Implementation of the
Reformulated Gasoline Program
Susan L. Mayer,
Environment and Natural Resources Policy Division
Science Policy Research Division
August 1, 1995
TABLE OF CONTENTS
WHAT IS REFORMULATED GASOLINE?
LEGISLATIVE HISTORY OF THE RFG PROGRAM
PUBLIC RESPONSE TO THE RFG PROGRAM
-- Reported Health Effects
-- MTBE Health Risk Studies
-- Health Effects of Other Gasoline Constituents
-- Other Potential Causes of MTBE Health Complaints
-- Health Benefits
PRICE AND SUPPLY IMPACTS
-- RFG Supply
-- RFG Prices
-- Oxygenate Supply and Demand
-- RFG Price Outlook
-- Legislation to Suspend or Repeal the RFG Mandate
FUEL ECONOMY ISSUES
IMPACT OF RFG ON SMALL ENGINES
OPT-INS AND OPT-OUTS
-- Regulatory Action
IMPACT OF OPT-OUTS AND PROPOSED
THE ROLE OF ETHANOL IN RFG
-- Regulatory Issues
-- Judicial Action
-- Legislative Options
RFG IMPORTS FROM VENEZUELA
-- Legislative Options
CONCLUSIONS AND IMPLICATIONS
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
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
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
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
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.
HISTORY OF THE RFG PROGRAM
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.
RESPONSE TO THE RFG PROGRAM
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:
There are no published studies...which can find any definite link
between the use of RFG and these reported illnesses. Because of this lack of hard,
scientific evidence, the Committee is reluctant to impose any specific legislative
restrictions on the use of RFG. However, EPA is directed to continue their reviews of all
available literature and data developed in response to this situation, and provide for the
Committee a determination of what additional studies or actions are necessary to
adequately monitor the issue and develop practicable alternatives.(3)
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 Effects
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.
MTBE Health Risk Studies
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
There is unlikely to be a substantial risk of acute health symptoms
among healthy members of the public receiving "typical" environmental exposures
under temperate conditions (i.e., not subarctic temperatures). This leaves the question
open about more subtle health risks, especially among susceptible subpopulations. If acute
symptoms are being caused by MTBE, they appear to be mild and transient.(6)
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
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.
This study was unable to attribute the increased prevalence of
symptoms in Milwaukee to RFG use. It does not rule out subtle effects of RFG exposure, or
the possibility that a relatively small number of individuals may have a greater
sensitivity to RFG mixtures.(8)
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.
Health Effects of Other Gasoline Constituents
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
Based on the known risks of some gasoline components, and the
uncertain risks of oxygenated fuels, in December 1994, EPA concluded:
With the currently available information, there is no basis to
expect that the use of MTBE-oxygenated gasoline or MTBE-reformulated gasoline will pose a
greater public health risk than traditional gasoline.(12)
Other Potential Causes of MTBE Health Complaints
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
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
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
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
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.
Oxygenate Supply and Demand
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.
RFG Price Outlook
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)
Legislation to Suspend or Repeal the RFG Mandate
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
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
FUEL ECONOMY ISSUES
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.
RFG ON SMALL ENGINES
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
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.
Areas Using Reformulated Gasoline
||New York (3)
|New York City
||New Hampshire (2)
||New Jersey (1)
||New York (5)
||Rhode Island (1)
||District of Columbia
*The number of areas in each State opting in
or out is given in parentheses.
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
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.
OF OPT-OUTS AND PROPOSED LEGISLATION
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.
THE ROLE OF
ETHANOL IN RFG
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
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
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
- Mandatory RFG areas include Los Angeles, San Diego, Hartford, New
York, Philadelphia, Baltimore, Houston, Milwaukee, and Chicago.
- RVP is a measurement of fuel volatility. A high RVP fuel has a
greater tendency to evaporate. RVP is typically reported in pounds per square inch (psi).
- U.S. House of Representatives, Report to Accompany H.R.2099,
Committee on Appropriations, H.Rpt. 104-201, July 21, 1995, p. 57.
- Personal Communication with Misha Vakoc, U.S. Environmental
Protection Agency, Region X, July 26, 1995.
- Wisconsin Department of Health and Social Services. An
Investigation of Health Concerns Attributed to Reformulated Gasoline Use in Southeastern
Wisconsin, May 30, 1995, p. 4.
- Environmental Protection Agency. Assessment of Potential Health
Risks of Gasoline Oxygenated with Methyl Tertiary Butyl Ether (MTBE), November 1993,
EPA/600/R-93/206, p. 45.
- Ibid., pp. 7-12.
- Wisconsin Department of Health and Social Services. An
Investigation of Health Concerns Attributed to Reformulated Gasoline Use in Southeastern
Wisconsin, May 30, 1995, p. 6.
- Ibid., p. 6.
- "New Study Shows MTBE Causes Cancer; Other Scientists Refute
Results, Methods," Daily Environment Report, March 14, 1995, p. A-8.
11. Wixtron, R.N. and S.L. Brown. Individual and Population
Exposures to Gasoline, J. Exp. Anal. Environ. Epidemiol., vol. 2, 1992, pp.
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,
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.
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.
19. Ibid., pp. 10-12.
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.
22. 60 Federal Register 2696.
23. 60 Federal Register 31269.
24. Oxy-Fuel News, February 12, 1995, p.9.
25. 57 Federal Register 13416.
26. 59 Federal Register 7716.
27. 59 Federal Register 39258.
28. American Petroleum Institute v. EPA, CA DC, No.
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
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.
32. 59 Federal Register 22800.
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,
34. Personal Communication with Cheryl Trench, Petroleum Industry
Research Foundation Inc., June 14, 1995.