuel is actively traded at several distribution points nationwide. Platt's OilGram Price Report, among other trade press sources, tracks trading at various distribution points around the Nation. Recent price quotes in Platt's place unleaded (regular octane) RFG roughly 5 cents per gallon above gasoline that does not meet RFG specifications.

Reformulated gasoline before the oxygenates are added is often referred to as reformulated gasoline blendstock for oxygenate blending (RBOB). It is the base fuel to which oxygenates are added to make RFG. In most markets, RBOB is not available for local blending. However, at pipeline terminals in the Chicago area, RBOB is traded, with price postings reported in Platt's. This likely accommodates the preferences of consumers in Wisconsin for RFG oxygenated with locally blended ethanol rather than RFG already containing MTBE as the oxygenate.

RBOB may become a commonly traded commodity. This would be beneficial to refiners with extra supplies or unused manufacturing capacity for RBOB. It would also provide advantages to marketers, who could blend oxygenates to local preferences as well as take advantage of MTBE or ethanol price differences. With MTBE and ethanol traded as industrial commodities, trading in RBOB would mean that all the major components comprising RFG were individually traded and freely available to any potential RFG marketer. Such developments help ensure a healthy market, with more suppliers participating, thus reducing the likelihood of supply emergencies or price spikes.

An initial concern about implementation of the RFG program was that supply of RFG might be unstable, and its price would not only fluctuate, but be unacceptably higher than conventional unleaded gasoline. However, such excessive price increases and supply restrictions have not occurred.

The oxygenates in current use, MTBE and ethanol, cost more than gasoline. However, adequate manufacturing capacity, as well as a market where oxygenates are bought and sold, appears to have developed, so supply problems, which might cause large price increases, have not occurred. In addition, while prices of oxygenates have fluctuated, the price of RFG is not very sensitive to such fluctuations, because oxygenates are a small percentage of the volume (and therefore cost) of RFG. An increase of 10 cents per gallon, for example, in the price of either MTBE or ethanol, would roughly translate into a 0.5 to 1 cent per gallon increase in the price of RFG.

The market for oxygenates is relatively new. Its newness, coupled with the increased demand for oxygenates generated by the RFG mandate, has caused prices to fluctuate across a broad range. MTBE prices on U.S. spot markets have ranged during 1995 from as low as 60 cent per gallon to highs in the $1.10 per gallon area. The more mature ethanol market has shown greater stability, despite a new role as an RFG oxygenate. Ethanol prices have ranged between $1.00 and $1.30 per gallon. Perhaps as more suppliers domestically and internationally begin to trade more MTBE, its price may stabilize. At this point, however, oxygenates sell at prices virtually double the trading range of 50 to 65 cents per gallon (excluding State and Federal taxes) for wholesale gasoline.

As MTBE becomes a more commonly used gasoline blending component worldwide, trading is beginning to occur at other important oil product trading centers. While there are no oxygenate requirements in other countries, MTBE is used abroad to enhance gasoline performance, including raising octane levels. MTBE may be evolving into an internationally traded bulk commodity. As this occurs, it may provide the dimension of supply and price stability associated with active trading of large volumes of production of a commodity from a diversity of supplies. Global trading of oxygenates and other blending components could contribute to RFG price and supply stability.

In the first 6 months of the RFG program, prices have generally settled into a 5 cent per gallon differential above unleaded regular gasoline. This probably reflects the cost of the oxygenate component added to RBOB to meet the RFG specification; RBOB itself costs only a fraction of a cent more than regular unleaded gasoline to manufacture. These price increases relative to conventional gasoline may outline future RFG price patterns. This year's price experience dovetails well with a DOE study completed in October 1994, which estimated that production costs for RFG would be about 4 to 6 cents higher than those for conventional gasoline.(17)

There has been discussion this year in Committee and on the House floor about altering the RFG program. However, when the appropriations bill, H.R. 2099, was passed by the House, it contained no language affecting the RFG program. This is significant because--after extensive discussion--the House effectively decided to leave the RFG requirement unchanged. Unless the Senate acts, or the conferees agree on some program modification, the current RFG program configuration will remain.

Just after the RFG program became effective, concerns about MTBE health effects prompted the introduction of legislation aimed at repealing or temporarily suspending the Federal RFG mandate. While there has been little legislative action on measures to suspend or ban the RFG program, concerns about the health effects of RFG containing MTBE linger.

Were the RFG program to be repealed, as has been proposed in H.R. 1052, it would reduce, but not eliminate, the demand for high-oxygen content fuel. Use of ethanol--which is more expensive than MTBE and twice the wholesale price of gasoline--as an oxygenate would likely diminish. This could result in lower prices for fuel ethanol, which would still find a motor fuel market in gasoline blends known as "gasohol," as well as an octane booster. MTBE on its own, without a regulatory or legal assist, may be headed toward a more common role as a component of the normal blend of substances used in formulating gasoline, albeit in lower concentrations than required in RFG.

If the RFG mandate were to remain in effect with its current oxygenate standards, and MTBE to be effectively banned because of health concerns over its high concentrations in RFG--either permanently or indefinitely--one result would be an increased demand for ethanol. With little surplus ethanol production capacity at current demand levels, greater ethanol use would likely result in sharp price increases. Higher ethanol prices would result in higher RFG prices at the pump. Higher RFG prices would likely cause an increase in consumer complaints about the RFG program.

However, transportation and distribution difficulties pose more important considerations with a possible MTBE ban and a consequent increased role for ethanol. Ethanol blended fuels cannot be shipped through the long distance pipeline system that transports most the Nation's fuel. And they cannot be stored. Because ethanol-gasoline mixtures separate quickly, ethanol blending must be done at the point of sale shortly before the sale takes place. Difficulties in distributing 2 million barrels per day of ethanol oxygenated fuel could overwhelm the RFG program, and would likely reinforce calls for its suspension or a reduction in its scope.

Would an effective MTBE ban create a market for the ethanol derived oxygenate ETBE? ETBE is a good oxygenate for RFG formulation. However, it has not been produced in large scale commercial quantities and has no track record of consumer acceptability. Some producers of MTBE claim that ETBE can be produced in the same facilities now manufacturing MTBE, but this has not been tested on a fully commercial operating scale.

Additionally, those contending that ETBE can be readily manufactured are also seeking the same Federal tax treatment for ETBE that ethanol receives. This amounts to a 54 cents per gallon tax credit for ethanol used in gasoline. With little experience in commercial quantity manufacturing and marketing and ETBE's tax treatment awaiting a final IRS rule, it is difficult to outline a clear picture of this oxygenate's potential price and supply role were MTBE use to be restricted by legislation or regulation.

One of the concerns that accompanies the use of RFG is that fuel economy decreases when vehicles use oxygenated fuels. Despite consumer complaints about drastically reduced fuel economy for some vehicles while using RFG, these results have not been replicated over all vehicles. Thus, although fuel economy issues continue to be debated, they are not currently the basis of potential legislative or regulatory action.

Oxygenates typically have a lower energy content than gasoline. However, RFG contains only 11 percent MTBE by volume, 5.7 percent ethanol by volume, or 12.6 percent ETBE by volume, minimizing the energy loss of the RFG blend. Based on the difference in energy content of oxygenates and gasoline, and the typical proportion of oxygenates in RFG, the theoretical fuel economy loss resulting from RFG compared to conventional gasoline is about 2 percent. In its preamble to the RFG rule, EPA concluded that fuel economy is reduced by 2 to 3 percent during the winter season, and 1 to 2 percent during the summer season. In reviewing a number of studies on fuel economy conducted by industry and scientific researchers, EPA found that estimated fuel economy losses did not exceed 3.5 percent regardless of the oxygenate used.(18)

Fuel economy is highly dependent on "real world" variables that are not well controlled in laboratory studies, such as weather conditions, driving habits, vehicle maintenance, fuel quality, and road conditions. To address the concerns that fuel economy losses were greater in the "real world," EPA, in conjunction with the State of Wisconsin conducted an on-road study in March 1995. The study was conducted using fuels available in Wisconsin. Researchers found that when RFG was compared to conventional gasoline, on average, there was a 2.8 percent reduction in miles per gallon achieved when using RFG in the same vehicle over similar driving conditions. Although the average results of this study are consistent with previous studies and the theoretical impact of lower energy content of RFG, some combinations of vehicle and fuel resulted in considerably variable fuel economy results. One combination of vehicle and RFG tested in Wisconsin resulted in a 13.8 percent loss of fuel economy compared to conventional gasoline, while another combination of vehicle and RFG resulted in a 6.4 percent gain in fuel economy attributed to the RFG.(19)

Small decreases in fuel economy from the use of RFG (i.e., 1 to 3 percent) are expected. Such small decreases would not be detectable to drivers who do not regularly track their gas milage. It is not these small changes, but less frequently reported large fuel economy losses that cause greater concern.

Another concern about the RFG program was the potential effect RFG would have on the performance of small engines such as those powering lawn and garden equipment. EPA examined available information on the problems associated with the use of RFG and found that one technical concern is the potential separation of RFG oxygenated with ethanol if water condensation accumulates in the tank.(20) This is more likely to occur for equipment that is used seasonally and is stored for long periods of time in damp locations. Another technical concern is the compatibility of engine materials with RFG. Some rubber or plastic engine parts could degrade more quickly with the use of oxygenated fuels relative to conventional fuels.

The Portable Power Equipment Manufacturers Association (PPEMA), a group representing manufacturers of products containing small engines, studied these concerns. To date, PPEMA's research indicates that the performance of small engine equipment using RFG is similar to performance using other fuels.(21) However, most of the small engine performance problems reported in Milwaukee affected cold weather equipment such as snow blowers and snow mobiles. There may be additional reports of performance problems because small engine equipment is predominantly used in the spring, summer, and fall.

Although RFG is only mandatory in nine cities, the CAA allows other nonattainment areas to opt in to the RFG program. Initially, 14 States, and the District of Columbia agreed to voluntarily require RFG as a means of achieving VOC emission reductions. As the effective date of the RFG program neared, a few nonattainment areas that had voluntarily opted in no longer wished to participate. EPA did not anticipate such requests and did not have a policy in place for dealing with them. Figure 1 shows the mandatory RFG areas, as well as those that opted in to the RFG program, and those that subsequently requested to opt out.

During development of RFG rules, several States inquired about whether they would be permitted to opt out of the program once they opted in. These States were concerned that after their pollution control programs became effective they would not need the additional emission reductions achieved through the use of RFG, and would no longer find the program cost-effective. Despite this discussion, EPA only indicated in its final rule that it might pursue a separate action allowing States to opt out.

New York made the first formal request to EPA for opting out of the RFG program. EPA received a petition on November 29, 1994, from New York's Governor requesting opt-out for Jefferson County (i.e., the Syracuse area). The request was originally made because RFG supplied in the Syracuse area was being transported from the Albany and Buffalo areas, and the additional transportation costs were expected to significantly affect the retail price of gasoline in Syracuse. In fact, retail prices increased about 6 to 7 cents per gallon by mid-December 1994. Later, New York requested to opt out eight additional counties in the Buffalo and Albany areas.

On December 27, 1994, EPA received a petition from Maine requesting opt-out for Hancock and Waldo counties. These areas are located in the Northeast part of the State where delivery was expected to be difficult. RFG supplies in Hancock and Waldo counties would have been transported more than 100 miles from the Portland area, likely increasing RFG prices relative to conventional gasoline.

Mandatory Areas	Opt-in Areas*	Opt-out Areas*
Los Angeles	Connecticut (1)	Pennsylvania (11)
San Diego	Delaware (1)	New York (3)
Hartford	Kentucky (2)	Maine (2)
New York City	Massachusetts (2)
Philadelphia	Maine (4)
Baltimore	Maryland (1)
Houston	New Hampshire (2)
Milwaukee	New Jersey (1)
Chicago	New York (5)
	Pennsylvania (11)
	Rhode Island (1)
	Texas (1)
	Virginia (2)
	Wisconsin (3)
	District of Columbia

On December 1, 1994, Pennsylvania's Governor signed a bill that removed 28 counties in 11 areas from the RFG program. The Governor also submitted a formal opt-out petition to EPA. The opt-out request did not affect the five counties in the Philadelphia area that are required to use RFG, only the areas that had voluntarily opted in to the program at the Governor's request in 1991.

On January 11, 1995, EPA issued a 6-month stay of the RFG program in the New York, Pennsylvania, and Maine areas that had requested opt-out so that the Agency could comply with notice and comment requirements of the rulemaking before taking final action on the requests.(22) on June 30, 1995, EPA extended the stay until it finalizes the opt-out rulemaking.

On June 14, 1995, EPA published a proposed rule for opting out of the RFG program.(23) To ensure stability of RFG markets, and to prevent supply and price disruptions, EPA proposed to allow areas to opt out 30 days after a Governor's request is received if RFG is not needed to achieve air quality goals. If the RFG program is already in the State's SIP, opt-out could take several months. The State would be required to develop a plan demonstrating how the area would meet air quality standards without the RFG program. Opt-outs would become effective 30 days after the alternate plan is approved by EPA. Finally, in areas where EPA has not yet approved a SIP that includes RFG as a control measure, opt-out would become effective 120 days after a petition is received.

At a public hearing held on July 5, 1995, EPA sought comments on its opt-out proposal. The Society of Independent Gasoline Marketers of America (SIGMA) requested that EPA extend the time period for permitting opt-outs to at least 60 days rather than 30 days, so that the industry could avoid financial losses by changing its gasoline ordering and distribution practices in advance of the effective date for opt-out.

Another related issue is the possibility of more opt-ins, particularly from areas that are already in attainment with ozone air quality standards. Some attainment areas (e.g., San Antonio, and parts of North Carolina) are interested in using RFG to maintain compliance with the ozone standard. Although EPA has continued to discuss this possibility with these areas, it is unclear whether EPA has the statutory authority to approve such requests. At the July 5, 1995 public hearing, a representative of the American Petroleum Institute and the National Petroleum Refiners Association argued the EPA does not have such authority.

In addition, more nonattainment areas could choose to opt in as the November 1996 deadline for demonstrating a 15 percent reduction in VOCs draws near. The potential for more opt-ins creates additional uncertainty in the RFG program. Some refiners would like to see the market for RFG expanded through more opt-ins, including potential opt-ins by attainment areas.

Opt-outs and proposed legislation (e.g., H.R. 1015 and S. 462 which provide for the temporary suspension of the RFG program) create uncertainty for all parties interested in the RFG program. Although the report accompanying H.R. 2099 contains language that affects the RFG program, the House-passed bill would not result in a specific legislative restriction on the use of RFG. Some oil companies appear to be concerned about their large investment in RFG areas to develop the proper infrastructure for supplying the new fuel. Distributors and marketers may be worried about getting stuck with excess supplies of the more costly fuel that could only be sold at a loss. Some environmentalists fear that if opt-out procedures are too cumbersome, States could be discouraged from initially opting in. They are also concerned that a legislative RFG suspension would hinder State efforts to comply with the CAA.

Because legislative program suspensions would be temporary (i.e., until health effects issues are settled), manufacturers and distributors of RFG and oxygenates would likely be hesitant to make additional investment in the short term. Opt-outs could also affect long-term investment in RFG and oxygenate production by reducing demand for RFG. In 1995, 2.8 mbd of U.S gasoline demand (about 35 percent) was expected to be RFG before opt-outs. Actual demand has been much lower (only about 25 percent). The areas of Pennsylvania and New York that have requested to opt out of the program represent about 6 percent of the total RFG demand.(24)

In June 7, 1995 testimony before the House Commerce Committee, Subcommittee on Oversight and Investigations, the President of the American Petroleum Institute requested that EPA establish an orderly procedure for handling opt-out requests. He criticized the Agency's opt-out policy for not providing companies with enough lead-time to change fuels. He also testified that opt-out decisions should take into account the investments made by companies and the logistics of changing fuels.

Opt-outs and proposed legislation also raise the question of how nonattainment areas will meet air quality goals without requiring the use of RFG. States with ozone nonattainment areas must submit State Implementation Plans (SIPs) to EPA detailing how they will achieve required air pollution reductions. About one third of the States are relying on the RFG program to meet VOC reduction goals. With the November 1996 deadline for many areas to demonstrate a 15 percent reduction in VOCs nearing, State efforts to comply with the CM could be seriously hampered by a program suspension, or by additional opt-outs. Areas that are unable to meet CM emission reduction goals because they are not implementing the RFG program pose a continued health risk to residents by exceeding national ozone standards.

SIPs for opt-out areas that rely on RFG would need to be revised to include other programs that will achieve equivalent emission reductions. Substitute programs could also be undesirable to consumers for reasons such as reduced cost-effectiveness or added burden. Any pollution reduction program imposes a cost on industries or consumers and is likely to face some opposition.

Another concern for States is that they could be subject to CM sanctions for failure to submit or implement adequate SIPs. If the RFG program were temporarily suspended, but a State SIP already contained a commitment to implement the RFG program, the State could be subject to sanctions for failure to implement an approved SIP. Sanctions include a possible loss of Federal highway construction funds, or an increase in required emission offsets for construction of new pollution sources. None of the legislation introduced addresses the issue of whether sanctions would be suspended if the RFG requirement is suspended.

Another contentious area of the RFG program is the role that ethanol should play as a fuel oxygenate. Ethanol, and its derivative ethyl tertiary butyl ether (ETBE), compete with petroleum based oxygenates such as MTBE for a share of the oxygenate market used in producing RFG. Because ethanol is a domestic renewable fuel that is produced from agricultural processes, there has been political pressure that ethanol be used in RFG to the greatest extent possible. Recent regulatory and judicial actions that are explained below, leave the outlook for ethanol use in RFG uncertain and increases the chance that a legislative clarification will be considered.

Ethanol has a long history of use as an automotive fuel, both in the United States and abroad. During the 1930s, grain alcohol was blended with gasoline in midwestern States as an attempt to increase farm income during the Depression. Later, during World War II, gasoline shortages led many countries to use various alternatives to gasoline, including ethanol. The oil shortage of the 1970s renewed interest in ethanol as a fuel. In the United States, significant use of ethanol for fuel began in 1978 when Federal highway tax exemptions for ethanol became effective for the first time. The blend of 10 percent ethanol and 90 percent gasoline, sometimes known as "gasohol," increased in sales from zero in 1978 to about eight billion gallons in 1985; it then levelled off, but in 1992 began rising again, spurred by the use of ethanol in the oxygenated fuels program. Currently, gasohol accounts for about 10 percent of the automotive fuel market in the United States.

Ethanol in the United States is obtained almost exclusively from corn. A few large producers account for most domestic fuel ethanol production, with the Archer Daniels Midland Corporation (ADM) by far the largest. ADM accounts for about 60 percent of total domestic fuel ethanol production. Corporations such as ADM, and other large agricultural interests viewed the RFG program as a potential market for their product.

Because EPA anticipated the controversial nature of the RFG program, it participated in a regulatory process known as a regulatory negotiation, or "reg neg." This negotiation was intended to keep the potentially controversial RFG regulations out of the courts, and to avoid future congressional involvement, by obtaining agreement among all the parties before the regulations were written. After extensive negotiations among the 30 interested parties, agreement was reached in August 1991 and signed by all parties. EPA then issued a regulatory proposal on April 16, 1992 based on the "reg neg" agreement.(25)

EPA's proposed regulations did not include a volatility waiver that had been sought by the ethanol industry. Ethanol blended with gasoline increases the volatility of fuel, making it unable to meet the stringent summertime fuel volatility restrictions in ozone nonattainment areas. To be used in ozone nonattainment areas, ethanol needed a waiver of one psi (pound per square inch) from the established Reid vapor pressure (RVP) limits.

The ethanol waiver became the most controversial aspect of the RFG rulemaking process. The ethanol industry argued that without an RVP waiver, it would be completely locked out of the RFG market. A coalition of environmental and oil industry groups argued that an RVP waiver for ethanol would conflict with the ozone-reduction goals of the CAA.

EPA's final RFG rule was published on February 16, 1994.(26) In the final rule, EPA did not grant ethanol the volatility limit waiver, the rule simply required gasoline refiners to comply with the terms of the regulation as it was envisioned during the "reg neg." However, at the same time that EPA issued the final RFG rule, it proposed another rule, known as the renewable oxygenate standard (ROS), requiring that at least 30 percent of the oxygen used in RFG comes from renewable sources. The ROS rule was finalized on August 2, 1994.(27) Since ethanol is the only renewable oxygenate currently available, the rule was an effective set-aside of oxygenate market share for ethanol. ETBE is also considered a renewable oxygenate source, but it is not yet available for large-scale commercial use. If ETBE were to become commercially available at competitive prices, it would have advantages over MTBE and ethanol in that it has lower volatility and relatively high octane.

Shortly after the ROS was issued, the American Petroleum Institute (API) and the National Petroleum Refiners Association (NPRA) filed suit against the EPA, contending that the ROS was illegal, and gave ethanol an unfair advantage in the RFG market over petroleum based oxygenates such as MTBE. In September 1994, the D.C. Federal appeals court granted a stay of the rule, preventing the ROS from being implemented in January 1995. Implementation of the rest of the RFG program was allowed to proceed as scheduled. On April 28, 1995, the court struck down the ROS, ruling that EPA did not have the authority to issue a renewable oxygenate mandate.(28) on June 12, 1995, EPA filed an appeal in the form of a petition for rehearing. On July 3, 1995, the court denied EPA's request for rehearing. The Department of Justice has until October 2, 1995 to appeal the court's decision to the U.S. Supreme Court.

Based on the court's recent decisions, the ROS, or some other ethanol mandate could not be implemented without legislative action. During the appropriations process for FY 1995, the Senate considered but did not pass a provision that would have prevented EPA from using its funds to implement, administer or enforce the ROS.(29) The House-passed report accompanying H.R. 2099 directs EPA not to pursue any regulatory effort which would mandate a market share for any motor fuel or for any fuel additive. The Committee expressed concern that "far too much time and effort has been spent on this issue and this process and it is now time to let the markets work as first envisioned in the RFG "reg neg."(30) Although the report language was approved, there is no language in the bill itself.

Some ethanol supporters would like to see the ROS included in the 1995 Farm Bill. Although the Farm Bill is a potential vehicle for reviving the ethanol mandate, a measure as controversial as the ROS could exacerbate existing difficulties in reaching consensus on agriculture issues. On the other hand, including an ethanol mandate in the Farm Bill might help offset the impact of expected cuts in farm subsidy programs.

The American Corn Growers Association (ACGA) does not support continued efforts to legislatively pursue the ROS. Instead, the group is seeking to expand the use of ethanol through other avenues, such as promoting the use of ETBE as a fuel oxygenate, and making it harder for areas to opt out of the RFG program.

Revisiting the tax subsidies available for ethanol could have a dramatic impact on its production and use in RFG. Ethanol's current tax exemption is worth 54 cents per gallon to ethanol producers or blenders. Without the tax credit, ethanol would not be an economically viable oxygenate for RFG. Although no legislation has been introduced during this Congress that would change the ethanol tax exemption, there appears to be interest in such proposals. The Chairman of the House Ways and Means Committee recently invited testimony on proposals to promote tax equity among various alternative fuels.(31)

EPA has stated that it is committed to supporting the use of ethanol in the RFG program. In a June 2, 1995 letter to Sen. Daschle, EPA Administrator Carol Browner said that she would propose lifting the 2.7 percent summertime oxygen limit for RFG to allow ethanol a greater opportunity to compete as an oxygenate during the summer months. Such a move has been opposed by environmentalists who believe the raising the oxygen content of RFG above 2.7 percent could result in an increase of NOX emissions. Although the letter did not contain details of the proposal, oil industry representatives fear that they will have to drop the RVP of their base gasoline (RBOB) to accommodate higher ethanol blends while maintaining the fuel RVP limits. Such action by EPA could be prohibited by Congress if an appropriations limitation is enacted.

An ancillary controversy related to the implementation of the RFG program is whether RFG imported from Venezuela will be able to compete in the U.S. RFG market. The issue involves the performance standard for determining the acceptability of Venezuelan gasoline imports. The question is whether Venezuelan RFG will continue to be certified using the standard of quality applied to the average of all RFG manufactured in the United States, or whether it will be permitted to measure the required 15 percent improvement relative to its own 1990 gasoline production. Some contend use of its own 1990 baseline would enable Venezuela to export to the United States relatively "dirty" and less expensive gasoline. This could undermine RFG program goals of attaining cleaner air, and have adverse competitive impact on domestic marketers in areas where Venezuelan imports are sold.

Under EPA's regulations, the 1990 baseline may be determined in one of two ways. First, a refiner can calculate the baseline from its own 1990 gasoline production. Second, a refiner may use the national average of all gasoline produced in the U.S. during 1990. In general, refiners that produced gasoline that was cleaner than average in 1990 would benefit from using the national average as a baseline. Alternatively, refiners that produced gasoline that was dirtier than the 1990 average for all refiners would benefit from calculating their own baseline.

The Venezuelan national oil company is seeking to calculate its own 1990 baseline, which is one of the two options offered domestic refiners.

The Venezuelan national oil company, PDVSA, owns the CITGO chain of gas stations located on the East Coast. PDVSA planned to market 55,000 barrels per day (bd) of RFG through these gas stations, many of which serve areas requiring RFG. In late 1993, PDVSA requested that EPA certify a 1990 baseline for its own gasoline output. Some of those opposed to the request believed the Venezuelan gasoline was not as clean as fuels produced in the United States on average. In addition, they argued that it would be difficult for EPA to ensure that the PDVSA baseline was calculated correctly without the ability to conduct facility inspections and examine records. PDVSA argued that without its own baseline, it would be required to do more clean up relative to its 1990 baseline than U.S. refiners, constituting an unfair restraint on trade. Further, it invited EPA to inspect both its records and its facilities.

EPA agreed to certify a baseline for PDVSA, in part because of a December 1993 complaint to the General Agreement on Tariffs and Trade (GATT). On May 3, 1994, EPA proposed a foreign refiner baseline rule which would allow PDVSA (and possibly other foreign suppliers) to more easily compete with RFG produced by U.S. refiners.(32) Before this rule was finalized, Congress took preclusive action.(33)

In the September 1994 Congressional debate those opposed to the appropriations ban contended that Venezuelan RFG imports would be an important source of supply to certain areas served by CITGO. Absent the incremental supply, competition would be diminished, and RFG would cost consumers more. Such concerns appear not to have materialized, as there was no discernable price differential within those regions after implementation of the RFG program began in January 1995.

Venezuelan gasoline imports have declined since January 1,1995, averaging about 32,000 bd during the first three months of 1995, although this decline may not necessarily be a consequence of the baseline controversy.(34) Given PDVSA's reported RFG capacity of 64,000 bd, CITGO service areas could potentially receive a slightly greater supply of RFG, possibly resulting in marginally lower local pump prices.

Venezuela has reactivated its GATT complaint, which is now before the World Trade Organization (WTO), which has taken over GATT's work. In addition, Brazil, a former gasoline exporter to the United States, has filed a similar complaint with WTO.

P.L. 103-327 prevents EPA from finalizing the foreign refiner baseline rule during FY 1995 (i.e., until September 30, 1995). The law would not prevent EPA from finalizing the foreign refiner baseline rule in FY 1996 using funds appropriated for that year. Unless a similar amendment is adopted during the appropriations process this year, EPA could--although there is reportedly no policy decision yet--continue to prepare and implement foreign refiner baseline regulations. Such action could affect competition in the U.S. RFG market by allowing Venezuelan imports to more easily meet the RFG performance standard, increasing supply and competition.

The House-passed report accompanying H.R. 2099, includes language stating that any effort by EPA to re-propose a foreign refiner baseline rule would be unwise given the ongoing WTO proceeding. The report further states that EPA actions that are inconsistent with the provision contained in P.L. 103-327 would be unacceptable. Although the report language was approved, there is no language in the bill itself.

With a complaint at WTO awaiting resolution, the report would direct EPA to take no action while the WTO investigation is ongoing. By adopting a wait and see posture, Congress would be directing EPA not to second guess WTO by acting on a presumption of how WTO might rule, or to do anything which might affect the outcome of WTO decision making. As there is no precedent on which to predict an outcome, WTO may make a finding in favor of the United States. Were an adverse finding made, EPA could then possibly take whatever action is necessary to comply with that ruling.

The first 6 months of the RFG program have progressed fairly smoothly from a manufacturing and distribution point of view. However, public reaction and reported health effects from RFG oxygenated with MTBE has generated congressional interest. Some minor RFG program revisions could be candidates for the House legislative corrections day. Some potential legislative changes would address specific issues without challenging the basic structure of the program (e.g., the tax treatment of ethanol, or Venezuelan exports of RFG to U.S. markets), whereas other potential legislative changes could affect the core of what can be accomplished by the program. The House has opted not to impose legislative restrictions on the use of RFG during FY 1996 as part of the appropriations process, but has unambiguously directed EPA not to pursue further action on the ethanol and Venezuelan gasoline issues.

CAA compliance and achievement of CAA goals could be hindered by not continuing implementation of RFG programs. Many SIPs for meeting the 15 percent VOC reduction by November 1996 rely heavily on RFG. Without the RFG program, some areas would be unlikely to achieve attainment with ambient air quality standards. The air quality standards are set at levels considered protective of human health, thus areas remaining in nonattainment pose a health threat to residents. If the CAA were amended to change the RFG program by suspending it, or by eliminating the program entirely, it likely would leave a hole in some States' efforts to comply with the CAA. Substitute programs might not be implemented fast enough to keep areas on track for mandatory attainment deadlines.

Changes to the RFG program could also have important consequences for areas that choose not to implement RFG programs. Areas whose SIP contains the RFG program would be violating the CM if they failed to implement a program that was part of an approved SIP. Under the CAA, areas that fail to implement an approved SIP are subject to sanctions that may include increased offset requirements, or a loss of Federal highway funds. Areas that fail to submit an approvable SIP to EPA would also be subject to sanctions. Changing RFG requirements could affect the application of sanctions unless legislation includes provisions revising the CM so that sanctions would not be applied.

Finally, areas that do not want to implement the RFG program would have to implement other programs that would achieve equivalent emission reductions. While some pollution control programs may be more cost-effective than others, all pollution controls require expending resources that could be employed elsewhere. Substitute programs could reduce overall compliance costs, but this outcome is not guaranteed. Other programs could be more costly, or they could merely redistribute the costs to different sectors of the economy.

11. Wixtron, R.N. and S.L. Brown. Individual and Population Exposures to Gasoline, J. Exp. Anal. Environ. Epidemiol., vol. 2, 1992, pp. 23-78.

12. EPA, Office of Research and Development. Health Risk Perspectives of Fuel Oxygenates, EPA 600/R-94/217, December 1994, p. 9.

13. U.S. Department of Energy. The Energy Information Administrations's Assessment of Reformulated Gasoline, October 1994, SR/OOG/94-20/1, p. 73.

14. Wisconsin Department of Health and Social Services. An Investigation of Health Concerns Attributed to Reformulated Gasoline Use in Southeastern Wisconsin, May 30, 1995, p. 5.

15. For a more complete discussion of the health benefits of air pollution control, see CRS Report 89-161 ENR, John Blodgett, Health Benefits of Air Pollution Control: A Discussion (1989).

16. Personal Communication with Ron Planting, American Petroleum Institute, June 14, 1995.

17. U.S, Department of Energy. The Energy Information Administration's Assessment of Reformulated Gasoline, October 1994, SR/OOG/94-02/1, p. 56.

18. Wisconsin Department of Natural Resources and U.S. Environmental Protection Agency. On-Road Study of the Effects of Reformulated Gasoline on Motor Vehicle Fuel Economy in Southeastern Wisconsin, March 31, 1995, pp. 3-6.

20. Environmental Protection Agency. Engine Performance and Materials Compatibility Issues Arising From the Use of RFG, March 31, 1995.

21. Donald E. Purcell, Portable Power Equipment Manufacturers Association, Testimony before the Maine Legislature, April 3, 1995.

29. On August 3, 1994, the Senate voted 51-50 to table the amendment, with Vice President Gore casting the tie-breaking vote in favor of retaining the ROS.

30. U.S. House of Representatives, Report to Accompany H.R. 2099, Committee on Appropriations, H.Rpt. 104-201, July 21, 1995, p. 56.

31. "Archer Announces Hearing on Miscellaneous Tax Reforms," Committee on Ways and Means Advisory, June 30, 1995.

33. On August 4, 1994, the Senate voted (86 to 9) to add a rider to the EPA appropriations bill (HR 4624) to address the issue of Venezuelan gasoline imports. The amendment prohibited EPA from using its funds to implement, administer, or enforce a foreign refiner baseline. On September 12, 1994, the House voted favorably on the Senate measure, which became P.L. 103-327 when it was signed by the President on September 28, 1994.

34. Personal Communication with Cheryl Trench, Petroleum Industry Research Foundation Inc., June 14, 1995.

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