Clean fuel rules caught in legislative limbo

Jan. 12, 2004
Congress, rather than the White House, stands to make the most dramatic changes to how clean fuels are made and sold in 2004.

Congress, rather than the White House, stands to make the most dramatic changes to how clean fuels are made and sold in 2004.

Given that 2004 is both a congressional and presidential election year, consensus on omnibus energy legislation, which currently includes a clean fuel title, may be hard to reach. But that doesn't mean a clean fuel reform measure may not find itself in other legislation due out this year; possible legislative vehicles include a massive transportation funding plan or an annual appropriation measure funding the federal government.

HR 6 status

Pending before Capitol Hill is a sweeping energy bill that includes a provision to update federal reformulated gasoline (RFG) rules. Shortly before the legislative session ended last month, US Senate Republican leaders formally dropped the entire 1,200 page bill, nearly 3 years in the making, because they could not secure enough votes to cut off debate (OGJ, Dec. 1, 2003, p. 27.)

One large point of contention was over an ethanol and motor fuels title. House Republican leaders refused to back down from a provision that gave producers of the fuel additive methyl tertiary butyl ether (MTBE) limited product liability from water contamination lawsuits.

Senate Majority Leader Bill Frist (R-Tenn.) promised in November to quickly pursue similar energy legislation when the Republican-led Congress returns in late January. To pass the bill out of the Senate however, supporters have acknowledged they need at least two senators to switch their position, a difficult although not impossible task.

Another option is to drop the MTBE liability clause although House Republicans are resisting that plan.

Immediately after the November vote, Sen. Pete Domenici (R-NM), chairman of the Senate Energy and Natural Resources Committee, sounded pessimistic about the bill's future, telling New Mexico radio journalists the chances were "slim to none" that legislation could pass in 2004. But before Congress officially left for the year, Domenici revised that outlook, saying Congress may indeed reconsider a bill, especially in light of higher natural gas prices.

"I'm hopeful that in the next couple of months as we watch things get worse on the energy front, that we will find a way to come back to the energy bill and pass it substantially as it is. If some adjustments have to be made, we should find ways to do that. It's not going to be easy, but it has never been easy to pass an energy policy for this country," Domenici said Nov. 25.

"We haven't passed an energy bill in a decade or more. We're going to end this year with a big 'no action' in terms of passing a comprehensive bill," he said. "I hope in the ensuing months as winter hits that we don't have high spikes in natural gas prices. I hope we don't have another blackout. If they do and the American people ask what we've done about it, our answer will have to be 'nothing,'" the senator said.

Domenici's House counterpart, Billy Tauzin (R-La.), chairman of the House Energy and Commerce Committee, also predicted the bill could pass in 2004.

Past, possible prologue

The bill that failed was modeled after the White House's May 2001 energy blueprint. But it became increasingly controversial after it was amended to include tax incentives that had a price tag three times higher than what the White House originally said it wanted.

Of interest to fuel suppliers was Title 15 of the bill; it included provisions on ethanol and motor fuels.

The title sought to encapsulate in legislative terms a fragile clean fuel compromise endorsed by the American Petroleum Institute, ethanol interests, and Northeast air regulators nearly 2 years ago.

It removed the 2% oxygenate mandate for reformulated gasoline in smog-filled cities so refiners would not be forced to add either MTBE or fuel ethanol to meet clean fuel rules. And to appease US Midwest legislators, the bill also included a "renewable fuels" mandate designed to add 5 billion gal/year of ethanol to the gasoline pool by 2012. Small refiners that produce 75,000 b/d or less did not have to start meeting the fuel ethanol requirement until 2010; other refiners had to start ramping up ethanol use beginning in 2005.

After 2012, fuel suppliers would have had to adjust their ethanol fuel ratio each year to reflect US gasoline demand increases, to preserve ethanol market share. Bill authors also sought to make the so-called "renewable fuels standard" flexible by creating a credit trading system and an averaging program so suppliers did not have to use ethanol blends in areas where it may not be competitive to use.

To address water contamination issues, the bill phased out MTBE although it was under a 10-year schedule instead of the 4 years originally endorsed by the Senate and by Northeast air regulators. Another irritant to environmentalists and Northeast air and water regulators was that the legislation did not truly ban the fuel additive, which ironically enough, became popular with refiners in the early 1980s as a replacement for lead-based octane additives.

The bill also called on the National Academy of Sciences to study how cost-effective banning MTBE would be; results of the analysis were due to the White House no later than June 30, 2014.

Based on the study's findings, a future EPA could postpone or eliminate the phase out altogether if it chose.

Supporters of the bill's MTBE provision said it was designed to give regulators flexibility to adjust the rules in the event of a sudden motor fuel price spike brought on by ethanol supply shortages or an unstable crude market. The bill also gave the US EPA permission to shorten the MTBE phase out schedule although states always had the option of keeping the oxygenate as long as they liked.

MTBE producers meanwhile could have received "transition assistance" grants from the Department of Energy after it consulting with the US EPA. The bill allowed for up to $250 million/year from fiscal years 2005 through 2012 ($2 billion total) to assist MTBE manufacturers if they wanted to convert an MTBE facility to produce iso-octane, alkylates, or even renewable fuels. DOE had wide discretion on whether to allow grants.

Environmentalists were already unhappy that the MTBE phase out had been extended but the biggest lightening rod proved to be over the so-called "safe harbor" provision for MTBE. MTBE producers say the language is needed to protect them from frivolous product liability suits. An earlier Senate plan included safe harbor language for fuel ethanol and the current bill preserved that protection for the alcohol additive.

Several water districts, mainly in the Northeast, have pending lawsuits against MTBE producers concerning water contamination issues. So far, there have been four cases in which utilities sought to prove the additive itself was defective.

Producers have successfully argued in three of those cases that water contamination problems came from leaking underground fuel storage tanks; they also proved that MTBE is actually more benign to humans than gasoline.

Nevertheless most Senate Democrats and a handful of Northeast Republicans opposed the House's "safe harbor" provision. There also was a related measure designed to retroactively protect producers from many of the pending lawsuits.

That further infuriated local water utilities, many of which are from the East and West Coasts. Utilities say the total cost to clean up drinking water could be as high as $29 billion nationwide, and that the MTBE liability provision would have allowed contamination to continue.

The bill authorized $800 million that could be used for MTBE-related problems with leaking underground storage tanks but several states argue that the money was not guaranteed and was not enough to the job even if lawmakers did appropriate the funds.

In a related effort, the group of Northeast air regulators that first endorsed the original Senate clean fuel deal at the 11th hour urged members to oppose the energy bill because it gave MTBE producers too many loopholes.

Producers argued that contamination problems are already subsiding because underground tanks are being replaced and MTBE use may drop dramatically within the decade.

At least 17 states have taken action to ban MTBE; three big RFG markets—California, Connecticut, and New York have prohibitions that go into effect in 2004.

Administrative clean fuel actions

Most refiners are on schedule, and in some cases ahead of schedule, to meet low sulfur highway diesel fuel requirements in the next 4-6 years, according to an Oct 2003 EPA analysis.

Under the January 2001 rule, any refiner or importer planning to produce or import highway diesel fuel in 2006-10 is required to submit a "precompliance report" to EPA.

The reports are due annually from June 2003 through 2005 and must contain information that includes the amount of low-sulfur fuel that will be produced or imported, the number of credits that will be generated or used, and a projected compliance time line.

The agency is mandating low-sulfur diesel as part of a larger clean air program that also includes cleaner vehicles that are being designed to run on the lower-polluting fuels.

Based on current projections for 2006, 96% of the nearly 3 million b/d of highway diesel produced will meet the 15-ppm sulfur standard. EPA's analysis of information supplied from 126 refiners shows that fuel suppliers are positioned to comply with the 15-ppm sulfur standard on time; highway diesel fuel production will be sufficient to meet demand; and 15-ppm sulfur diesel fuel will be widely available nationwide.

With regard to nonroad diesel fuel, industry generally supports a pending EPA plan to reduce most sulfur levels to 15 ppm by 2010.

EPA in April 2003 proposed a new rule that limits sulfur content in nonroad diesel to a maximum 500 ppm by mid-2007 with the stricter 15-ppm standard phased in 3 years later. The agency considered but rejected a plan requiring all nonroad diesel fuel to contain 15-ppm sulfur or less by 2008 (OGJ Online, Apr. 16, 2003).

Refiners, engine makers, state regulators, and most environmental groups largely support the proposal, although the agency is considering a change to the compliance portions of the rule now that the agency is being run by a new administrator, former Utah governor Mike Leavitt. Before Leavitt came on board EPA last spring said it wanted to have the regulation finalized by March 2004.

Refiners told EPA in June they were already gearing up to produce 15-ppm sulfur highway diesel starting in mid-2006. And while refiners generally need 4 years to plan for and implement major changes in fuels specifications, the American Petroleum Institute told EPA it thinks its members can meet a tighter timetable if a two-step approach is used.