Clean fuel specifications part of shifting political landscape

Clean fuel specifications remain a moving target for US refiners and fuel suppliers, thanks to a shifting political landscape.

Maureen Lorenzetti
Washington Editor

WASHINGTON, DC, Oct. 2 -- Clean fuel specifications remain a moving target for US refiners and fuel suppliers, thanks to a shifting political landscape.

Congress mulls a sweeping energy reform bill, but with elections looming and a possible military strike against Iraq dominating the legislative agenda, it remains unclear if lawmakers think the legislation is a political asset or liability.

Some House Republicans, for example, are urging party leaders to walk away from current negotiations because they are anticipating the Democratic-led Senate may shift to a Republican majority later this fall. And if the Republicans indeed win in the November elections, Republicans from some oil producing states think they will have a much better chance of moving their own agenda forward, which includes a controversial leasing proposal in a small section of the Arctic National Wildlife Refuge.

On the table
Despite the current uncertainty over the Senate's makeup, negotiations continue on a conference energy bill.

Among the items under discussion is an ethanol mandate, considered to be an important US heartland issue. And in a related issue, lawmakers are also mulling updates to the federal reformulated gasoline program, created when the Clean Air Act was last amended in 1990 to reduce smog in the most polluted US cities.

The House and Senate the first week in October have been feverishly negotiating on what shape the clean fuel provisions might take. A new House version of the clean fuel title is similar to the Senate version in that it preserves a 5 billion gal "renewable fuel" mandate for transportation fuels and removes the current 2 wt % oxygen standard. However, there are also key differences between the two proposals.

The House bill removes the federal phase-out of the clean fuel additive methyl tertiary butyl ether; extends the liability waiver in the Senate bill to include both MTBE and its chemical sister ETBE (ethyl tertiary butyl ether), and extends the timeline in which fuel ethanol would have to be added to motor fuel.

The House plan delays implementation of the renewable fuels mandate by 1 year. The mandate begins Jan. 1, 2005, with a requirement of 2.3 billion gal/year and doesn't reach 5.0 billion gal/year until 2014, 2 years later than the Senate version.

Especially egregious to environmentalists is the expanded liability protection to ethers and a related provision that removes the Environmental Protection Agency's authority to regulate renewable fuels or fuel additives that cause air or water pollution (OGJ, Sept. 23, 2002, p.24).

House vs. Senate bill
Energy conferees were considering a compromise that would accept the House language dropping an MTBE phaseout and preserve the Senate language on fuel liability. Under the proposal, merchant MTBE producers would receive "transitional assistance" provided by the more-generous House version to convert their facilities to other fuel blendstocks.

Green groups, however, strenuously object to the House MTBE language. They say the House offer makes several changes to the Senate bill that could potentially preempt future state bans on MTBE. Nineteen states are planning to ban MTBE over the next 5 years.

They maintain the combined impact of this language could be used to preempt states that have not yet adopted bans from doing so in the future.

The House bill requires that regulations designed to address seasonal supply swings do not prevent or interfere with the attainment of national ambient air quality standards or significantly increase the price of motor fuels to the consumer. The Senate bill stipulates that if EPA finds there are "excessive" seasonal variations, the agency shall promulgate regulations to ensure that 35% or more of the ethanol mandate threshold is met in a given year.

In addition, House negotiators want to change the Senate's state hardship petition language from "causing severe economic harm" to causing "significant economic" harm; they also want to allow states to petition to get a waiver from the ethanol mandate if they can show that it would "prevent or interfere with attainment." The House plan further specifies that such a petition is deemed granted if EPA fails to act in 90 days.

The pending proposal also removes some of the Senate bill's language on the need to phase out MTBE, including a reference to the need to eliminate the use of MTBE as a fuel additive and a reference to the findings of the 1999 Blue Ribbon Panel Study.

Authorization levels for MTBE Producers Conversion Assistance is left unchanged, but sums are designated "to remain available until expended." The Senate bill authorizes $200 million for MTBE cleanups in fiscal year 2003 that were supposed to start this October and includes $2.5 billion in related efforts, including a provision that would allow the Department of Energy to offer loans to merchant MTBE producers converting their facilities to other gasoline feedstocks. Under the House plan, DOE could offer grants of up to $250 million/year during 2003-05. The Senate bill extends the grants for 5 years.

The elimination of the oxygenate mandate remains; however, the special clause for states with clean air "209(b)" waivers to be exempted early from the oxygenate mandate is removed.

Section 209 of the Clean Air Act states California can set some of its own emission standards. The law currently permits other states to adopt the California standards, as New York and Massachusetts have done regarding low-emissions vehicles. It also sets up some limits on adoption of nonroad emissions standards.

Fuel studies
The House proposal also adds a provision to the Senate's fuel system harmonization study. The new language calls on EPA and DOE to assess the extent to which improvements in air quality and changes in the price of motor fuel can be projected to result from the EPA's "Tier II" air regulations, the reformulated gasoline program, the renewable fuels standard, and state programs. The House version does not call for the development of national standards and moves the study date to 2003 from 2006.

In addition, House lawmakers clarified that gasoline blends must contain at least 10% ethanol to be part of the mandate total, and that ethanol-blended gasoline is required if the price increase is less than 5%. That 5% level is determined by a new definition of "generally competitive price."

House leaders want to stipulate that ethanol use does not interfere with clean air attainment or contribute to drinking water contamination. The House bill also removes bedrock and soil remediation programs and authorizations under the Leaking Underground Storage Tanks section present in the Senate bill.

The House included broad language designed to ensure that the amount of Highway Trust Fund money raised from fuel excise taxes does not suffer because of expanded ethanol use. (Fuel ethanol gets a special tax break to encourage its use).

The House bill also does not include a data collection section that the Senate has, which gives the Energy Information Administration the authority to collect the necessary data to monitor renewable fuels markets.

Another area closely watched by industry is pending low-sulfur rules for highway and nonroad diesel fuel.

EPA officials say the two rules are fundamental to their desire to encourage use of clean diesel because it has the potential to be cleaner than other transportation fuels and help reduce oil consumption overall.

Stakeholders from the auto and oil industries, government, and the environmental community recently endorsed the work of an independent clean diesel panel that reviewed technology trends related to EPA's 2006 highway low-sulfur diesel regulations (OGJ Online, Sept. 26, 2002). The panel said it does not anticipate the introduction of new technology to be a stumbling block for the rule's implementation.

Nevertheless, serious concerns remain among refiners, pipeline operators, and marketers over the rule.

Fuel suppliers unsuccessfully urged EPA to expand the scope of the independent panel beyond reviewing technology issues related to the 15 ppm low-sulfur diesel standard. The panel ultimately acknowledged some refiners' concerns over the impact the rule may have on distribution, but it also stressed that the majority of the panel concluded that those issues are outside the scope of the panel's charter and would be addressed at a separate EPA workshop to be held in Houston in November.

With regard to nonroad fuel issues, EPA Assistant Administrator for Air and Radiation Jeff Holmstead said the agency is "working actively" with the White House's Office of Management and Budget over the potential use of market-based averaging, banking, and trading programs that might include permission to trade emissions-reduction credits between nonroad and highway engines. Sulfur would be one of the pollutants that could be "banked" or "traded."

Holmstead also said states will be consulted over the impact the proposal might have on heating oil, which is outside of EPA's direct regulatory authority and typically has very high sulfur levels. Some states are looking to reduce sulfur levels in heating oil.

EPA says it plans to propose an nonroad emissions standard to the White House by the end of the year, with publication of a proposal slated for May.

Refiners and fuel suppliers, meanwhile, are mulling their own proposal for EPA to consider.

One proposal under active consideration would call on oil companies to reduce all nonroad diesel sulfur levels to 500 ppm by 2007, with further reduction to 15 ppm by 2010.

Some industry officials are also considering asking EPA to revise the highway diesel sulfur 2006 timetable through some sort of trading scheme. Currently, about 80% of highway diesel fuel is supposed to meet a 15 ppm sulfur limit by mid-2006, but industry might try to reduce that requirement to as low as 50%. That plan has engine makers worried, because they are designing engines to run on the lower-sulfur fuels.

Also possibly on the table may be a tax incentive for clean diesel fuel, akin to what now is present in Europe and what ethanol fuels now enjoy in the US.

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