MEETING BEFORE THE CALIFORNIA AIR RESOURCES BOARD BOARD HEARING ROOM 2020 L STREET SACRAMENTO, CALIFORNIA THURSDAY, DECEMBER 9, 1999 9:00 A.M. Janet H. Nicol Certified Shorthand Reporter License Number 9764 Vicki L. Ogelvie Certified Shorthand Reporter License Number 7871 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 ii APPEARANCES MEMBERS PRESENT: Alan C. Lloyd, Ph.D., Chairman Joseph C. Calhoun Dorene D'Adamo Mark DeSaulnier Dr. William Friedman C. Hugh Friedman Matthew R. McKinnon Barbara Patrick Ron Roberts STAFF: Michael Kenny, Executive Director Tom Cackette, Chief Deputy Executive Officer Mike Scheible, Deputy Executive Officer Lynn Terry, Deputy Executive Officer Kathleen Walsh, General Counsel Kathleen Tschogl, Ombudsman CALIFORNIA ENERGY COMMISSION: Michal C. Moore, Commissioner PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 iii INDEX PAGE Proceedings 1 Call to Order 1 Pledge of Allegiance 1 Roll Call 1 Opening Remarks by Chairman Lloyd 2 AGENDA ITEMS: 99-10-2 Public Meeting to consider a Report on the Air Quality Impacts of the Use of Ethanol in California Reformulated Gasoline Introductory Remarks by Chairman Lloyd 4 Staff Presentation Mike Kenny 4 Bart Croes 5 Public Comments Don Lucas 24 Gary Whitten 29 Janet Hathaway 37 Tom Koechler 42 99-10-3 Public Hearing to Consider Amendments to 50 the California Reformulated Gasoline Regulations, Including a December 31, 2002 Prohibition of Using MTBE in Gasoline, Adoption of Phase 3 Gasoline Standards, a Phase 3 Predictive Model, and Other Changes Introductory Remarks by Chairman Lloyd 50 Staff Presentation Mike Kenny 54 Michal Moore, CEC 56 Steve Brisby 60 Gordon Schremp, CEC 76 Kathleen Tschogl 103 (continued) PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 iv INDEX (continued) PAGE Public Comment Catherine Koshland 106 Tom Stallard 111 Rosario Marin 112 Duane Bordvick 118 Douglas Henderson 127 Ed Manning 131 Al Jessel 136 Charles Franiken 155 Gregory Dana 160 William Piel 170 Michael Scippa 175 Mike Kulakowski 177 Chad Tuttle 184 John Wright 188 Jay McKeeman 197 Paul Guyer 203 Jim Lyons 205 Paul Knepprath 210 Sandra Spelliscy 214 Brooke Coleman 219 Mark Nelson 229 Janet Hathaway 230 Larry Greene 236 Chung Liu 237 Martin Tuttle 241 Gene Fisher 243 Al Sutron 247 Franco Reyna 251 John McClelland 253 Michael Graboski 257 Alison Pollack 265 Neil Koehler 272 Gary Whitten 283 Steven Mazor 288 Bruce Heine 291 Bob Reynolds 295 Eric Vaughn 299 Terry Jaffoni 305 Jodi Waters 311 V. John White 314 John Cabaniss Jr. 320 Gary Herwick 324 Harold Haskew 329 (continued) PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 v INDEX (continued) PAGE Walter Kreucher 331 Ann Schlenker 337 Suzanne Phinney 341 Dennis Lamb 343 Charlie Peters 347 Azibuike Akaba 351 Stanley Van Vleck 354 Robert Bullard 358 Adjournment of Day One 403 Certificate of Reporter 404 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 1 1 P R O C E E D I N G S 2 CHAIRMAN LLOYD: Good morning. The December 9th, 3 1999, public meeting of the Air Resources Board will now 4 come to order. 5 And, Supervisor DeSaulnier, will you lead us in 6 the Pledge of Allegiance, please. 7 All stand. 8 (Pledge of Allegiance recited). 9 CHAIRMAN LLOYD: Thank you. 10 The clerk of the board, please call the roll. 11 MS. WHITING: Calhoun. 12 BOARD MEMBER CALHOUN: Here. 13 MS. WHITING: D'Adamo. 14 BOARD MEMBER D'ADAMO: Here. 15 MS. WHITING: DeSaulnier. 16 BOARD MEMBER DeSAULNIER: Here. 17 MS. WHITING: Hugh Friedman. 18 BOARD MEMBER C.H. FRIEDMAN: Here. 19 MS. WHITING: Dr. Friedman. 20 BOARD MEMBER FRIEDMAN: Here. 21 MS. WHITING: McKinnon. 22 BOARD MEMBER McKINNON: Here. 23 MS. WHITING: Patrick. 24 BOARD MEMBER PATRICK: Here. 25 MS. WHITING: Riordan. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 2 1 (No response.) 2 MS. WHITING: Roberts. 3 (No response.) 4 MS. WHITING: Chairman Lloyd. 5 CHAIRMAN LLOYD: Here. 6 Thank you. Thank you very much. 7 Before we start today, I would like to make a few 8 remarks to the audience. Clearly, given the agenda, we're 9 expecting a long hearing and we need everybody's cooperation 10 to get through the agenda as efficiently as we can. So let 11 me tell you how I hope that we are going to organize this. 12 The board will be taking up the ethanol fate and 13 transport report first of all. That time is budgeted for 14 about two hours, but it might take longer, little less, 15 based on past estimates. 16 Phase 3 gasoline will be next and will take the 17 rest of the day. 18 We will not be hearing the rice straw report and 19 the research proposals until tomorrow morning, beginning at 20 9:00 o'clock. 21 We plan on working straight through the lunch 22 hour, so don't be alarmed if there's no break. The board is 23 equipped to handle that by basically getting lunch on the 24 fly at the back. There is the cafeteria on this floor where 25 we can take a quick bite and several restaurants nearby so PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 3 1 we can keep going through. 2 It's anticipated that many people will wish to 3 testify on these two items, and so we're handling sign-ups a 4 little differently today. Please sign up in the lobby 5 outside the hearing room, rather than with the clerk of the 6 board. And if you've written testimony, please give 20 7 copies to staff out there. 8 I would appreciate also if you would fill out the 9 speaker cards as completely as we can, and that will help us 10 coordinate the speakers' list and make the meeting as 11 efficient as possible. 12 Again, thank you for your cooperation there. 13 When we get to the witness list, we're starting 14 off and we will continue with a five-minute limit per 15 speaker. 16 We're also planning to group common interests 17 together, so if there are several colleagues, please discuss 18 amongst yourselves how you can coordinate the testimony to 19 make the most efficient use of your time and of our time. 20 Let me say that we're very good listeners up here, 21 and don't truly need to hear the same point over and over to 22 understand those issues. 23 If follow-up witnesses could keep their comments 24 to new issues, it would be very much appreciated. I plan on 25 reminding people of that as we go along, but I certainly PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 4 1 hope that we don't have to. 2 If we are still working into the evening, there 3 will be a dinner break, but we plan on finishing our major 4 agenda item that's on the Phase 3 gasoline regulation today, 5 so depending where we are on the witness list, we may need 6 to come back. We'll keep you all posted as the meeting 7 progresses. 8 Again, I think that summarizes the preliminaries 9 on that issue, and I'd like to move ahead to the first item, 10 which this is on the fate and transport of ethanol. I think 11 we will look to staff to commence that presentation. 12 MR. KENNY: Thank you, Mr. Chairman and members of 13 the board. 14 On March 25th, 1999, Governor Davis issued an 15 Executive Order calling for the removal of MTBE from 16 gasoline no later than December 31st, 2002. 17 The order directs the ARB and the State Water 18 Resources Control Board to construct an environmental fate 19 and transport analysis of ethanol in air, surface water and 20 groundwater. 21 The Office of Environmental Health Hazard 22 Assessment, OEHHA, is to conduct a health risk analysis. 23 The ARB staff has worked closely with OEHHA 24 throughout the process and has provided the results of the 25 air quality analysis to support this risk assessment. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 5 1 One key aspect, however, is that we cannot predict 2 the precise formulations that refiners will use for future 3 Phase 3 gasoline. As a result, the staff has evaluated 4 three likely scenarios and their impacts on air quality for 5 the year 2003. 6 At this time what I'd like to do is turn the staff 7 presentation over to Mr. Bart Croes. 8 And Bart. 9 MR. CROES: Thank you, Mike. 10 Good morning, Chairman Lloyd and members of the 11 board. 12 We appear to be having some technical 13 difficulties, so I think we'll have to work with the paper 14 copies of the overheads that we passed out. 15 CHAIRMAN LLOYD: Do all the board members have 16 paper copies? 17 Why don't we take one minute. 18 (Pause in proceeding.) 19 CHAIRMAN LLOYD: I guess the engineering staff 20 helped us out. 21 MR. KENNY: It was a Y2K problem. 22 Actually, I think we can run it in this format. 23 It's not the exact format we'd like, but at least it's quite 24 legible. 25 MR. CROES: Thank you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 6 1 I've divided my presentation into the parts shown 2 here. 3 First, I'll introduce a general objective and 4 scope of our analysis. 5 Then I'll describe our findings from a review of 6 prior studies, followed by our own predictions of emissions 7 and air quality. 8 Next I will discuss the uncertainties in our 9 analysis and how they are being resolved. 10 After this, I'll summarize the comments from a 11 scientific peer review and end my presentation with our 12 recommendation to the board. 13 Governor Gray Davis issued Executive Order D-5-99 14 on March 25th, 1999. It calls for the removal of MTBE from 15 gasoline at the earliest possible date, but no later than 16 December 31st, 2002. 17 Task 10 of the Executive Order states, and I 18 quote, the California Air Resources Board and the State 19 Water Resources Control Board shall conduct an environmental 20 fate and transport analysis of ethanol in the air, surface 21 water and groundwater. 22 The Office of Environmental Health Hazard 23 Assessment shall prepare an analysis of the health effects 24 of ethanol and gasoline, the products of incomplete 25 combustion of ethanol and gasoline, and any resulting PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 7 1 secondary transformation products. 2 These reports are to be peer reviewed and 3 presented to the Environmental Policy Council by December 4 31st, 1999, for its consideration. 5 We conducted four analyses. 6 First, we reviewed several recent comprehensive 7 assessments of the impact of oxygenated gasoline on the 8 environment. 9 Second was a literature review of studies that 10 measure the direct impact of the use of ethanol and 11 gasoline. 12 The third component was to evaluate emission and 13 air quality impacts from MTBE-free fuels in comparison to 14 MTBE-containing fuel. 15 Our last component is to close data gaps as part 16 of this study and ongoing efforts. 17 Based on our understanding of atmospheric 18 chemistry, the main concern is the reaction of ethanol to 19 form acetaldehyde and peroxyacetyl nitrate, or PAN, as it is 20 commonly called. 21 Acetaldehyde is an air toxic that is both directly 22 emitted and formed in atmospheric reactions. 23 PAN is an eye irritant and causes plant damage. 24 We compared these impacts to the reaction of MTBE, 25 which produces formaldehyde, another toxic gas. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 8 1 The California Energy Commission determined that 2 alkylates will be used in non-oxygenated gasoline and some 3 ethanol-containing fuels in California to replace the volume 4 in octane normally provided by MTBE, so we also investigated 5 these compounds. Alkylates form aldehydes and PAN. 6 The atmospheric reactions for MTBE, ethanol and 7 alkylates are relatively slow, so they do not necessarily 8 lead to substantially more toxics than PAN. 9 OEHHA also requested information on a number of 10 proven and suspected air toxics and all criteria air 11 pollutants, although these later group of compounds are 12 being addressed in the Phase 3 reformulated gasoline 13 rulemaking. 14 Our public review process included individual 15 stakeholder meetings and three public workshops. 16 We posted intermediate reports on our Web page at 17 least a week before each workshop. The staff report before 18 you lists and responds to all the written comments we 19 received. 20 We hired experts in two critical areas. Professor 21 Robert Harley of the University of California at Berkeley 22 performed some emission calculations and reviewed our 23 overall approach. 24 Dr. Daniel Grosjean is a world-recognized 25 authority on PAN and assessed all the observations in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 9 1 California of this difficult-to-measure compound. 2 We also had the staff report undergo a scientific 3 peer review by the University of California. 4 First, we conducted an extensive review of prior 5 studies. We reviewed several major assessments of the 6 impact of oxygenated gasoline on the environment. The 7 studies identified several issues of concern that we 8 addressed in our analysis. 9 However, they lacked a comprehensive review of air 10 quality studies in areas that have already introduced 11 ethanol into their fuel supply. They identified a need for 12 a modeling analysis of ethanol and other MTBE alternatives. 13 We addressed these two needs in our study. 14 We reviewed 16 journal articles and reports that 15 describe measurements of the air quality impacts of ethanol. 16 The most comprehensive studies were in Denver, 17 Albuquerque and Brazil. Denver has used ethanol since 1988 18 and Albuquerque since 1994 to control their wintertime 19 carbon monoxide problem. 20 Brazil is the only country in the world where a 21 national large-scale ethanol fuel program has been 22 implemented. Ethanol was first introduced in 1979, and in 23 1997 approximately nine million cars ran on ethanol blended 24 with 22 percent ethanol by volume -- I'm sorry, with 25 gasoline blended with 22 percent ethanol by volume, more PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 10 1 than twice the maximum content proposed for California. And 2 another four million cars used pure ethanol. 3 The impact on acetaldehyde levels is substantial 4 only in Brazil, which lacks a Reid vapor pressure limits 5 that will constrain evaporative emissions in California. 6 Even in Brazil, the observed PAN levels are well below 7 historical levels in Southern California. 8 The main component of our analysis was the 9 prediction of emissions in air quality in 2003 in order to 10 compare MTBE-free fuels to MTBE-based gasoline. 11 Our focus was on the South Coast Air Basin, 12 because it has the conditions most conducive to acetaldehyde 13 and PAN formation in California, the highest number of 14 gasoline-related emissions sources and the most observations 15 of air quality levels necessary for our analysis. 16 We used the best available information on the 17 emission characteristics of the fuel that will be available 18 in 2003, and an airshed model with state-of-the-science 19 chemistry for an ozone- and PAN-forming episode in 1997 and 20 2003. We used the modeling results to scale measured air 21 quality in the 1997 time frame to 2003. 22 We analyzed four fuels that were assumed to fully 23 comply with the Phase 2 reformulated gasoline regulations. 24 The current MTBE-based fuel allows us to scale between 1997 25 and 2003. And we analyzed two ethanol blends and a gasoline PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 11 1 without any oxygen for comparison to MTBE. 2 In the next three slides the air quality 3 predictions for various pollutants are displayed relative to 4 1997 levels. The MTBE case shown for 1997 shown as a blue 5 bar at the left of each series is defined as 100 percent. 6 The next four bars in each series are the predictions for 7 air quality in 2003 for MTBE, which is the orange bar; 8 ethanol-blended fuel at two percent oxygen by weight, the 9 yellow bar; ethanol at three and a half percent oxygen, the 10 pale green bar; and non-oxygenated gasoline, the purple bar. 11 What you'll see in the three slides is that all 12 pollutants decreased from the 1997 MTBE baseline to the 2003 13 MTBE baseline due to reductions in overall emissions in 14 South Coast Air Basin. 15 The predicted decreases are specially pronounced 16 for the toxic air contaminants, ranging from 11 percent for 17 formaldehyde and acetaldehyde, to 33 percent for benzene and 18 44 percent for 1,3-butadiene. These toxics are listed in 19 decreasing order of their cancer potency. 20 For all but acetaldehyde, the last series of bars, 21 there is very little variation among the 2003 fuels for 22 individual toxics. Acetaldehyde is predicted to increase to 23 1997 levels for the ethanol-blended gasoline at three and a 24 half percent oxygen content. The preliminary health 25 assessment by OEHHA has determined that this is an PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 12 1 insignificant increase because it is offset by smaller 2 reductions in other air toxics. 3 Since fuel-related activities are the only 4 inventoried source of MTBE, air quality levels decrease to 5 zero as shown in the first series of bars. 6 In the next series, ethanol levels are predicted 7 to increase by only 40 percent and 63 percent for the two 8 ethanol-blended fuels, as there are many preexisting sources 9 of ethanol, primarily consumer products. 10 OEHHA's preliminary assessment identified no 11 health concerns for ethanol at these levels. Despite the 12 acetaldehyde increase we saw earlier for the high ethanol 13 content fuel, levels of PAN and its cousin, PPN, are not 14 predicted to vary among the four fuels in 2003. 15 Due to the constraints of the Phase 2 predictive 16 model, we do not predict any variation among the four 2003 17 fuels for chemical formation of ozone, nitrogen dioxide and 18 particulate matter. For carbon monoxide, which is the 19 second series of bars, the high ethanol content fuel results 20 in lower predictive values and the non-oxygenated gasoline 21 results in higher predictions. 22 However, this apparent increase for non-oxygenated 23 gasoline is a function of the emission assumptions. Due to 24 the wintertime oxygenate requirement for the South Coast Air 25 Basin, non-oxygenated gasoline cannot be sold during the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 13 1 time of carbon monoxide air quality standard violations. 2 We have provided all of these results to OEHHA to 3 determine the health risk. 4 OEHHA concluded that there is no indication of the 5 toxicological problem with any of the alkylates, primarily 6 due to lack of data. 7 The maximum values we estimated for n-hexane, 8 isobutene, toluene, and xylenes are a factor of ten or more 9 below any level of concern. 10 We were initially surprised by the lack of 11 sensitivity of PAN formation to the ethanol content of the 12 gasoline and higher acetaldehyde levels. 13 To understand the causes of this finding, we 14 investigated ten historical episodes of high PAN levels 15 spanning the past three decades in Southern California, and 16 two cases in Brazil with widespread use of ethanol. Because 17 of the lack of detailed measurements of winds and other 18 variables, we used the model of simple physics, but the same 19 state-of-the-science chemistry as the airshed model. 20 We found that other components of gasoline and 21 other emission sources are primarily responsible for PAN. 22 Even in Brazil where ethanol and acetaldehyde levels are 23 very high, these compounds are not the major contributors to 24 PAN formation. 25 The long-term trend in PAN levels in the South PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 14 1 Coast Air Basin also supports this finding. PAN has dropped 2 by a factor of ten over the past three decades, apparently 3 due to reductions of all hydrocarbons under California's 4 ozone control program. 5 Our report identified a number of uncertainties, 6 most of which have been resolved by ongoing efforts or do 7 not materially affect our conclusions. 8 Our analysis did not include increased evaporative 9 emissions from ethanol-blended fuels due to reduced canister 10 function or increased permeation through rubber hoses. 11 Additional research is needed in this area. 12 Commingling of ethanol-blended and non-ethanol 13 fuels in gas tanks also increases evaporative emissions. 14 While we did not include this effect in our analysis, it is 15 being addressed in the Phase 3 RFG regulatory process, as 16 will be discussed by staff during the next agenda item. 17 Sensitivity calculations using an increase in 18 hydrocarbon emissions to bracket the effect of a new motor 19 vehicle emission model, called EMFAC 2000, resulted in large 20 increases for many pollutants for all fuels. 21 However, there was no significant increase in 22 acetaldehyde and PAN for the ethanol-containing and 23 non-oxygenated gasolines relative to the MTBE-based fuel. 24 Airshed modeling still has significant 25 uncertainties and there are many ongoing efforts to improve PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 15 1 model inputs in the models themselves. However, the 2 atmospheric chemistry of ethanol, MTBE and alkylates appear 3 to be well known and the use of the airshed model in a 4 relative sense should bypass the effects of other 5 uncertainties. 6 We are confident in our conclusion that there are 7 no significant air quality concerns with MTBE-free fuels 8 that are not being addressed as part of the Phase 3 RFG 9 regulations, though we plan to revisit this analysis if 10 important new information emerges in the future. 11 Our analysis of the air quality impacts should be 12 confirmed with field measurements that take place before and 13 after the phase-out of MTBE. These types of studies were 14 conducted in California during the implementation of the 15 Phase 2 RFG in 1996. 16 California's existing ambient air quality network 17 should be sufficient for all the criteria pollutants, toxic 18 air contaminants, MTBE and alkylates. 19 However, ethanol and PAN are not part of any 20 routine air monitoring program. Early last month, we began 21 a PAN monitoring program at two sites in the South Coast Air 22 Basin and we hope to expand to the Central Valley next year. 23 We will investigate the possibility of adding ethanol 24 measurements to our program in the future. 25 The University of California Office of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 16 1 President approved four peer reviewers with complementary 2 areas of expertise. These individuals are eminently 3 qualified and at the top of their respective fields. 4 The last peer review was completed early this 5 week. The complete reviews and our plans to modify the 6 report in response to each concern were posted on our Web 7 page yesterday. 8 Two of the reviewers agreed with our overall 9 conclusions and had no major concerns about the effects of 10 uncertainties in our analysis. 11 The other two reviewers gave a qualified 12 agreement, as both were concerned about the potential for 13 increased evaporative emissions from ethanol-containing 14 fuels. 15 One reviewer wants us to emphasize the importance 16 of Reid vapor pressure control and predict what will happen 17 if the seven psi limit is not met. This very analysis was 18 approved by the board last December, when ARB staff 19 presented a comparison of the effects of the fully complying 20 gasoline and a high RVP ethanol-gasoline blend. The 21 analysis showed a significant detriment to emissions in air 22 quality. 23 Including this analysis in our report serves both 24 as a caution that it is important to meet the RVP 25 requirements and to not extend our findings to the parts of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 17 1 the country that the US EPA allows an RVP exemption for 2 ethanol. 3 We also received several suggestions for improving 4 model inputs. We have now bracketed the effects of EMFAC 5 2000 and determined that the addition of chlorine chemistry 6 for ethanol emitted in coastal environments and some other 7 minor corrections will not materially affect our 8 conclusions. 9 Because of their strength in atmospheric 10 chemistry, the reviewers were asked to comment on the 11 suggestion by Dr. Whitten of ICF Consulting to increase the 12 CO reactivity factor for the Phase 3 regulation. 13 Two reviewers, one who is a chairman of the 14 board's Reactivity Scientific Advisory Committee, believe 15 that Dr. Whitten's suggestion has merit as part of the 16 complete update of all the reactivity factors. However, 17 they agreed with our position that for the sake of 18 consistency with existing regulations, we should not make 19 this one single adjustment. 20 Minor edits and clarifications suggested by the 21 reviewers are already being incorporated into the report. 22 And to conclude, we recommended that the board 23 approve the staff report for submittal to the Environmental 24 Policy Council with the changes recommended by the 25 scientific peer review. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 18 1 Thank you for attention. We're ready to answer 2 any questions. 3 CHAIRMAN LLOYD: Thank you very much. 4 Questions from the board members? 5 Mr. Calhoun. 6 BOARD MEMBER CALHOUN: Bart, you reminded us of 7 the work that -- of the fact that they've used gasoline in 8 Brazil, what is it, 20 percent by volume, I believe it is. 9 MR. CROES: 22, yes. 10 BOARD MEMBER CALHOUN: 22. 11 And you also indicated that the acetaldehyde level 12 is fairly high in Brazil. Have we any indication as to the 13 health, the impact that this has had on people's health in 14 Brazil? 15 MR. CROES: No. We're not familiar with any 16 studies of health effects of acetaldehyde in Brazil. 17 BOARD MEMBER CALHOUN: Also think you said OEHHA 18 did not, I don't recall exactly what you said, about OEHHA's 19 concern about acetaldehyde. I assume that from the 20 statement that was in the staff report that there's no 21 significant concern about the increase in acetaldehyde? 22 MR. CROES: We have Dr. Melanie Marty from OEHHA 23 here. Maybe if we can have her address the comment. 24 DR. MARTY: I'm Melanie Marty from OEHHA. 25 Yes, you're correct, we didn't have a concern PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 19 1 about the small increase in acetaldehyde. It is essentially 2 balanced by a decrease in some more potent carcinogens, for 3 example butadiene, such that the overall cancer risk is not 4 increased overall. 5 BOARD MEMBER CALHOUN: Thank you. 6 CHAIRMAN LLOYD: Yes, Professor Friedman. 7 BOARD MEMBER C.H. FRIEDMAN: Similarly, has there 8 been any studies about the health effects in Denver or these 9 other or did I miss that? 10 DR. MARTY: To our knowledge nobody has really 11 looked at the health impacts of using ethanol in gasoline or 12 even as a neat fuel. The studies that we're aware of that 13 have looked at air quality impacts in Brazil primarily 14 focused on the criteria air pollutants and not things like 15 acetaldehyde or ethanol. So there really is not a lot of 16 information. 17 BOARD MEMBER C.H. FRIEDMAN: Is it obtainable? 18 DR. MARTY: Ditto Denver. 19 BOARD MEMBER C.H. FRIEDMAN: Is that something 20 that could be obtained without enormous cost? 21 DR. MARTY: Well, what you're really talking about 22 is -- 23 BOARD MEMBER C.H. FRIEDMAN: Could you 24 segregate -- 25 DR. MARTY: I think it would be very difficult at PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 20 1 this point. You have to start de novo with a new 2 epidemiological study. You'd also have to figure out what 3 endpoint you were looking for in terms of toxicities, so it 4 would not be a small undertaking. 5 BOARD MEMBER C.H. FRIEDMAN: Thank you. 6 CHAIRMAN LLOYD: Questions from the board? 7 I'd like to ask a couple if I could. 8 Again, I think I would agree with Professor 9 Seinfeld in terms of Dr. Whitten's comments vis-a-vis 10 reactivity of CO, and I think you recognized that and do it. 11 And I think it brings the overall issue of how we 12 address persistent organic pollutants as we look at the 13 slower reacting compounds. 14 If you in fact did pursue this in terms of a 15 overall research thrust to try to do a more comprehensive 16 study, recognizing that this is not something we can do in 17 this context, but as an issue to be addressed, how would you 18 address methane in that case? 19 MR. CROES: If you address CO with other 20 slow-reacting compounds through the approach that 21 Dr. Whitten suggested, yes, you would have to include 22 methane, even though it's even slower reacting than CO. It 23 does react and there's such large amounts of it that it may 24 have a contribution to overall ozone effects. 25 CHAIRMAN LLOYD: So are you going to propose a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 21 1 specific program, even a follow-up on Professor Seinfeld's 2 suggestion there and Dr. Whitten's suggestion? 3 MR. CROES: Well, actually Professor Seinfeld in 4 his comments noted that at the last meeting of the 5 Reactivity Scientific Advisory Committee, which occurred two 6 months ago, that they had made that very suggestion to use a 7 more sophisticated approach to estimate reactivity. And 8 while no longer personally involved, I know that other staff 9 have been working on this for the past year and hope to 10 improve the scale in the future as part of ongoing efforts. 11 CHAIRMAN LLOYD: Would you intend to use the model 12 that's being developed in the Central Valley, the 13 larger-scale model? Would that be an appropriate tool for 14 that? 15 MR. CROES: One of the strengths of the existing 16 reactivity scales is that it represents a variety of air 17 pollution episodes around the country, on the order of 40 or 18 so, and so you'd want to rely on not just one single episode 19 in the South Coast Air Basin and in the Central Valley, but 20 look at a variety of ozone episodes, which is really the 21 current difficulty of implementing Dr. Whitten's suggestion, 22 because there's a limited number of model episodes available 23 around the state. 24 CHAIRMAN LLOYD: It seems fairly clear from the 25 analysis you've done there in terms of the likely, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 22 1 particularly PAN, that those likely levels are much lower 2 than certainly when I was living in LA and being subjected 3 to the air and to PAN there. 4 You also did -- did you look into the chlorine 5 chemistry? That's a relatively new research angle sort of I 6 know that's been raised. 7 MR. CROES: Yeah. We just received a comment on 8 chlorine chemistry Monday, so we've done some sensitivity 9 work to try to bracket the effect of the chlorine chemistry. 10 And the comment we received from Professor Finlayson-Pitts 11 was that the chlorine chemistry is confined to coastal areas 12 and is limited to daytime hours. 13 We looked, we made a simplistic assumption that it 14 extended to the entire South Coast Air Basin for daytime and 15 nighttime, and even under those extreme assumptions it 16 didn't seem to have much of an effect. 17 CHAIRMAN LLOYD: Yeah. I think again to reiterate 18 I think what Mr. Kenny mentioned up-front, this is the air 19 quality impact phase of looking at the potential 20 environmental impact of ethanol, and the water board and the 21 water agencies will be looking at similar assessment here. 22 And this will, I think confirms that we don't see any show 23 stoppers that will come before the Environmental Council, I 24 think it's January 18th, 2000. Secretary Hickox will be 25 chairing that. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 23 1 And I know we've had a number of comments in terms 2 of areas where we can maybe look a little bit better, but we 3 also recognize that we are trying -- we are complying with 4 the Governor's Executive Order and I think being able to 5 abide by his time frame. 6 So do we have -- 7 BOARD MEMBER CALHOUN: I have one other question. 8 CHAIRMAN LLOYD: Mr. Calhoun. 9 BOARD MEMBER CALHOUN: One of the peer reviewers 10 mentioned the fact that a mixture of ethanol with gasoline 11 caused an increase in vapor pressure, and that's a concern, 12 and I don't know if it's more appropriate to discuss that 13 here at this time or in the -- when we get to the 14 reformulated gasoline. 15 MR. SCHEIBLE: Mr. Calhoun, we'll be addressing 16 that specific issue on the next item. 17 BOARD MEMBER CALHOUN: Thank you. 18 CHAIRMAN LLOYD: That reminds me, I guess on the 19 permeability aspect, I know that was mentioned there, I 20 don't know which set of staff looked at that issue in more 21 detail, whether it was related to the Phase 3 or whether 22 it's related to the fate and transport. 23 MR. SCHEIBLE: We reviewed permeability of fuels 24 also as part of Phase 3 regulation analysis that we've been 25 doing the last month or so. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 24 1 CHAIRMAN LLOYD: So that's going to be addressed 2 in your presentation? 3 MR. SCHEIBLE: Yes, it can be. 4 CHAIRMAN LLOYD: Okay. With that, we have just 5 two witnesses signed up, and I guess in this case I'll take 6 the chairman's prerogative and waive the five-minute thing, 7 since I don't think these, hopefully, will not go much more 8 than five. 9 First we have Dr. -- 10 BOARD MEMBER C.H. FRIEDMAN: If they do, you can 11 unwaive it. 12 (Laughter.) 13 CHAIRMAN LLOYD: Good to have a professor here. 14 First we have Dr. Don Lucas from the Lawrence 15 Berkeley National Lab, who was one of our peer reviewers. 16 DR. LUCAS: Morning, Mr. Chairman. My name is 17 Donald Lucas. I'm a staff scientist at the Lawrence 18 Berkeley National Laboratories. I'm a researcher in the 19 School of Public Health at UC Berkeley. I have a Ph.D. in 20 physical chemical from UC Berkeley. My research interests 21 include combustion-generated air pollutants, and developing 22 new diagnostic methods. 23 I was an investigator on the UC MTBE report 24 requested by Senate Bill SB 521. We reviewed previous data 25 on the combustion byproducts of MTBE in laboratory and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 25 1 vehicle studies, and performed laboratory experiments and 2 flow reactivity. 3 I also reviewed last year's ARB report on the RVP 4 waiver for ten percent ethanol fuels. 5 I've also read previous studies relating to this 6 subject and comments and reviews made by other interested 7 parties and the subsequent responses of ARB staff. 8 I also served as a reviewer for the reformulated 9 gasoline regulations that will be discussed later today. 10 The review of this work was done by four 11 individuals, Professor John Seinfeld, Cal Tech; Professor 12 Barbara Finlayson-Pitts of UC Irvine; Professor Roger 13 Atkinson of UC Riverside; and myself. 14 Each of us reviewed the executive summary and the 15 sections relating to our areas of expertise. 16 My comments today are a short summary based on all 17 the reviews and some communications we have had. However, 18 my comments have not been reviewed or approved by the other 19 reviewers. 20 The predicted changes in the emissions expected 21 from using ethanol in gasoline appear reasonable, both in 22 the direction and magnitude of the changes. 23 The calculations presented appear to be consistent 24 and are well documented. 25 Professor Atkinson states that the findings of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 26 1 report are supported by the evidence presented, indicate 2 that vehicle exhaust emissions and their impact on ozone 3 formation will not be significantly affected by replacing 4 MTBE with ethanol. 5 The results are also consistent with previous 6 studies, the reviews regarding the impacts of oxygenated and 7 reformulated fuels. 8 Professor Seinfeld states that the photochemical 9 modeling is consistent with current practices and there are 10 no evident danger signals associated with the results. The 11 model performance could be better in an absolute sense, but 12 using the simulations in a relative sense should bypass many 13 of the problems. It is noteworthy that the predicted 14 differences in ozone between MTBE and ethanol cases are 15 small. 16 Professor Finlayson-Pitts used the report as a 17 good initial approach to addressing air quality impacts from 18 the use of ethanol in reformulated fuels. Her major concern 19 is that this report will be taken by many as the final 20 assessment and could be cited as such in a widespread 21 manner. 22 The calculations presented in the report are very 23 complicated and there are many assumptions made regarding 24 the emissions. The reviewers and the ARB staff recognize 25 that the results rely on engineering judgments and that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 27 1 additional modeling and testing needs to be done. 2 There were concerns expressed about several 3 issues. 4 There was a large, complex report that was 5 conducted at the same time as the Phase 3 reformulated 6 gasoline and the EMFAC 2000 studies. They're all related 7 and all have time constraints. The timing of these studies 8 make it difficult to use information generated in the other 9 reports. 10 While I do not think the results from this study 11 would change significantly if more time were allowed, care 12 must taken in balancing the need for timeliness issues with 13 the effort and time needed to produce sound scientific 14 results. 15 Professor Finlayson-Pitts and I are concerned 16 about the potential for increased evaporative emissions. 17 The increase could be from an increase in the RVP allowed, 18 from commingling of fuels, decreased canister performance 19 and/or increased permeability of the fuels. 20 I was disappointed that the vehicle testing done 21 in this study did not include testing of the evaporative 22 emissions from vehicles. 23 These issues need to be clarified as they could 24 have significant impact on real-world emissions. 25 Professor Seinfeld and I agree that the ARB should PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 28 1 not change the way it calculates the importance of CO in 2 ozone formation. 3 The value of examining issues such as these should 4 not be underestimated and continued input from outside 5 experts such as Gary Whitten and others should be 6 encouraged. 7 They are also a number of changes and corrections 8 suggested by the reviewers, such as adding additional 9 chlorine chemistry, revised rate constants and also boundary 10 conditions. As mentioned, ARB staff has responded to these 11 and made many changes in the report. 12 In summary, conclusions reached by the ARB staff 13 appear correct and are justified by the data and analysis 14 performed. The emissions are calculated in a consistent and 15 defendable manner and the assumptions made in reaching the 16 conclusion are reasonable. 17 Thank you. 18 CHAIRMAN LLOYD: Thank you very much. 19 Questions from the board? 20 Thank you very much also for responding, and I 21 realize on a very short time frame on a lot of information 22 to assimilate. Thank you very much. 23 By the way, the witness list is growing, so I 24 guess somebody heard that I'm not going to keep it to five 25 minutes, so I guess we have two more, so now we have four PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 29 1 people. 2 The next one is Dr. Gary Whitten, from ICF 3 Consulting. 4 DR. WHITTEN: Good morning. My name is Gary 5 Whitten. I'm the chief scientist with ICF Consulting in San 6 Rafael, California, here to talk about the assessment in 7 terms of airshed modeling that was done. 8 And I want to applaud the staff for the work that 9 they did in the past year or even less than that. It was a 10 lot of work and I think it was quite well done. 11 I agree with most of the peer review comments that 12 the urban airshed model that was used is a good tool for 13 assessing things on a relative basis and that the overall 14 main conclusion that was the beginning of this was the 15 impact of use of ethanol fuels on PAN and acetaldehyde. I 16 believe that the comments and suggestions that I have today 17 will not appreciably affect that in any way whatsoever. 18 But I do believe that the results that one gets 19 from a model such as the urban airshed model depend very 20 strongly on the inputs that are used and the quality of 21 those inputs. 22 And the peer review did not comment on the fact 23 that the initial modeling efforts were quite a bit different 24 than the final modeling efforts. And it was not clear to me 25 from our interactions with the staff what was done to the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 30 1 inputs to make these changes. 2 And I also agree with the peer reviewers that the 3 impending inputs from EMFAC 2000, which have now been 4 postponed to March for full approval, could change some of 5 the results substantially. 6 The main things that I wish to bring in at this 7 point that are new are, first of all, that the speciation 8 profiles, the representation of the gasoline components 9 needs to, I think some more work in terms of, especially in 10 terms of the area of aromatics. 11 And then also wish to comment on some of the 12 formaldehyde importance as you've been hearing already. 13 I can talk without slides, I think. 14 The point I'd like to make is that the results of 15 this modeling study have changed dramatically during the 16 one-month period between October and November. The initial 17 results showed a spread in ozone formation between the 3.5 18 or full 10 percent volume ethanol fuel and the 19 non-oxygenated fuel, a difference of six ppb in ozone. 20 Now, this is a phenomenal large difference. The 21 newest results show a difference of only three-tenths of a 22 ppb between these two fields. So the fact that this change 23 from a six ppb spread to three-tenths of a ppb spread is 24 something that I think it needs some explanation and would 25 like to hear what that is. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 31 1 A six ppb spread between these two fuels is 2 comparable from other modeling that we've done at ICF, is 3 comparable to removing all of the evaporative emissions from 4 the model. So this is a large difference, six ppb. And the 5 fact that it's diminished to only three-tenths is something 6 that's not clear. 7 The next thing I'd like to talk about is higher 8 aromatics that may be possible from non-oxygenated fuels. 9 In 1994 there was a introduction of oxygen, the 10 MTBE that was the beginning of the use of MTBE in the fall 11 of 1994, and Professor Harley and his group did, I think, a 12 seminal measurement in the Caldecott Tunnel where there was 13 enough -- no regulations towards performance of these fuels 14 except that they must have oxygen. 15 And what the oil companies did was add this oxygen 16 at about the two percent level where it was required at, the 17 same time they reduced aromatics. 18 So now we're at the, if you will, the flip side of 19 that situation where we're talking about not making 20 appreciable changes to the regulations, but removing MTBE 21 and in some case removing the oxygenate, and so without -- 22 it seems to me that you would expect aromatics then to go 23 back up, because both MTBE and ethanol are very powerful 24 octane enhancers, and this sensitivity to aromatics and 25 various toxins and things like that that might be involved, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 32 1 especially ozone, has not been addressed, I believe, in the 2 study to date. 3 On the carbon monoxide issue, the point I'd like 4 to make here is that it is a very important part of the 5 overall ozone-forming process. The ARB staff did do a 6 sensitivity analysis when they were looking at the three 7 times the emissions to take into account the EMFAC 2000, and 8 the six ppb spread then spread to 22 ppb between full 9 ethanol fuel and the non-oxygenated fuel. 10 And the sensitivity that they did for CO was, I 11 think, was very good and that they set the CO the same 12 between these two and they found that a seven ppb of the 22 13 ppb was accounted for by the CO. That's one-third of the 14 difference between these fuels. And seven ppb, just a CO 15 adjustment to make them the same, I think attests to the 16 fact how important CO is towards the ozone-formation 17 process. 18 I would add that in the analysis that we have done 19 and commented on earlier this morning, that we also had 20 changed boundary conditions and found that boundary 21 condition for CO could also play a factor, and I suggest a 22 sensitivity analysis of that be done as well. 23 So one of the things that did occur between the 24 six ppb spread that I told you about and the three-tenths of 25 a ppb in the new staff analysis was a reduction in the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 33 1 amount of CO. 2 And later today in the reformulated gasoline 3 regulations I will talk more about the amount of CO that 4 might be adjusted. But that was one of the things that was 5 reduced in the final analysis. 6 So thank you. That's my comments at this time. 7 CHAIRMAN LLOYD: Thank you very much, Gary. 8 Maybe we could ask staff to respond. 9 MR. SIMEROTH: Chairman Lloyd, maybe I can start. 10 The tunnel study in 1994 was done before 11 implementation of Phase 2 gasoline vapor recovery. With 12 that the aromatic content with gas control for 1994, premium 13 gasolines could be found that added up to 60 percent 14 aromatics. So putting something in to give the aromatic -- 15 or the octane and reducing aromatics is fairly logical. 16 The Phase 2 aromatics were capped at 30 percent 17 and the average has been around 24 or 25, so there are two 18 entirely different situations, so the logic that oxygenates 19 are going to cause a significant decrease in aromatics by 20 our program doesn't hold because of the way our program is 21 structured. There will be some shifts that it's going to be 22 relatively minor, one or two percent. 23 In terms of the changes of what happened from the 24 first draft to the second draft, at the workshop I indicated 25 that there was some errors in the analysis and we were PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 34 1 working on correcting. 2 Subsequent to that statement we found what the 3 errors were, we found that staff had simply taken the 4 oxygenate out and grown the remaining compounds there to 5 fill the void, so to speak, so you saw an increase in 6 aromatics and olefins and everything else. In real life, it 7 won't happen that way. Something will replace the 8 oxygenate, whether it be ethanol or alkylates, and they have 9 different characteristics than what staff assumed. 10 Staff corrected that assumption and published the 11 corrections. We think we're now correct and the previous 12 one was simply incorrect. 13 We also corrected -- we made the same mistake on 14 the two percent ethanol fuel as well and we corrected that 15 one as well. 16 CHAIRMAN LLOYD: I think on the speciation 17 profiles, we probably all agree that we can do better there 18 and get those as time goes on. 19 And again, with all due respect to Dr. Whitten, I 20 don't think there's anybody, by the way, who's probably done 21 more modeling runs than Gary throughout the years. He 22 started this, pioneered a lot of the work. 23 But I don't think probably, Gary, you would admit 24 it's unusual for some of the air modeling results to change, 25 not only by the month, but probably by the day, depending on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 35 1 what's done there. 2 So I think again I think we understand the issue 3 in this case that staff has changed some of the results, but 4 I think we understand that part of it. But clearly we will 5 continue to refine the modeling. 6 But I'm not sure the bottom line here is that we 7 don't see a major show stopper for ethanol from an air 8 quality perspective, and that's what we were trying to do in 9 terms of the Governor's Executive Order. 10 DR. WHITTEN: My comments were more directed to 11 the non-oxy fuel and that the direction of aromatics was 12 down rather than up, and that's contrary to what we would 13 expect. 14 CHAIRMAN LLOYD: Dean, I'm sure you can respond. 15 MR. SIMEROTH: Dr. Lloyd, I think the direction 16 was correct and it was wrong initially, and we spent a lot 17 of time working on that correction. We also found that we 18 made a similar error on the two percent ethanol or 5.7 19 percent ethanol fuel and corrected that one as well. 20 DR. WHITTEN: We'll have more comments later. 21 CHAIRMAN LLOYD: I'm sure. 22 Dee Dee, sorry. Ms. D'Adamo. Sorry. 23 BOARD MEMBER D'ADAMO: Yes. Just one other 24 question then of staff. 25 So initially a noncomplying fuel was used and then PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 36 1 you made a change so that you used a fuel that would comply 2 with the proposal? 3 MR. SIMEROTH: It was an error made on how we were 4 assessing what the exhaust emissions would be. And also it 5 would have been a noncomplying if we simply had done it that 6 way, backing it back up in the liquid gasoline. 7 I think the corrections were necessary and 8 appropriate and are consistent with what we expect in the 9 future under Phase 3 reformulated gasoline. 10 BOARD MEMBER D'ADAMO: And the problems that you 11 saw with the first set of data disappeared once you did the 12 run a second time with fuels that would comply? 13 MR. SIMEROTH: Yes. We found all the mistakes, 14 corrected them and gave the results that you see in the 15 report today that's been peer reviewed, and we've listed 16 every single assumption that we've made and referenced what 17 the source of those assumptions was. 18 BOARD MEMBER D'ADAMO: Great. 19 MR. SCHEIBLE: I just want to note that we 20 actually identified the problem with the emissions input 21 prior to putting out the draft report, judged that since the 22 major results in the report about how ethanol substitution 23 affected toxics and PAN needed as much time as possible for 24 review, so we put that advisory in the report when it went 25 out, noticing people that we would be revisiting that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 37 1 particular section. 2 CHAIRMAN LLOYD: Thank you. 3 Thank you very much, Gary. Look forward to seeing 4 you later. 5 Next witness is Janet Hathaway from NRDC. 6 MS. HATHAWAY: I'm Janet Hathaway from Natural 7 Resources Defense Council. I'm dragging a bag behind me 8 like the ghost of Christmas past. Be in the holiday spirit. 9 CHAIRMAN LLOYD: You can distribute the goodies. 10 MS. HATHAWAY: Right. 11 I did want to make one just brief comment about 12 this segment of the proceedings today. 13 First of all, I recognize that this is an 14 extraordinarily complex issue that the board and the staff 15 have had to deal with in a very short time because of the 16 Governor's order. 17 (Loud musical sound in auditorium.) 18 MS. HATHAWAY: Is that Microsoft? 19 (Laughter.) 20 MS. HATHAWAY: Spooky, isn't it? 21 (Laughter.) 22 MS. HATHAWAY: But I do think that it's important 23 to just pay attention to a couple of possible concerns that 24 need further addressing, and although I know that the Water 25 Resources Board is chiefly designated to be looking at some PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 38 1 of these questions, I think part of the problem that 2 happened in our last round with RFG is having two segmented 3 and segregated series of reviews, so I just want to draw 4 attention to these issues and hopefully they will get 5 resolved fully as we move forward. 6 One is the fact that we still don't really 7 understand enough, I think, about the effect of ethanol 8 blends on the environmental persistence of the other toxic 9 compounds in gasoline. That is very problematic, precisely 10 because we know that many of the contamination places that 11 are most likely to see ethanol spills, places around 12 refineries, around distribution centers, near gas delivery 13 systems, already are contaminated with BTEX compounds, with 14 the benzene, toluene, xylene, ethylene compounds. And 15 because there is reason to believe that there is an effect 16 on making those compounds more soluble, making them migrate 17 more through soil, I just think we need to be very concerned 18 to have those answers before we actually do wide-scale 19 introduction of an ethylene -- I mean of a ethanol-blended 20 gasoline in this state. 21 Now, many people will say, oh, well, there's no 22 reason to worry, because other states have already done 23 this. 24 But there is reason to worry, because this is from 25 the peer reviewed report. None of the states require PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 39 1 ethanol concentrations to be measured in groundwater. So we 2 wouldn't know, even if there were indeed problems going on. 3 We do know from laboratory scale experimentation 4 that ethanol can change the structure of clay lenses, which 5 are known or at least believed to help protect our 6 groundwater sources by sort of capping them and providing a 7 barrier that is usually impenetrable to the usual gasoline 8 compounds, the BTEX compounds. That can be affected by 9 ethanol, so that's a reason for concern, in addition to the 10 co-solvency effect, the effect of -- not melting -- the 11 solvency that occurs that allows the BTEX compounds to move 12 more rapidly through soil. 13 And then finally some of the studies that have 14 been done to date show that the hydraulic activity or the 15 moving of the water through soils that have ethanol blends 16 in them is increased by an order of magnitude or in some 17 cases even two. So, again, reason just to flag that, make 18 sure we have the answers and that we know how to respond if 19 indeed there are changes in how gasoline and ethanol would 20 move through soil. 21 Now, this is not to say at all that ethanol is 22 something more problematic than MTBE. It is widely and, I 23 think, probably universally acknowledged that ethanol itself 24 will break down in soils pretty rapidly. And that is very 25 reassuring. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 40 1 Whether there's air in the soil or not, ethanol is 2 very likely to break down. 3 The only concern here that I'm raising is the 4 transport of other possibly even more toxic substances 5 through our soil systems into groundwater and that we have 6 to be very careful about. 7 And keep in mind that we already have thousands 8 and thousands of MTBE-contaminated sites. The effects 9 should be looked at not just in terms of BTEX, these 10 benzene, toluene, xylene compounds, but also in terms of the 11 co-solvency effect that might move more of the MTBE already 12 in the soil. 13 Not wanting to rain on any parades or anything, I 14 just wanted to make sure that we are very careful about this 15 approach. I do think that the staff has been 16 extraordinarily conscientious at looking at all the air 17 quality impacts. 18 But this board and I think every agency has to 19 keep in mind the cross-media issues, because it's easy for 20 them to sort of slide into somebody else's domain and not 21 get fully addressed. 22 Any questions? 23 CHAIRMAN LLOYD: Thank you very much, Janet. And 24 I think we take your comments to heart. And I hope that you 25 passed those on to the State Water Resource Control Board, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 41 1 and also make comments at the October 18th first meeting of 2 the Environmental Council. 3 And, as you know, Senator Bowen has made sure that 4 we will not in the future forget cross-media, inter or 5 intramedia interactions, as well as the Governor and 6 Secretary Hickox. 7 MS. HATHAWAY: Absolutely. I'll be attending 8 those. 9 CHAIRMAN LLOYD: And that's an issue. 10 See if any board members have any comments or 11 questions. 12 BOARD MEMBER C.H. FRIEDMAN: I have a quick 13 question. 14 Does our report explicitly raise this issue? 15 MR. CROES: Our report does not raise any issues 16 on surface or groundwater impact. 17 BOARD MEMBER C.H. FRIEDMAN: I know we didn't 18 investigate it, I take it, but do we point out that we -- 19 that we raised this concern and so that it -- 20 MR. CROES: Our report is one chapter of a 21 three-chapter report that is going to the Environmental 22 Policy Council. The chapter being written by the State 23 Water Resources Control Board and their contractor, Lawrence 24 Livermore National Lab, will completely address these 25 issues. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 42 1 BOARD MEMBER C.H. FRIEDMAN: So we say at the end, 2 if not the beginning of our report, that this is one in 3 three chapters? 4 MR. CROES: Yes. 5 BOARD MEMBER C.H. FRIEDMAN: And be sure to read 6 the others? 7 MR. CROES: Yes. 8 CHAIRMAN LLOYD: Thank you. 9 By the way, I hadn't noticed that Supervisor 10 Roberts has joined us. 11 Good morning. 12 BOARD MEMBER ROBERTS: Thank you. 13 CHAIRMAN LLOYD: Last witness on this particular 14 item is Tom Koechler, representing the ethanol industry. 15 MR. KOECHLER: Good morning. Thank you. My name 16 is Tom Koechler. I'm here today representing Parallel 17 Products, the only current ethanol producer in the State of 18 California. And hopefully after these and other proceedings 19 are over we will be joined by many others. 20 I'd like to just briefly touch on Janet's 21 comments. I mean, her questions are absolutely appropriate, 22 and I believe that that discussion has been reviewed 23 extensively by the Water Board and a study with Lawrence 24 Livermore Lab and perhaps, I notice there are people from 25 the Water Board here today, they may want to just clarify PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 43 1 issues. 2 My understanding is that ethanol biodegrades at 3 warp speed and in fact the water issue is not an issue. 4 I would like to thank staff for their work on the 5 urban airshed modeling. I think it was a very good piece of 6 work. Staff was extremely responsive. 7 And I think, Dr. Lloyd, you're correct when you 8 look at the analysis, both the previous analysis and the 9 current analysis, what it says is that the fate and 10 transport of ethanol gives you air quality benefits as good, 11 if not better, than what we currently receive from the 12 California reformulated gasoline program, which in itself is 13 very good air quality benefits. 14 I guess I would encourage if there's other runs to 15 be done to include some ancillary benefits of the use of 16 ethanol here in California, like the reduction of rice straw 17 burning that affect on air pollution, the reduction of other 18 potential wildfire burning that can be all turned into and 19 will be turned into ethanol. I think that would be 20 appropriate to include in further analysis. 21 I think you'll find that the use of ethanol on an 22 air quality issue alone will provide multi benefits for the 23 environment. 24 Just one comment, there has been talk about the 25 aromatic level of the non-oxygenated gasoline versus PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 44 1 ethanol, and I agree, Dr. Lloyd, and with Bart that these 2 are assumptions and over time they change. I would like to 3 point out that the non-oxygenated fuel that was actually 4 measured by the ARB staff in the field versus the actual 5 ethanol fuel that was measured in the field, the non-oxy had 6 twice the amount of aromatics. So just wanted to point that 7 out. 8 And lastly wanted to follow up on the peer review 9 by Dr. Seinfeld. And in his analysis, I'll quote, 10 Dr. Whitten's analysis of the effect of carbon monoxide on 11 ozone formation is correct. 12 And essentially what Dr. Whitten has been saying 13 is the carbon monoxide is extremely important to the 14 formation of ozone, and is in fact underrepresented by the 15 MIR scale. 16 Now, Dr. Seinfeld goes on to say it's not 17 appropriate to change the MIR for CO alone, but that it 18 would be appropriate to go back, and in fact I believe he is 19 recommending to go back and revisit this issue, and change 20 all of the species based upon the more accurate 3D modeling. 21 And I would encourage the board possibly to direct 22 staff in that direction, and that would be appropriate, 23 would be appropriate action. 24 I believe that's all I have. 25 CHAIRMAN LLOYD: Thank you very much, Tom. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 45 1 Any questions from the board? 2 Mr. Calhoun. 3 BOARD MEMBER CALHOUN: I think Dr. Lucas made some 4 remark, I'd like to get staff's reaction to the suggestion 5 about changing the R scale, in particular as it pertains to 6 CO. 7 MR. CROES: The comments from both Donald Lucas, 8 or Dr. Lucas and Professor Seinfeld were that the -- that it 9 would be desirable to base the reactivity scales on 10 state-of-the-science airshed models. MIRs are currently 11 based on models with simple physics with complex chemistry. 12 And the reason that was done a number of years ago 13 was because those were the models that best represented a 14 range of conditions that you would expect around California 15 and throughout the country. 16 We recognize when we adopted the reactivity scales 17 that as we developed better information with more complex 18 models that we would eventually go to using those as the 19 basis for the reactivity scales. And there's been a 20 long-term research program that has begun since the early 21 '90s to eventually go toward that objective. 22 The staff feels that we aren't there yet, and I 23 believe that the Reactivity Scientific Advisory Committee 24 would agree with that as well, but it's something that we're 25 going towards. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 46 1 BOARD MEMBER CALHOUN: Thank you. 2 CHAIRMAN LLOYD: Dean. 3 MR. SIMEROTH: Chairman Lloyd, I'd like to 4 indicate the liquid fuels used in the test program that ARB 5 conducted, the total aromatics ranged from 24 percent to 28 6 percent in liquid fuels. 7 CHAIRMAN LLOYD: Okay. That range. 8 I'd like to make two comments. 9 One I think that Bart is correct, I think in 10 heading towards the urban airshed model to look up the 11 reactivity, but on the other hand, I think that's a huge 12 exercise when you look at the fact that we still have 13 tremendous degrees of freedom outside the chemistry when we 14 do that. 15 So I understand staff and the scientific 16 community's concerns, but on the other hand I think the -- 17 you should be congratulated for supporting a lot of 18 Dr. Whitten's work which actually has consistently actually 19 pushed the issue that we have to look at CO as an ozone 20 precursor. And I think that significant strides have been 21 made in that, and I've seen that evolve over the last ten 22 years, and clearly as we've pushed the hydrocarbons down in 23 the atmosphere, then CO acting as a hydrocarbon has been 24 recognized. So I think the investment you've made on that, 25 we're reacting and putting that in there, so I congratulate PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 47 1 you for supporting that work. 2 MR. KOECHLER: I think the environment is the 3 winner, and the peer reviews essentially note that CO is an 4 essential component of ozone, and I think that's an 5 important issue to remember as we go into the next board 6 item as well. 7 Thank you. 8 CHAIRMAN LLOYD: Thank you. 9 I think that's the last witness we have. 10 Mr. Kenny, are there any written comments on that 11 item? 12 MR. CROES: Yes. We received three letters in 13 response to this item. 14 The first two letters were from the Western States 15 Petroleum Association. There's a letter dated December 3rd, 16 which actually was addressed to Dr. Bill Vance from the 17 California Environmental Protection Agency. And I clarified 18 this letter with WSPA, but apparently he was commenting on 19 the earlier draft of the report from late September. And 20 then it's superseded by a letter dated December 7th, which 21 is actually fairly complimentary that several of our 22 criticisms from early this year have been addressed. And 23 the letter primarily describes the revisions that WSPA 24 agrees have improved the results. 25 And then they outline four areas of minor PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 48 1 corrections, clarifications, and we will certainly address 2 those in the final version of the report and feel these are 3 fairly minor issues and just explains what we did. 4 We also got a letter from the Governor's Ethanol 5 Coalition signed by Larry Pearce, and it just wanted to 6 submit a report that they funded, titled, "The Fate and 7 Transport of Ethanol-Blended Gasoline in the Environment: A 8 Literature Review and Transport Modeling." 9 We had actually included a review of this report. 10 It was one of the seven reports that we reviewed in our 11 assessment of prior work. And the report is almost 12 completely focused on groundwater impacts, so we have passed 13 this report on to the State Water Resources Control Board. 14 CHAIRMAN LLOYD: Thank you. 15 Although this is not a regulatory item, Madam 16 Ombudsman, do you have any comments on the process? 17 OMBUDSMAN TSCHOGL: The process has been 18 outstanding, and I could go through a list of all of the 19 meetings that they've held and all of the attendees, but in 20 the interest of time, since process hasn't been an issue 21 with anyone's comments so far, I would be willing to pass on 22 that if that would be your pleasure. 23 CHAIRMAN LLOYD: Thank you. Yes. 24 Staff, any more comments? 25 MR. KENNY: No. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 49 1 CHAIRMAN LLOYD: Any other discussion amongst the 2 board? 3 Obviously this not a regulatory item, so it's not 4 necessary to officially close the record. 5 Entertain any questions or comments from the 6 board. 7 No? 8 If not, then we have a motion and seconded to 9 approve the report. 10 BOARD MEMBER FRIEDMAN: So moved. 11 BOARD MEMBER PATRICK: Second. 12 CHAIRMAN LLOYD: All in favor say aye. 13 (Ayes.) 14 CHAIRMAN LLOYD: Nay? 15 (No response.) 16 CHAIRMAN LLOYD: It's unanimous. 17 We will take, actually let's take just a 18 ten-minute break, give the court reporter a chance to change 19 over here and then we will resume with the item on Phase 3 20 gasoline. 21 (Thereupon a short recess was taken.) 22 // 23 // 24 // 25 // PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 50 1 CHAIRMAN LLOYD: The next item on the Agenda today 2 is 99-10-3, Public Hearing to Consider Amendments to the 3 California Reformulated Gasoline Regulations. 4 Let me start by welcoming our distinguished guests. 5 To my far right is, at the end of the dais, is Commissioner 6 Michal Moore. 7 Commissioner Moore Chairs CEC's Fuel and 8 Transportation Committee, which prepared two reports related 9 to Phase 3 gasoline. 10 The first concerned California's ability to 11 maintain adequate gasoline supplies in light of the MTBE 12 phase-out and the potential costs of alternatives. 13 We will hear more about that report after staff's 14 presentation. 15 The second report was an assessment of the 16 potential for stimulating a biomss-to-ethanol industry so 17 that Californians might directly benefit, in terms of jobs 18 and local business investments, from increased use of ethanol 19 in California. 20 You can see Commissioner Moore is very knowledgable 21 in this subject area, and I am pleased to have him with us 22 today. 23 CEC Commissioner, also, Robert Pernell, is also 24 here or shortly will be here this morning. 25 Commissioner Pernell is the second Member of CEC's PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 51 1 Fuel and Transportation Committee and an equally important 2 contributor to this process, and again, we appreciate you 3 coming. 4 I would also thank Commissioner Moore and Pernell 5 for the courtesy and opportunities extended to me at the last 6 hearing that CEC conducted, and I really appreciate that very 7 much, Commissioner Moore. 8 I would also like to point out and thank these 9 Commissioners and others, and Chairman Bill Keys, for the 10 excellent cooperation that we have had between CEC staff and 11 also with the Commissioners and the Board here to help us in 12 this tough task in fulfilling the Governor's Executive Order, 13 and I know Secretary Hickox and Secretary Nichols were 14 delighted to see this taking place. 15 Our third distinguished guest, that I do not see 16 here at the moment but we will recognize when he comes, is 17 Kip Lipper, Chief of Staff to Senator Byron Sher. 18 Senator Sher authored the bill requiring that Phase 19 3 Gasoline be at least as clean as the fuel that it will 20 replace, and I believe that staff's met that directive with 21 the final proposed regulations and I hope that the Senator 22 agrees with that assessment. 23 I guess we will welcome Kip as he arrives. 24 I should say, by the way, we do have a 25 representative here from Secretary Nichols, many of you will PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 52 1 recognize Jim from his former work at the Air Resources Board 2 Executive Office. 3 As the Governor said when he issued his Executive 4 Order last March, California will not backslide on air 5 quality nor will we sacrifice clean air for clean water. We 6 can and we will have both. 7 Earlier this week, the Governor received 8 encouraging news from a major oil company, not only was that 9 goal achievable, but it could be accomplished at relatively 10 low or no cost, provided certain conditions were obtained. 11 First and foremost, California needs to receive the 12 waiver that has been seeking from the national oxygen 13 requirement. 14 The Federal rules are simply too prescriptive and 15 will keep refiners from reaching the best, lowest cost 16 alternatives. That has to change. 17 We also need a smooth, well-managed transition. 18 The Air Resources Board will do everything in its power to 19 assist oil companies in shifting to Phase 3, non-MTBE 20 gasoline at the earliest possible date. 21 We are starting by sending a clear signal, today, 22 about what is required for non-MTBE gasoline. We will follow 23 up with assistance at the local level, doing whatever we can 24 to expedite that part of it. 25 We understand the permit issues there, the issue of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 53 1 increased truck traffic, etcetera, but I know I am speaking 2 on behalf of Secretary Hickox when we say, we are committed 3 to make sure that transition is smooth and will help industry 4 with that part of it. 5 As staff will describe, we also have additional 6 regulatory work to do next year, namely, clarifying how the 7 downstream blending process will work, dealing with the small 8 refiners' issues and setting a sulfur specification for the 9 ethanol that is blended into gasoline. 10 These have been discussed, and they are not part of 11 today's actions, although they will be addressed next year. 12 Again, I want to emphasize, this entire effort is 13 incredibly complex and is being done in an extraordinarily 14 compressed timeframe in order to comply with the Governor's 15 Executive Order. 16 Again, from my perspective, my observations of 17 seeing many long hours that staff has put in, staff has done 18 an incredible job of getting the first major element 19 completed on deadline and resolving most, if not all, the 20 biggest technical issues. 21 There are still a lot of concerns out there, to be 22 sure, but they've been considerably narrowed since this 23 process began. 24 Again, I want to commend Mr. Kenny and all his 25 staff for the tremendous efforts that they have put in and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 54 1 the flexibility they have shown and the dedicated, hard work, 2 and again, also, for the CEC staff also working with us on 3 that. 4 So, I think we are able to meet the Executive Order 5 on time. We have done a first-rate job. 6 Obviously, we are going to get comments today 7 reflecting on that, but I want to frame that in the context 8 that this was a very, very complex issue. 9 Because there's been so much dialogue with affected 10 parties, we have a bit of a moving target before us, and I 11 know staff has been working right up to the last minute. 12 Mr. Kenny, I understand that staff will tell us 13 what they initially proposed, how that has changed, and most 14 importantly, why, so that the Board and the audience can 15 follow along. 16 With that segue, I would like to ask Mr. Kenny to 17 start the staff presentation. 18 MR. KENNY: Thank you, Mr. Chairman and Members of 19 the Board. 20 As you stated, the staff's objective in developing 21 a proposed Phase 3 RFG regulations, were to eliminate the use 22 of MTBE in gasoline, to provide flexibility to refiners to 23 make or import Phase 3 RFG without MTBE and to fully preserve 24 the significant air quality benefits realized from the 25 current California RFG 2 regulations. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 55 1 In developing the proposal, staff was sensitive to 2 the growing demand for gasoline in California and the 3 realization that gasoline imports will be increasingly needed 4 on a routine basis in the future. 5 Staff has also provided flexibility in their 6 proposal to facilitate the use of ethanol in California to 7 also address this issue. 8 Staff is proposing reduction in sulfur and benzene 9 levels to preserve current emissions benefits. To increase 10 refiners flexibility, staff is proposing increases in the 11 flat, averaging and cap limits for T50 and T90 12 specifications. 13 I would like to mention that ARB staff has worked 14 closely with the California Energy Commission staff to assist 15 with a number of the issues, in particular, gasoline supply, 16 distribution and cost. 17 ARB staff is deeply indebted to the CEC staff. 18 They really have helped us immensely, and I would like to 19 essentially express the staff's appreciation to them. 20 CEC staff will also make a presentation to the 21 Board, and they are also here to respond to any questions 22 that the Board may have. 23 CHAIRMAN LLOYD: Mr. Kenny, I just wanted to point, 24 before the staff presentation, I would like to let 25 Commissioner Moore make some introductory comments as well. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 56 1 So, when you have completed your introductory 2 comments, we will turn it back to Commissioner Moore. 3 MR. KENNY: I have just completed them, and I will 4 turn it back to you. 5 CHAIRMAN LLOYD: Yes. Good team work. 6 That also actually highlights my error when I 7 should have turned it over to Commissioner Moore, before I 8 turned it over to you Mr. Kenny, so, thank you. 9 COMMISSIONER MOORE: Verifying that timing is 10 everything. 11 Good morning. I'm Michael Moore. 12 As the Chairman indicated, I'm a Commissioner at 13 the California Energy Commission, and I'm the Presiding 14 Member of our Fuels and Transportation Committee, which has 15 overseen the work that was quoted by your Chairman. 16 I want to thank you very much for giving me the 17 opportunity to speak here today, and I brought two of my 18 staff members, Tom Glaviano and Gordon Schremp, to make a 19 presentation, very brief, about the results of our study, and 20 they will be available. 21 I'm getting too much gain on the microphone. 22 They will be providing some background for you and 23 also be available to answer questions on our analysis of the 24 economic implications of producing CARB Phase 3 gasoline 25 without MTBE. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 57 1 Since the position of our work assumed an oxygenate 2 waiver, I cannot over emphasize the importance of Governor 3 Davis' statement regarding the need for a waiver from the 4 Clean Air Act requirements. 5 For some companies, a Federal waiver could reduce 6 the cost of making Phase 2 gasoline to nearly zero and 7 expedite the phase-out period of MTBE to less than one year 8 under certain, very controlled circumstances, and as any 9 other Commissioner will tell you, making a set of controlling 10 assumptions, which we will introduce for you in our 11 presentation, as you listen to our CEC-based conclusions, 12 keep in mind that we find that the majority of any actual 13 production cost increases will be the result of making the 14 gas without MTBE, not necessarily the CARB 3 regulations. 15 We find that less than one cent on a per gallon 16 basis can be attributed to making the Phase 3 gasoline, which 17 captures current air quality benefits as directed by SB 989. 18 I want to point out to you that these are average 19 production cost increases, not projected retail street 20 prices, which can vary widely by geography and by season and 21 by incident, if anything else is happening around the state. 22 As you, the Board Members, consider adopting CARB 23 Phase 3 regulations today, without using MTBE, I want to 24 remind you about the retail price spikes we experienced this 25 past summer, you may be aware that there are some out there PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 58 1 who blame CARB regulations primarily caused these spikes, we 2 do not find that to be true. 3 Our analysis of the behavior of the market would 4 suggest that while fuel specifications can be a contributing 5 factor, one of many, they are not the sole cause. 6 The primary causes are geographic distance to the 7 next available source supplies in, namely, the U.S. Gulf 8 Coast, coupled with a level of market demand which in peak 9 periods basically equals in-state refinery production 10 capacity. 11 Geography is a problem for all of the West Coast. 12 This summer, refinery and pipeline problems in Washington and 13 Oregon resulted in gasoline prices that were for a short 14 period of time higher than California's. 15 That happened in spite of the fact that the 16 Northwest relies on conventional specification gasoline. The 17 main problem in the West Coast is that it takes much longer 18 for us to get gasoline supplies and components from the Gulf 19 Coast than it does for the rest of the United States and that 20 basically our refinery base is straining to meet current as 21 well as projected demands. 22 The consequence of all those factors is the price 23 volatility, and we cannot simply will it away. Price 24 volatility has been with us in the past. It is here with us 25 currently and we expect it to continue in the future. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 59 1 The severe refinery production outages that we 2 experienced this summer would have resulted in greatly 3 increased prices regardless of the fuel specification used. 4 While it is true that having conventional gasoline 5 specifications may have shaved some of the price spikes, we 6 feel very strongly that it could not have prevented the 7 situation. 8 Again, as I pointed out, Washington and Oregon 9 experienced similar price spikes, even though they have 10 conventional specifications. 11 With this in mind, I am directing my own staff to 12 investigate potential mitigation strategies that may reduce 13 this volatility in the future. 14 I anticipate holding several workshops and hearings 15 next year to look into this issue. I will be inviting your 16 Chairman and his representatives to participate closely, 17 literally, as if they were part of the CEC machine, and 18 machinery, as we begin to investigate those, and I will be 19 pleased to make the results available to you through your 20 staff and in person should you wish. 21 Following your staff's presentation, my staff would 22 like to make a short presentation about the results that we 23 had in our study. 24 Thank you, Mr. Chairman. I appreciate being here 25 this morning. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 60 1 CHAIRMAN LLOYD: Thank you very much for those 2 comments and also for being here as well. 3 May we continue with the staff presentation, Mr. 4 Kenny? 5 MR. KENNY: I think we are ready to begin. 6 MR. BRISBY: Thank you, Mr. Kenny. 7 Good morning, Mr. Chairman and Members of the 8 Board. Today I will present to you the staff's 9 recommendation on the proposed California Phase 3 10 reformulated gasoline regulations. 11 I will provide some background information on the 12 events leading up to today's hearing. I will first describe 13 the staff's original proposal as presented in the October 14 staff report and then describe the changes we are proposing 15 today. 16 I will then discuss the effect of staff's 17 recommendation, discuss future activities and conclude with 18 the staff recommendation. 19 The Board has a long history of regulating gasoline 20 properties to reduce motor vehicle emissions. As this slide 21 shows, there have been at least seven major California 22 programs that have set specifications for gasoline. 23 The Phase 2 gasoline regulations were implemented 24 in 1996 and includes specifications on these eight 25 properties. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 61 1 This table summarizes the basic Phase 2 gasoline 2 specifications. The specifications were set to achieve the 3 maximum feasible reductions in emissions and to provide 4 flexibility. 5 Suppliers can comply in various options. One 6 option is to simply meet the flat limits. Another is to use 7 the predicted model to set alternative limits. Under no 8 circumstances may the cap limits be exceeded. 9 Almost all gasoline for sale in California is 10 produced using the predicted model compliance option. The 11 predicted model compliance option uses a set of mathematical 12 equations relating changes in vehicle emissions to changes in 13 fuel properties. 14 This increases the refiner's flexibility to produce 15 complying gasoline by allowing the refiner to trade off 16 emissions straight off increases in some fuel parameters for 17 decreases in others, while remaining emissions equivalent 18 with the flat limit specifications. 19 This increases production flexibility and reduces 20 cost of production. 21 The Phase 2 gasoline program has resulted in 22 greater benefits than originally estimated. This is because 23 in order to assure compliance with the Phase 2 gasoline 24 specifications, refiners produce fuels that are cleaner than 25 required. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 62 1 The additional emission reduction is about 30 tons 2 per day of hydrocarbons and NOx and about a 12 percent 3 reduction in potency weighted toxics. 4 It should be noted that these are the additional 5 emissions benefits that must be preserved in the Phase 3 6 gasoline regulations. 7 Further, the cost of the Phase 2 gasoline program 8 proved to be significantly lower than the staff's original 9 estimate. Originally the staff estimated the cost of 10 production to be between 5 and 15 cents per gallon. 11 In 1996, after the program was implemented, the 12 California Energy Commission estimated the increase in price 13 associated with the Phase 2 gasoline to be between 5 and 8 14 cents per gallon. 15 November of this year, a report prepared for the 16 State Attorney General's Office, estimated the price increase 17 for Phase 2 to be about 4 cents per gallon. 18 Since the late 70's, oxygenates were used primarily 19 to increase octane in gasoline. The 1990 Federal Clean Air 20 Act Amendments required oxygen sold in Federal CO 21 Nonattainment Areas to contain oxygen, starting in 1992, and 22 required that reformulated gasoline in severe extreme ozone 23 nonattainment areas to contain oxygen year-round, starting in 24 1995. 25 Based on its economic and blending characteristics, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 63 1 MTBE became the oxygenate of choice for most refiners. 2 California's rules are more flexible than the 3 Federal requirements. Our regulations can be met without the 4 use of oxygenates as long as emission benefits are preserved. 5 The oxygenates are only required in the winter in 6 carbon monoxide nonattainment areas, which today is limited 7 to the South Coast. 8 However, the Federal oxygen requirement still 9 applies year-round in the Federal RFG areas in the state. 10 Shown here are the Federal RFG areas. When San 11 Joaquin Valley becomes a Federal RFG area, up to 80 percent 12 of California's gasoline will have to contain oxygen. 13 On March 25, 1999, Governor Davis issued an 14 Executive Order to phase out MTBE from California gasoline. 15 The Executive Order directs the ARB to adopt Phase 3 gasoline 16 regulations to provide additional flexibility in lowering or 17 removing MTBE and to preserve emission benefits. 18 Governor Davis also directed the ARB to pursue a 19 waiver from the Federal oxygen requirement from the U.S. EPA. 20 Other key directives are listed here. The Sher 21 Bill signed into law in October 1999 by Governor Davis, 22 requires the ARB to assure the Phase 3 regulations maintain 23 or improve upon emissions and air quality benefits while 24 providing additional flexibility to reduce or remove oxygen 25 from motor vehicle fuel. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 64 1 The Sher Bill also establishes that future 2 regulatory changes must be reviewed by the Governor's 3 Environmental Policy Council. 4 Governor Davis also signed the Bowen Bill in 5 October. It establishes a mechanism for conducting a 6 multi-media review of revisions to the ARB's reformulated 7 gasoline standards. The Environmental Policy Council review 8 is scheduled for January 18. 9 I will now describe the staff proposal as published 10 in the October staff report. Subsequently, I will present 11 the staff's proposed amendments to the original proposal. 12 Today, the staff's proposal is responsive to the 13 Governor's Executive Order. 14 Consistent with this, our objectives are to 15 prohibit the addition of MTBE to California gasoline and to 16 preserve the current emission benefits while providing 17 flexibility in meeting the regulatory requirements. 18 The proposed changes will also help enable the use 19 of ethanol, offset losses in gasoline production and will 20 accommodate imports. 21 The staff held various meetings with individual 22 stakeholders and also held nine public workshops. We worked 23 closely with the California Energy Commission on supply and 24 cost issues. 25 We were advised by consultants from the University PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 65 1 of California. Also, the staff proposal was peer reviewed 2 following the California Environmental Protection Agency 3 formal process for conducting peer reviews. 4 As originally proposed in the October staff report, 5 the regulations would prohibit the use of MTBE, make changes 6 to the gasoline specifications, make changes to the 7 predictive model, provide a carbon monoxide credit, make 8 changes to accommodate 10 percent ethanol blends, change the 9 winter time oxygenate season for the South Coast and amend 10 the regulations to facilitate the blending of ethanol 11 downstream of a refinery. 12 Initially, we proposed specifications for denatured 13 ethanol and a DI specification. As will be discussed, 14 subsequently, the staff will be recommending that these two 15 proposals be removed. 16 In the next few slides, I will provide more details 17 on these items. 18 Consistent with the Governor's Executive Order, 19 staff proposes to prohibit the addition of MTBE to California 20 gasoline beginning December 31, 2002. Staff is proposing 21 diminished residual levels for MTBE that would be phased in 22 overtime. 23 Staff originally proposed that the flat, averaged, 24 and cap limits for sulfur and benzene be reduced to assure 25 benefits are preserved. Staff also proposed that the flat, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 66 1 average, and cap limits for T50 and T90 as well as the cap 2 limit for aromatic hydrocarbons be increased to provide 3 additional flexibility. 4 Finally, staff proposed RVP be allowed to vary with 5 use of the proposed evaporative emissions model. 6 With time, the California fleet has changed. We 7 are proposing the predictive model be updated to reflect 8 these changes in the fleet and include new data that has 9 become available since the original adoption of the 10 predictive model in 1994. 11 We have taken advantage of more powerful 12 statistical tools and the new data to make the predictive 13 model representative of the current and future fleet by 14 adding a new vehicle technology class representing 1996 and 15 newer vehicles. 16 The staff is proposing to add an evaporate 17 emissions element to the predictive model. This would allow 18 refiners to vary RVP to gain flexibility in producing 19 gasoline. 20 This would allow trading between exhaust and 21 evaporative hydrocarbon emissions. 22 Staff is proposing to provide a credit that 23 recognizes the role of carbon monoxide in ozone formation. 24 CARBOB, stands for California reformulated blend 25 stocks for oxygenate blending, and is gasoline formulated PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 67 1 without oxygen, such that when ethanol is added, it becomes a 2 fully complying gasoline. 3 Staff has proposed some changes to the existing 4 CARBOB provisions to facilitate the use of ethanol, but 5 further changes will be needed. 6 We are committed to working with all stakeholders 7 to further update the CARBOB provisions next year. Staff 8 also proposes to adjust the oxygen cap to accommodate 10 9 percent ethanol blend. 10 The staff proposes to remove the winter time 11 oxygenate requirement in the South Coast Air Basin for the 12 month of October to eliminate the overlap for the RVP control 13 season. 14 During the month of October, there has only been 15 one exceedence of a CO standard in the South Coast in the 16 last four years. 17 With this proposal, staff does not expect future 18 exceedences in the month of October in the South Coast. 19 What I have presented so far was the initial staff 20 proposal as contained in the staff report. Since the 21 report's release, staff has continued discussions with 22 numerous parties. 23 As a result, we are now proposing some 24 modifications to the original proposal. If approved by the 25 Board, these will be subject to a 15-day public comment PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 68 1 period. 2 These changes include the following: 3 First, we are proposing additional modifications to 4 some of the fuel property limits. We are proposing small 5 refinery provisions. 6 We are providing early access to the Phase 3 7 program, and we are proposing that upon the Board's approval 8 of MFAC 2000, that the technical changes shown here be made 9 to the predictive model. 10 We are also proposing to eliminate the originally 11 proposed DI specification, and finally we are proposing to 12 defer setting denatured ethanol specifications and consider 13 those specifications in concert with the additional changes 14 to the CARBOB provisions next year. 15 This table shows the changes we are proposing to 16 the fuel specifications. 17 We are proposing a two-degree increase in the T50 18 flat and average limits. We are also proposing to reduce the 19 T50 and T90 cap limits to be the same as in the existing 20 Phase 2 regulation, and finally, we are proposing to remove 21 the DI specification. 22 Before leaving this slide, I want to note that the 23 actual fuel produced pursuant to this regulation will be 24 somewhat cleaner than the specification shown here. 25 This is because refiners must produce fuels PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 69 1 somewhat cleaner than the specifications to assure that they 2 stay in compliance. 3 With respect to changes to the T50 specification, I 4 want to note that these specifications still meet our 5 original objectives to preserve the benefits while providing 6 increased flexibility to refiners in removing MTBE. 7 Since the staff made its initial proposal in the 8 staff report, we obtained better information on how much 9 cleaner 1998 in-use fuels were compared to the Phase 2 10 specifications. 11 It is the benefit of the cleaner 1998 in-use fuels 12 that we are capturing with the Phase 3 specifications. 13 Because of this additional information, staff is able today 14 to provide, propose a minor increase in the T50 specification 15 to provide further flexibility to refiners while still 16 preserving the benefits of the current program. 17 The staff is proposing provisions for small 18 refiners. This is consistent with the Board's history of 19 considering the needs of small refiners. 20 Unfortunately, small refiners with less complex 21 refineries have an economy of scale disadvantage and are 22 disproportionately affected by the removal of MTBE. 23 Staff's proposal would only apply to small refiners 24 that produce complying Phase 2 gasoline in 1998 and 1999. 25 Small refiners will be subject to a production PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 70 1 volume limit on the amount of California reformulated 2 gasoline produced. 3 Staff believes any increase in emissions associated 4 with the use of small refinery gasoline provisions should be 5 mitigated by the production of a cleaner diesel fuel. 6 Amendments to the diesel regulation cannot be made 7 as part of this rulemaking, but the staff are committed to 8 address the necessary changes to the diesel fuel regulations 9 in a future rulemaking. 10 Here are the proposed small refinery limits which 11 include higher flat limits for certain properties. However, 12 small refiners must still comply with same cap limits as 13 large refiners. 14 The staff is proposing to allow refiners the option 15 of early access to the Phase 3 regulations which could 16 facilitate the early removal of MTBE. 17 As you know, the staff are still developing 18 recommendation for MFAC 2000. The staff proposed for the 19 Board to allow the Executive Officer to adopt the appropriate 20 technical changes to the predictive model after the Board has 21 approved MFAC 2000. 22 Phase 2 reformulated gasolines have very favorable 23 driveability characteristics. This is mainly due to the 24 current caps on T50 and T90. 25 Since today's proposal is to restore the T50 and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 71 1 T90 caps to the Phase 2 limits, we no longer believe that a 2 DI specification is needed. Therefore, we are proposing an 3 elimination of DI. 4 However, staff believes that a national DI 5 specification would produce emission benefits and are 6 proposing to request the U.S. EPA to consider such 7 specifications. 8 Finally, staff is proposing to delay consideration 9 of the denatured ethanol specifications and have them 10 considered as part of the CARBOB amendments to be considered 11 by the Board next year. 12 I will now describe the effects of today's 13 proposal. I will go through the items listed here. 14 With respect to emissions, the staff's proposal 15 meets the Governor's directive to preserve real world 16 emission benefit. 17 I will outline the process the staff used to 18 demonstrate that emission benefits are being preserved. 19 First, the staff determined the average properties 20 and the emission benefits of gasoline marketed in 1998. Then 21 we proposed specifications for Phase 3 gasoline that would 22 preserve these benefits. 23 As a check, staff then verified that the proposed 24 specifications are more stringent than the current 25 specifications. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 72 1 As this slide shows, the staff proposal preserves 2 the benefit of the current program. As shown here, 3 hydrocarbon emissions are essentially equivalent, and there 4 are some modest benefits for oxides of nitrogen and potency 5 weighted toxics. 6 Since the publication of the staff report, staff 7 now believes that the actual capital costs are significantly 8 less than $1 billion. 9 Most of these costs are associated with removal of 10 MTBE. 11 In the October staff report, ongoing costs were 12 estimated to be between 2 and 6 cents per gallon. 13 However, representatives of the ethanol industry 14 and at least one refiner believe that the ongoing cost will 15 be less than staff's estimate. 16 With a waiver from the Federal minimum oxygenate 17 requirement, the costs are expected to be reduced by up to 2 18 cents per gallon. If alkylate blendsstocks and ethanol costs 19 are significantly less than estimated, then the cost could be 20 zero. 21 The proposed Phase 3 gasoline regulations will 22 limit MTBE contamination to pre-existing contaminated 23 sources, and lower benzene content in gasoline will result in 24 less benzene contamination of surface and groundwater. 25 However, increased ethanol use may result in a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 73 1 slight increase in emissions from increased rail and 2 heavy-duty truck traffic from transporting ethanol. 3 Also, there will be no increase in greenhouse gas 4 emissions and a decrease expected to the extent that ethanol 5 is produced from California biomass. 6 Phase 3 gasoline should result in equivalency on 7 hydrocarbon emissions and a slight decrease in NOx potency 8 weighted toxics. 9 In the previous Board item, you heard the ARB's 10 evaluation of the environmental fate and transport of ethanol 11 in air. 12 The State Water Resources Control Board is 13 conducting a similar assessment for water. The Office of 14 Environmental Health Hazard Assessment is currently 15 evaluating the health impacts associated with replacing MTBE 16 with ethanol in California gasoline. 17 The reports from the Air Resources Board, State 18 Water Resources Control Board and the Office of Environmental 19 Health Hazard Assessment are to be considered by the 20 Environmental Policy Council on January 18. 21 There is a commingling effect from mixing gasoline 22 containing ethanol and gasoline without ethanol. When 23 gasoline with ethanol is blended with gasoline without 24 ethanol, the RVP increases. 25 The increased vapor pressure of the resulting PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 74 1 mixtures of gasolines will increase evaporative emissions. 2 Since the staff report was released, we have done 3 further work to quantify this effect. The effect on emission 4 depends on various factors, such as whether the oxygen 5 waivers granted; refiner choices; who will use ethanol, in 6 what areas and at what levels; consumer choices, such as 7 brand loyalty and grade loyalty play a significant role. 8 The effects of commingling are very sensitive to 9 these assumptions. 10 The staff's estimate of commingling is that it 11 could increase the average vapor pressure by about .1 pounds 12 per square inch. 13 The staff's proposal provides a cushion to address 14 this potential impact. 15 The staff proposes that a commingling study be 16 completed by December 2001 to assure that we have properly 17 accounted for any adverse effects of commingling. If this 18 study shows that commingling is having a larger than expected 19 adverse impact on emissions, staff will consider proposing 20 additional changes to the regulations to mitigate the 21 effects. 22 We followed the Cal EPA formal process for 23 conducting peer review of the staff proposal and the 24 predictive model. As presented earlier, three individuals 25 conducted the peer review. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 75 1 On balance, their assessment is that the regulation 2 meet the stated goals of providing flexibility while 3 preserving emission benefits. 4 Two of the peer reviewers, Dr. Lucas and Dr. 5 Koshland are present and available to answer your questions. 6 The next steps are, the staff proposes to use 7 today's action to follow-up on the request for a waiver from 8 the Federal oxygenate mandate. Staff proposes that the Board 9 allow the Executive Officer to adopt the appropriate 10 technical changes to the predictive model after the Board 11 approves MFAC 2000. 12 The staff proposes to return before the Board by 13 next October with the CARBOB provisions including standards 14 for denatured ethanol and finalize the small refiner 15 provisions. 16 The staff proposes that we request U.S. EPA to 17 consider a national specification for Driveability Index. 18 The Environmental Policy Council will review the 19 Phase 3 regulations and the environmental fate and transport 20 assessment of ethanol. 21 The staff will monitor refinery progress towards 22 compliance with removing MTBE from California gasoline. 23 With the Board's approval, the staff is proposing 24 to do the following: To conduct a study, to collect the 25 information necessary to assure that we have addressed the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 76 1 commingling issue and will develop appropriate 2 recommendation; evaluate real world Phase 3 gasoline 3 properties to assure that the real world benefits of the 4 Phase 2 gasoline are preserved; evaluate the DI of Phase 3 5 gasoline as well as work with the California Energy 6 Commission on impacts of near zero sulfur levels in gasoline. 7 We recommend that the Board adopt the staff 8 proposal as modified today to phase out MTBE and to provide 9 refiners with additional production flexibility while 10 maintaining the emissions benefits of the existing 11 reformulated gasoline program, and that the Board direct 12 staff to return no later than October 2000 to address the 13 CARBOB denatured ethanol specifications and small refiner 14 provisions. 15 This concludes my presentation. I would like to 16 return to Mike Kenny, please. 17 MR. KENNY: I think at this point we are prepared 18 to hear from California Energy Commission. 19 CHAIRMAN LLOYD: Thank you, Steve. 20 MR. SCHREMP: Thank you, Mr. Kenny. 21 My name is Gordon Schremp. I'm on staff at the 22 Fuel Resources Office of the California Energy Commission. 23 I have been working with CEC for about nine years, 24 and we have been working on these MTBE matters and clean fuel 25 matters for approximately that same period of time. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 77 1 Today, I will keep my comments brief and concise as 2 I can and try to give the Board Members a brief overview of 3 our findings concerning the economic impacts of removing MTBE 4 and going to Phase 3 reformulated gasoline specifications. 5 In my opening remarks, I would talk about three 6 items, first of which is to reemphasize the importance of 7 removal of the minimum oxygen requirement, how important that 8 is to make gasoline in California without MTBE, and under 9 Phase 3 specifications, and that additional flexibility 10 results in declining average production cost for refiners. 11 The second point is the average production cost of 12 Phase 3 proposal alone, absent the phase-out of MTBE, is 13 quite modest, a third of a cent to approximately 1.2, and the 14 total cost could be less, as you heard by the Air Resources 15 Board earlier, one cent or even smaller if ethanol prices 16 that we assumed are today's price come 2003 and alkylates are 17 available in ethanol supply at modest prices. 18 Next slide please. 19 A description of what we mean by cost. We are 20 looking at the change in average production costs for all 21 refineries in California compared to today's gasoline 22 containing MTBE. 23 Now, those costs embody several components, 24 variables of cost, that is something like paying more for 25 oxygenate or more for a gasoline component compared to today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 78 1 Refinery capital charges are what is known as 2 refinery investments and how that translates into cents per 3 gallon. Ancillary refining costs are such things as building 4 additional tankage to handle numerous types of imported 5 products and finish components. 6 Logistic costs which are sold for the ethanol cases 7 and that is, change all the terminals to be able to receive, 8 store and blend ethanol, that is only about a tenth of a cent 9 per gallon, and mileage change impacts, that means basically 10 if the energy content of the gasoline changes compared to 11 today, if it has more energy, you can go a little bit further 12 on a gallon of gasoline, and that is a savings. 13 If it has a little bit less energy, which you will 14 see from the ethanol cases, then that is a little bit extra 15 cost. 16 Next slide, please. 17 Basic cases we looked at, we have to start 18 certainly from where we are today, and we call that a base 19 case. Then we went into three stages. 20 We looked at and tried to quantify impact of just 21 phasing out MTBE, and then what would be the economic impact 22 of phasing out MTBE and going to Phase 3 specifications, and 23 a third look is what would happen if the distillation 24 temperature were a bit higher for T50 or T90, and as we have 25 heard today, a revised proposal before the Board is 213, 14, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 79 1 15 and we look at a T50 of 214, so the results are 2 comparable. 3 Then we looked at what would happen if the waiver 4 was granted, and then we looked at ethanol at different 5 volumes and finished up with all the gas in California 6 containing the absence of oxygenates. 7 Next slide, please. 8 As you can see from this graphic, once again to 9 reiterate, the cost of just the regulation itself is 10 one-third of a cent to 1.2, depending on the case, and the 11 combined cost of also phasing out MTBE is a little less than 12 3.5 to less than 6.5 cents. 13 The investments do range towards $900 million, that 14 is for both phasing out MTBE and going to a Phase 3 gas 15 specification, and the investment is rather smaller for just 16 the Phase 3 components, and that is anywhere from almost a 17 reduction of $20 million to upwards of $210 million, so it is 18 significantly less than the range on the slide. 19 Next slide, please. 20 Imports, certainly when MTBE goes away, we are 21 about 85,000 barrels a day we are importing, we are going 22 need some replacements for that. In many of the cases, that 23 is ethanol, anywhere from 50,000 per day upwards of 80,000 24 barrels per day. 25 We also are going to be needing some additional PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 80 1 gasoline blank pumps that we talk about here, alkylates, and 2 so those two combined with some other smaller gasoline 3 components, can be upwards of 275,000 barrels per day, so 4 there is a rather significant increase in imports. 5 Those imports are expected to come from such places 6 as the Pacific Northwest, U.S. Gulf Coast, Europe, Virgin 7 Islands and other locations. 8 Something we call rejected blendstocks, when you 9 use ethanol, it does increase the volatility of your blended 10 gasoline, and during the summer months, what we are typically 11 out to do is remove certain components from his gasoline 12 pool, we call those pentanes, and some other components that 13 may be have some very high sulfur, such as what comes out of 14 certain process used in the refinery. 15 We say that those are rejected, meaning that those 16 would be shipped outside the state and sold in other markets 17 for other uses and not put in today's gasoline. 18 Back to the cost, the primary factor for the 19 expense is the more expensive imports that we have in our 20 refinery models for both ethanol and for those import 21 gasoline components called alkylates. 22 I have broken the cost into two components. This 23 is first of all the MTBE cost components, and the second 24 added on to that is the Phase 3 proposal in the October 22, 25 staff report. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 81 1 Once again, as you can see, the total cost impact 2 of just the regulation itself is rather minimal compared to 3 the overall cost estimate for these modeling results. 4 In the next slide, just to give you sort of a 5 flavor of the imports that are coming here, as you can see, 6 there is a lot alkylates, in the ethanol case, certainly we 7 have sizable imports of ethanol, and that is anticipated to 8 come primarily from the midwest of the United States, and in 9 the final no oxy, we have CARBOB, and as Steve explained, 10 that is the base gasoline before blending. 11 In this case, it would already be finished 12 gasoline. 13 Just as a way of example, down at the bottom, for 14 explanation, the oxy waiver, the first column on the left is 15 just the mandate, the mandate is removed or lifted. 16 The second column is being blended 2 weight percent 17 or about 5.7 percent by volume, and the third bar is 2.7 18 weight percent, which is about 7.8 percent by volume of 19 ethanol, and all the gasoline, and the final bar, of course, 20 does not contain any ethanol in the California gasoline, but 21 some ethanol in the gas being produced, that is why you see a 22 slight amount of ethanol in that stacked bar. 23 Next slide, please. 24 Now the average cost estimates we have, could they 25 be lower? Could they be higher? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 82 1 Yes, they can be. 2 Certainly, that depends on a lot of what you have 3 in the refinery model and what your assumptions are for 4 various things, such as the price of ethanol and the price of 5 alkylate. 6 So, just listing on a few sub bullets here of why 7 it could be lowered or significantly lower, and if you have 8 an over build in the ethanol supply industry, and almost an 9 abundance of ethanol and certainly the assumed price we had, 10 could decline significantly. 11 Once again, the Federal oxygen requirement was 12 eliminated, then that certainly means you do not have to 13 import as much ethanol as a 100 percent gasoline with 14 ethanol, and so you are paying a little bit less. 15 The elimination of import tariff to allow it to 16 come in from other locations other than midwest United 17 States, from such locales as Brazil, less expensive 18 alkylates, same situation, there is over build in the 19 alkylates supply industry, there is an anticipation of the 20 commodity, and it can be more abundant and less expensive 21 that we anticipated in this model. 22 Production of something called Isooctane, that 23 means basically you take an MTBE requirement, revert it to 24 produce a pure type of alkylate that has an octane blending 25 of 100 or a very valuable point, nobody does that at this PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 83 1 time, but we understand that there are several companies are 2 examining that possible outcome over the next three years. 3 Next slide, please. 4 One other factor that could help decrease the cost 5 is to lower the shipping cost. 6 Two bullets up there, if there is an over build in 7 the marine product tanker supply from shipping companies 8 anticipating greater products being moved from one locale to 9 another, and we have almost a glut of foreign flag vessels, 10 then you can see a decrease in the price of those when you 11 ship material from a foreign source. 12 Now, in the United States, if you move products 13 from one U.S. port to another, you must use U.S. Jones Act. 14 If that provision was eliminated, and then California's 15 suppliers could certainly pick any shipping company they 16 wanted, regardless of which flag, then that could help lower 17 the cost as well. 18 Ethanol right now is not blended at the refinery 19 and shipped through the pipelines terminals farther away from 20 the refinery. What a lot of places in the United States do 21 is actually ship a base gasoline to a terminal, store ethanol 22 at that terminal, and then when the tanker truck pulls up, 23 blend the two into the tanker truck at that time. 24 If, in fact, and the real reason this is done is 25 ethanol has an infinity for water, and the contaminants PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 84 1 associated with the water that you will find in the pipeline 2 system, and so there is a quality control issue here, and if 3 the pipeline companies can in fact deal with this issue, and 4 somehow be able to ship blended gasoline into ethanol, then 5 it could lower the cost and increase availability, and 6 loading components. 7 U.S. sulfur standards are set to go lower and that 8 will certainly cause investment outside of California to make 9 lower sulfur blending components, and I think that will be 10 good news for California. 11 They will be available. If necessary, they will 12 have more potential suppliers for lower sulfur components. 13 Next slide, please. 14 Now, on the flip side, could our cost impacts be a 15 bit higher? 16 Yes, that is possible. 17 Contrary to over building, ethanol supply could 18 under build. There is hesitation to build additional ethanol 19 supply facilities, and come 2003, we do not see quite enough 20 new construction for ethanol. 21 You can see an increase in the supply cost. MTBE 22 banned outside of California in the northeastern United 23 States, Texas, upper midwest, if MTBE were to be banned in 24 these locations as well, and they would provide more ethanol, 25 and there is still an oxygen mandate in place, you could see PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 85 1 a higher price for ethanol, and elimination of the Federal 2 excise blending tax credit for using ethanol, if that were to 3 be removed, then you would see a higher price for ethanol as 4 well. 5 What could add to the price of the alkylate from 6 where we assumed? Same situation. 7 There is not enough alkylate supply built in the 8 United States or other locations in the world, or there is a 9 greater demand for cleaner fuel specifications, not only in 10 the rest of the United States but also in Europe and other 11 locales, and of course, the MTBE being outside of California, 12 will also spur people to want to use more alkylate as MTBE 13 goes away. 14 Next slide, please. 15 Finally, I think a decrease in ability of importers 16 to continue suppling products to California, right now there 17 are a number of companies outside of California that do 18 supply gasoline from time to time, modest volume at times and 19 much greater volumes at others. 20 Will those companies still supply in the future? 21 It is likely that they will, but some may not be able to with 22 the change in specifications and removal of MTBE. 23 So, we will see what happens over the next three 24 years, but if they do not make the modifications, then that 25 could limit the number that currently are provided. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 86 1 Contrary to that, as I said earlier, cleaner fuel 2 standards will spur others outside of California to make 3 investments in the refineries. Decrease in the availability 4 of desirable blending components, and as I, once again, 5 reiterate, cleaner fuel standards will cause people to look 6 for cleaner components where they are making the gasoline 7 outside of California, and so those components will become 8 more desirable and could become more expensive. 9 No alkylate availability and refiners would instead 10 build all the alkylate capacity within California at a higher 11 capital charge rate. 12 So, this concludes my rather brief overview of our 13 findings, and at a later time I will be happy to answer any 14 questions that the Board might have. 15 Thank you very much. 16 CHAIRMAN LLOYD: Thank you very much, Gordon. 17 We appreciate that. 18 Yes, hold on Gordon. We have one quick question 19 from one of the Board Members. 20 Mr. Calhoun. 21 BOARD MEMBER CALHOUN: Mr. Schremp, you mentioned 22 the Federal excise tax credit which is a subsidy. 23 Do you know how much that is per gallon? 24 MR. SCHREMP: Yes. 25 It is about 5.4 cents per gallon, if you blend PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 87 1 ethanol in the gasoline, 10 percent by volume, and then they 2 prorate it at two other levels. 3 If you blend it 7.8 percent by volume, or 5.7, what 4 it works out to be is 54 cents for a gallon of ethanol. So, 5 if you are buying ethanol for, let's say, a dollar, your net 6 cost as a refiner, if you blend it, is the one dollar minus 7 the 54 cents or 46 cents. 8 CHAIRMAN LLOYD: Yes. 9 Supervisor DeSaulnier. 10 BOARD MEMBER DeSAULNIER: Do you have in ball park 11 numbers the percentage of difference in the capital cost 12 versus the transport cost in the increase? 13 MR. SCHREMP: When you say the transport cost -- 14 BOARD MEMBER DeSAULNIER: What I am looking at is 15 that the capital of the refineries versus the transport cost 16 for ethanol in particular, because early on, at least the 17 petroleum folks would tell me that ethanol was more expensive 18 because of transporting by truck versus pipeline. 19 MR. SCHREMP: Actually, I think either bringing it 20 by truck, that would be after the ethanol has already been 21 delivered to California, either marine port or a terminal, 22 distribution point and moving it from that point within the 23 state, the tanker trucks is not very expensive at all. 24 BOARD MEMBER DeSAULNIER: So, it is mostly the 25 capital cost? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 88 1 MR. SCHREMP: Yes. 2 BOARD MEMBER DeSAULNIER: Why is it that the 3 capital cost drops so significantly between our earlier 4 estimates and the estimate now? 5 MR. SCHREMP: Well, I think the primary reason is 6 really the higher distillation temperatures actually drop the 7 capital expenditure requirements, and if you look at the 8 mandate going away, and there is flexibility in the industry 9 to blend ethanol at a level that is most economical for the 10 state as a whole, which is about 60 percent of the gas that 11 would contain ethanol, that can decrease the refiner 12 investment significantly, because they do not have to make 13 modifications to make all of there gasoline contain ethanol, 14 just a portion. 15 CHAIRMAN LLOYD: Did I get that right? 16 You are saying that the staff's working with the 17 industry to give them additional flexibility to help reduce 18 costs? 19 MR. SCHREMP: Yes, I believe that is correct. 20 BOARD MEMBER C.H. FRIEDMAN: I have one quick 21 question. 22 You were talking about the cost impacts and the 23 various cases examined, and you reviewed the three stages 24 briefly, the last at which was a higher distillation 25 temperatures, and you mentioned specifically the two degree PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 89 1 increase allowance in the T50, but I did not hear you mention 2 the T90, and I understand there is a five degree increase 3 allowed in the flat and averaged limits, not in the cap, but 4 was that cost in, too, or did you take that into account? 5 MR. SCHREMP: Yes, we did. 6 Under the cases that I call higher distillation 7 temperatures, you are correct, Supervisor, it is both for 8 higher T50 of 214 and higher T90 of 310, I believe the staff 9 proposal here today before you is T50 of 213. 10 BOARD MEMBER C.H. FRIEDMAN: But in a T90, I think 11 305. 12 MR. SCHREMP: 305, correct, and so I think 13 certainly the cost savings we saw in those modeling runs, at 14 least a portion, probably at least half of the savings we saw 15 when we did the refineries can be attributable to what the 16 staff is proposing here today. 17 CHAIRMAN LLOYD: Okay. When you made your last 18 estimates according to cleaner burning gasoline, how did 19 reality compare with predictions? 20 MR. SCHREMP: The 5.8 cents? 21 CHAIRMAN LLOYD: I'm talking about for Phase 2. 22 MR. SIMEROTH: Chairman Lloyd, the Air Resources 23 Board staff did the Phase 2 assessments. 24 We were not working quite as close with Energy 25 Commission at that time. As the slide showed, we estimated PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 90 1 from 5 to 15 cents with an average of 10 cents per gallon. 2 The assessments of the cost impact since then have 3 shown the average of 10 cents was on the high side and is 4 coming in probably between 4 and 8 cents at this point, 5 depending on which assessments you look at. 6 CHAIRMAN LLOYD: Thank you. 7 Yes, Supervisor Roberts. 8 BOARD MEMBER ROBERTS: Maybe because I have been 9 here too many years now, well, I do not know where these 10 numbers come from, because they do not bear out my own 11 experience, and they sure in heck do not have anything to do 12 with the prices in San Diego. 13 I will tell you that, and if you think we are only 14 paying 10 cents a gallon more as compared to the rest of the 15 country, then you guys need to go on a trip with me and drive 16 around a little bit, because the numbers are way different 17 than what we hear here, and that has me greatly concerned. 18 I am proud of what we are doing in terms of 19 cleaning up the air. I feel very cynical when we talk about 20 the cost and added cost and everything else here, and I want 21 to see if we can do a little better job this time, because 22 there is always a lot of explanation for it, but there's 23 something bigger that has happened than just the projected 24 and incremental cost, and we were given a lot of reasons for 25 it. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 91 1 There is, the refinery is down. Suddam Hussin 2 coughed, something serious like that. 3 I have trouble believing that we are not a 4 significant part of what has happened here in California to 5 the price of gas, and I note there is an editorial before me 6 here that was passed out, and part of it said that more 7 refiners outside of California are expected to gear up to 8 produce California compliant gasoline. 9 That is one of the things we have done is we have 10 reduced competition in a pretty significant way. 11 I still believe pretty firmly in the market, and 12 when you do that, the expected result would be you pay higher 13 prices, and indeed we are. 14 I will share with you not only did we pour over the 15 statistics in the office on a regular basis but just from an 16 unscientific test that I did this past summer when I drove 17 from Boston to San Diego, and every mile of the way, looking 18 at gas stations and comparing prices only to find that when I 19 arrived home, the very highest price in the whole nation was 20 the gas station closest to my house. 21 BOARD MEMBER DeSAULNIER: It is a plot. 22 BOARD MEMBER ROBERTS: I do not feel paranoid 23 enough yet to assume that they are picking on me, except the 24 range was an excess of 70 cents a gallon. 25 The range and the average was probably more like at PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 92 1 least 30 and probably close to 40 cents a gallon. 2 When I hear it is only a nickel here and a dime 3 there, I am going to tell you the reality does not, that 4 isn't what happened, and it is far more significant than 5 that, and we have had hearings with the Energy Commission to 6 try to iron this out, after we went to the other gasoline, we 7 never could get to the bottom. 8 We were given list of excuses, and I am concerned. 9 I guess it is not clear to me from the testimony 10 here today, do we really expect that there is going to be 11 more gasoline produced by refiners outside of the state, and 12 we are going to have an opportunity to bring more California 13 type gasoline here, or are we going to further restrict that 14 market as we can see from all the mergers that are going on, 15 even have less and less competition, which I think is going 16 to drive these prices in a far greater rate than anything 17 than anyone has suggested here today. 18 CHAIRMAN LLOYD: Supervisor, you raise a good 19 point, but I think it might be more appropriate to get some 20 of the testimony before us and then engage in this dialogue, 21 because I think as Commissioner Moore mentioned earlier, the 22 difference between the cost and the pricing of those is a 23 very complex issue, and I think as you know, so, I think 24 maybe, if it is okay with you, I would rather -- 25 BOARD MEMBER ROBERTS: I just wanted to know from PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 93 1 just the previous witness, it was not clear for me from that 2 testimony what are they expecting. 3 COMMISSIONER MOORE: Mr. Chairman, perhaps I could 4 address in a very general sense and defer until later some of 5 the more specific questions, but in general, first I would 6 say I apologize for the lack of cooperation that may have 7 resulted in incomplete studies in the past. 8 I think we are taking dramatic steps to remedy 9 that. 10 As you go on, I think you will find the economists 11 and statisticians that the California Energy Commission are 12 more committed than ever to support your staff and give you 13 timely and complete analysis. 14 I think that two years from now, let's pick a day 15 in the future, you will look back and be able to say that the 16 analytical submissions are far more complete and far more 17 objective and more to your use than they have ever been in 18 the past. 19 So, I apologize for the level service in the past. 20 Second, on a very general basis, what Mr. Schremp 21 was indicating is that we are predicting a higher degree of 22 imports, and those are not necessarily from adjacent states, 23 but in our preliminary analysis, from the Gulf coast region 24 and of course, in extreme conditions, coming all the way from 25 Europe. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 94 1 So, at a later point in the hearing, we can get 2 into the specifics, but in a very general sense, the imports 3 that we are speaking of are Gulf Coast imports. 4 BOARD MEMBER ROBERTS: Okay. I will hold, Mr. 5 Chairman, because I am going to have a lot more questions on 6 this item. 7 Do we have a copy of Mr. Schremp's testimony? 8 Because I did not have it in my packet. 9 CHAIRMAN LLOYD: Yes. It should be there. 10 The other point that I realized, we jumped over 11 staff's presentation, and I recognize that the Board Members 12 may have some questions of the ARB staff presentation. 13 Yes, Ms. D'Adamo. 14 BOARD MEMBER D'ADAMO: Well, one thing that has 15 become rather clear to me is that this is not an exact 16 science and that there are many factors that go into price 17 changes. 18 Just taking a look at ARB's efforts, I think the 19 third slide was on California gasoline programs, from 1971 to 20 1998. 21 Do you have information about what the estimates 22 were as to the impact of those regulations similar to RFG 2? 23 In other words, initially staff had estimated 5 to 24 15 cents and ended up being somewhere between 4 and 8 cents, 25 quite a bit lower. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 95 1 Is that something that occurred with these other 2 programs as well? 3 MR. SCHEIBLE: For the prior gasoline programs, we 4 were talking a penny or two a gallon, and at that amount of 5 expense, with the kind of changes in the gasoline prices that 6 were occurring in the 70's and in the 80's, it defies 7 analysis. 8 The Phase 2 gasoline program was the first time we 9 did something to gasoline that was so significant that it 10 would be a nickel a gallon or above. 11 I do not think we can go back in and actually say 12 projected versus actual with any sort of certainty for those 13 earlier programs. Most of them were very, very cost 14 effective, were low cost in terms of cents per gallon and met 15 a cost effectiveness test that was very much unachievable 16 today. 17 BOARD MEMBER D'ADAMO: Almost diminimous on the 18 previous one's, but on RFG 2, quite a bit less than what was 19 originally projected? 20 MR. SCHEIBLE: Yes. 21 In terms of the cost, what the gasoline cost in the 22 market place, this is not a representation of how much Moore 23 gasoline costs in California than in other markets. 24 This is a representation of what we believe is the 25 cost of having the cleaner gasoline versus conventional PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 96 1 gasoline in California. 2 BOARD MEMBER D'ADAMO: Do you have any information 3 as to why it ended up being so much less? 4 Is it that industry was able to get ahead of the 5 regulation and somehow manage the regulation so it did not 6 have as much of an impact, other market conditions, what 7 happened? 8 MR. SCHEIBLE: We do know that our estimates of the 9 capital expenditures that would be required to make Phase 2 10 gasoline were significantly above what the cost actually came 11 in to, and there is competitive factors that are very hard 12 for us to look at. 13 The desire obviously for the industry to retire a 14 capital investment is controlled by the market opportunity to 15 get higher prices. 16 BOARD MEMBER D'ADAMO: Which could occur this time 17 around as well, possibly? 18 MR. SCHEIBLE: Right. 19 Our other point we looked at and Commissioner Moore 20 related to it, is, we can take the name California out of the 21 equation and put in Oregon, Washington, Nevada and write the 22 same story about gasoline prices this last summer, with the 23 one thing that you have to edit out and has its own special 24 recipe of gasoline, but there is very little difference in 25 the other things that are happening in those states. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 97 1 CHAIRMAN LLOYD: Yes. 2 Supervisor DeSaulnier. 3 BOARD MEMBER DeSAULNIER: Perhaps Mr. Kenny, could 4 we discuss just briefly the sulfur issue? 5 We have got a lot of comments about either that we 6 are not going far enough or that we are piling on, under the 7 Governor's directive SB 989, what kind of restriction does 8 staff feel that they were under so that we could not go 9 further than the 20 parts? 10 MR. KENNY: What we were trying essentially was to 11 really fulfill two imperatives, and the two imperatives were 12 that we wanted to remove MTBE from the fuel in order to 13 essentially eliminate the contamination that is occurring 14 with regards to the groundwater, and then at the same time 15 what we wanted to do was to preserve the air quality benefits 16 that we had achieved with California Phase 2 gasoline. 17 So, what we were doing was removing the MTBE and 18 then looking at a way to preserve all those benefits, and we 19 revolved that preservation really around the sulfur number. 20 The way we thought, the easiest way of getting that 21 is to drop the sulfur from where it is currently at, at 40, 22 down to the 20. 23 When we did that, what we were able to do is 24 essentially minimize the cost, maintain flexibility, provide 25 the opportunities for additional fuel supplies from out of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 98 1 state as the Federal government goes to their tier-two 2 gasoline, and we have sort of a closer, or a narrower 3 difference between us and them. 4 So, the end result of all of the analysis there was 5 that we were not really trying to drive sulfur down to the 6 lowest possible level, what we were trying instead to do was 7 simply to preserve the benefits and maintain the flexibility. 8 BOARD MEMBER DeSAULNIER: Mike, it seems though 9 that at least intuitively given the relative cost on dropping 10 sulfur and the desire by many of us to have it phased out 11 further, that this is an opportunity not necessarily to pile 12 on, but given that the capital cost are so significant at the 13 refineries, that there may be some refiners who actually 14 choose to do more around the directive to get MTBE out and to 15 be able to do what ultimately we are going to ask them to do, 16 which is to go to lower sulfur. 17 MR. KENNY: I think you are actually right. 18 In fact, what will probably happen is that there 19 will be some refiners who actually drive the sulfur down even 20 lower, and the main reason for that is that the sulfur is the 21 place in the predictive model where they will have some 22 flexibility to achieve some benefits that they can use in 23 other parts of the predictive model where they may want to go 24 to a different level and so that opportunity will occur. 25 I think kind of the bottom line with regard to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 99 1 sulfur is that everybody acknowledges that sulfur is bad and 2 that we want to basically get the fuels at some point in the 3 future that are sulfur free, but at this point in time having 4 just seen Phase 2 gasoline being implemented only three 5 years, we were not really looking to drive sulfur down to 6 zero. 7 Instead, what we were trying to do really is 8 maintain the air quality benefits that we got while we took a 9 significant component that achieved those air quality 10 benefits out of the fuel which was MTBE. 11 BOARD MEMBER DeSAULNIER: I'm struggling a little 12 bit, and I will finish with the opportunity for some refiners 13 to be able to build in lower sulfur and the chance that 14 Supervisor Roberts is concerned about, and all of us, is that 15 there may be unexpected boost again as other refiners try to 16 implement the capital cost of reducing sulfur when they can 17 do it now, and all though it might be a little bit more 18 painful now, in the long run, you will not have sort of a 19 secondary price increase. 20 MR. KENNY: I think it is a situation in which some 21 of the refiners actually may choose to make that choice. 22 I think the other thing that is going to happen 23 though is that nationally you are going to see the Federal 24 sulfur levels dropping from 500 parts per million down to the 25 30 part per million range. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 100 1 So, one of the things that will happen as a result, 2 there is not only California refiners looking at what they 3 can do to comply with Phase 3 requirements, but national 4 refiners will be looking at what they need to do to comply 5 with Federal sulfur requirements. 6 The benefit to you, us, in the long-term will 7 essentially be, actually a long-term is less than five years, 8 but what that will be is that we will have fuels nationwide 9 that have far greater opportunities to be introduced into 10 California to make sure that we have the supplies we need. 11 CHAIRMAN LLOYD: Thank you. 12 Professor Friedman. 13 BOARD MEMBER C.H. FRIEDMAN: Well, just on that 14 point, as I understand it, you are proposing a 50 percent 15 reduction in the sulfur, 40 to 20 and 30 to 15, that is at a 16 time when, if it is true, a third of the fuel has an average 17 of 10, even though the limits are much higher. 18 MR. KENNY: That is true. 19 Right now, essentially we do see kind of an average 20 in-use on sulfur throughout the state that are lower than our 21 flat limits. 22 BOARD MEMBER C.H. FRIEDMAN: Is there any reason to 23 hope and believe, accept that it will go below, and it will 24 hit five if it is ten0 now? 25 We are cutting ours in half would be the reality. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 101 1 MR. KENNY: I think that there is every reason to 2 believe that with a 20 flat limit what will happen is that 3 the sulfur levels in use will be substantially below the 20, 4 they will probably be in the 10 range. 5 I think the benefit from that will be that we will 6 get air quality reductions associated with it. 7 At the same time, I mean I think Supervisor 8 DeSaulnier is correct, some of the refiners will look at the 9 fact that we have the 20 here in California, and as the place 10 where they have an opportunity for flexibility, and they will 11 probably at least consider going down to lower sulfur levels 12 so that they can use that flexibility provided in the 13 predictive model to raise other particular parts of the model 14 formula, and that will give them benefits to maintain some 15 price flexibility and cost flexibility. 16 CHAIRMAN LLOYD: Do we have any other burning 17 questions for staff? 18 BOARD MEMBER CALHOUN: I have one, Mr. Chairman. 19 This question goes to the effect of commingling. 20 Earlier I talked about, the staff discussed the impact on RVP 21 of mixing the gasoline and the ethanol, that is going to make 22 control in the evaporative emissions more difficult, 23 obviously, and I guess the question that I have, staff, is 24 what programs do you intend to put into effect to assure 25 yourselves and us that the fuel is actually in compliance? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 102 1 MR. KENNY: What we have done so far in terms of 2 the proposals that we have looked at different scenarios 3 involving commingling, and we tried to make a determination 4 as to which of those scenarios we believe to be the most 5 reasonable, and that is how we quantify the kinds of numbers 6 you saw on the staff presentation today with regard to the 7 average RVP going up by .1. 8 As we basically go into the future, we are going to 9 need to confirm that. We do not know precisely today what 10 the actual formulations of the fuels of the future will be. 11 We know what the emissions consequences of those 12 fuels will be based on what we are going to allow, but we are 13 going to actually have to look at those fuels as they are 14 produced and assure that in fact they do meet the concerns 15 that we have with regard to commingling and make sure in fact 16 the scenarios that we have laid out do play out in practice. 17 If they do not, you will see us back before you. 18 BOARD MEMBER CALHOUN: Does that involve sampling? 19 MR. JENNINGS: If I could add for a second, one of 20 the elements of the staff's proposal that was not in the 21 staff presentation, because there are so many complications 22 with it, but it adds a provision that prohibits mixing 23 ethanol gasoline with non-ethanol gasoline during the RVP 24 season at any point in the distribution system unless the 25 person doing it can prove that the mixture does not exceed PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 103 1 the cap limit. 2 So, that will give us a good enforcement handle, 3 and we will not have to prove that it is in violation, which 4 we have to now. 5 CHAIRMAN LLOYD: I guess that was Tom Jennings from 6 the Legal Department. 7 Do you want to say anything? 8 MR. KENNY: No. 9 CHAIRMAN LLOYD: Good. Thank you. 10 With that -- 11 MR. KENNY: Actually, the only thing I have to say 12 is that, Mr. Calhoun, I presume that answers the question? 13 BOARD MEMBER CALHOUN: Yes, thank you. 14 CHAIRMAN LLOYD: Yes, I would like to move on here, 15 I guess, and turn over to Madam Ombudsman to make sure and 16 describe the public process by which we arrived at this point 17 and to see whether in fact all the concerns and comments were 18 addressed. 19 MS. TSCHOGL: Mr. Chairman and Members of the 20 Board, the item before you was developed between December 21 1998 to present. 22 Clearly, this has been a very difficult regulation 23 to develop. It has challenged the good nature of nearly 24 everyone involved in the process. 25 Fortunately, it appears that everyone has risen to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 104 1 the occasion. During the past year, there was a tremendous 2 amount of very constructive communication between the 3 stakeholders and ARB staff. 4 Unfortunately, the issues are complex. In the 5 opinion of some stakeholders, several of them remain 6 unresolved. 7 I will not attempt to summarize the stakeholders 8 issues or the level to which they were addressed by staff. I 9 know that they would prefer for you to hear their testimony 10 firsthand. 11 Instead, I will comment on the outreach process 12 followed by staff during the development of the proposed 13 regulation. 14 During the past 12 months, ARB's staff conducted 15 nine public workshops, three in El Monte and six in 16 Sacramento. 17 All workshops were properly noticed and posted. 18 The workshops solicited input from the automotive, oxygenate, 19 oil industries, environmental groups, as well as Federal, 20 State and local government agencies. 21 Because each workshop incorporated input from the 22 workshop that preceded it, there were many revisions along 23 the way. 24 The amendments before you today represent the end 25 product of these sessions. Collectively over 130 individuals PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 105 1 participated in these workshops, including representatives 2 from the Association of International Automobile 3 Manufacturers, the Renewable Fuels Association, the Western 4 State Petroleum Association, Citizens for a Better 5 Environment, Natural Resources Defense Council, the U.S. EPA, 6 California Energy Commission, several air districts and the 7 City of Richmond. 8 In addition to the public workshops, ARB staff 9 conducted dozens of individual meetings, conference calls and 10 one-on-one phone calls with many interested stakeholders to 11 receive additional input on the proposed regulations. 12 On October 21, staff posted the final report on 13 ARB's Website, and October 22, staff mailed out the notice of 14 today's hearing to a broad list of individuals, groups and 15 organizations. 16 Staff maintained an open channel of communication 17 with stakeholders throughout the process to the point of 18 including a final workshop during the 45-day notice period. 19 Staff continued to incorporate new data and posted 20 specific proposed modifications on the Website on December 7. 21 As you can see, this is a very complex issue, but 22 ARB staff took all the necessary steps in order to provide an 23 open and inclusive public process throughout the development 24 of this item. 25 Unfortunately, not everyone is pleased with the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 106 1 final product. 2 CHAIRMAN LLOYD: Thank you very much. 3 With that, I think we would like to move ahead with 4 the first witness, that was Dr. Catherine Koshland, 5 University of California, Berkeley. 6 To reiterate again, we have at this time 48 7 speakers. I will be enforcing the five-minute regulation. 8 Anything that you can do will gain a lot of bonus points with 9 the Board if in fact you can reduce that from five. 10 I guess trading is allowed, but it is going to be 11 at a discount. 12 Thank you. 13 DR. KOSHLAND: My name is Catherine Koshland. 14 I'm a Professor of engineering at the University of 15 California, Berkeley, with joint appointments in Public 16 Health and Energy and Resources. 17 I have Ph.D. in Mechanical Engineering from 18 Stanford University, and my research interests include 19 combustion and air pollution, particularly combustion 20 generated air toxics and developing diagnostics to measure 21 such pollutants. 22 I am also a lead investigator on the recent MTBE 23 report requested by Senate Bill SB 521 and assessment of 24 human health and environmental risk and benefits of MTBE in 25 gasoline. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 107 1 In our work, we have reviewed previous data from a 2 wide variety of laboratory, vehicle and fuel studies and also 3 performed experiments in a flow reactor, along with my 4 colleagues, Dr. Donald Lucas, of the Lawrence Berkeley 5 Laboratory, and School of Public Health, and Dean Catteo, of 6 Cal State, Northridge. 7 I was asked to review the report under discussion 8 now. I have read comments and reviews by other interested 9 parties, as well as previous documents and reports. 10 My comments today summarize the reviews of all 11 three reviewers. We have discussed the report with each 12 other. 13 However, my colleagues have not had the ability to 14 review the remarks I'm making now. 15 The report provides a clear description of the 16 proposed regulations which have been described by staff 17 today. 18 A major focus in the regulations, the elimination 19 of MTBE from gasoline in California, is in response to 20 Executive Order D 599, signed by Governor Davis. 21 These regulations provide additional flexibility to 22 refiners and will maintain current emissions and air quality 23 benefits and allow compliance with State Implementation Plan. 24 From a qualitative perspective, the recommendations 25 are sound. They appear to meet the state objectives of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 108 1 increased refinery flexibility while preserving air quality 2 benefits. 3 While emissions benefits can be quantified, not all 4 the decisions can be defended with precision. These include 5 the cost benefit analysis and the desire to maintain a 6 sufficient California fuel supply. 7 These issues tend to be policy-oriented or 8 political and scientific, and the criteria are indeed 9 different. 10 There are issues of timing in the development of 11 these regulations and the implementation process. Some of 12 these have been addressed today. 13 The ongoing studies related to in particular MFAC 14 2000, as well as the time constraints placed on ARB to 15 develop these regulations, has an impact, and care must be 16 taken in balancing the need for timely decisions with the 17 effort and time it takes to produce sound science. 18 The changes in the requirements for the 19 distillation temperature of T50 and T90 are directionally 20 correct and coupled with a requirement for low sulfur and 21 reduce benzene should maintain the air quality benefits 22 described previously, the changes in distillation 23 temperatures made the desired goal and increasing refinery 24 flexibility and maintaining the volume gasoline available. 25 However, we encourage the changes in emissions with PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 109 1 the changes in RVP be properly evaluated, as well as we 2 certainly support the staff's change and recommendation for 3 evaluating the impacts of commingling, which is just another 4 area of concern for all of us. 5 The predictive model has been used to calculate the 6 benefits of the proposed regulations. Staff notes that most 7 of the gasoline produced in California is based on a 8 predictive model. 9 It would be useful to have more information on the 10 statistical properties of the models so that uncertainty can 11 be judged. 12 The staff proposes to add a new technology group, 13 and there appears to be some sufficient justification for 14 this addition, although the difficult question of high 15 emitting vehicles requires ongoing research efforts. 16 ARB staff is proposing that CO be accounted in the 17 overall ozone formation process and appropriate addition 18 given the relatively new information on its importance. 19 It is important, however, in doing so that ARB 20 maintain a consistent approach from modeling behavior of all 21 ozone forming compounds. 22 We had concerns about the driveability index. 23 Based on what was said today, I am in support of what changes 24 were made with respect to that, and similarly there are 25 unresolved issues regarding CARBOB and what was suggested PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 110 1 today. 2 In summary, the proposed regulations are, however, 3 sound. The need to eliminate MTBE is the major driving force 4 behind the provisions. 5 It is important to do that while maintaining the 6 improved air quality that we enjoy as a result of the current 7 reformulated fuels program. We must recognize, however, that 8 to do so does mean that Californians may incur substantial 9 cost. 10 Thank you. 11 CHAIRMAN LLOYD: Thank you very much. 12 Any questions? 13 BOARD MEMBER ROBERTS: I wondering if you could 14 maybe shred some light on the sulfur standard, the 20 parts 15 per million versus the five parts per million standard. 16 MS. KOSHLAND: I cannot say we looked at anything 17 less than the 20 parts per million, but certainly reducing 18 the sulfur levels does give additional flexibility and 19 certainly helps the actual performance of the vehicles, but I 20 cannot comment really on going from 20 to 5. 21 CHAIRMAN LLOYD: Okay. Thank you very much. 22 Thank you for your big help to the staff and to the 23 other reviewers. Thank you. 24 Our next witness is Tom Stallard, Sacramento Area 25 Council of Governments. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 111 1 MR. STALLARD: Thank you, Mr. Chair, and Members. 2 Again, my name is Tom Stallard. I am the Third 3 District Supervisor in Yolo County. I'm here for the 4 Sacramento Area Council of Governments, which is a six-county 5 region, including Sacramento County. 6 I also sit on the Yolo County Air Quality 7 Management District Board of Directors. 8 I want to urge you today to do the very best you 9 can to remove as much sulfur as possible from the new 10 reformulated fuel. I certainly appreciate Supervisor 11 DeSaulnier's comments earlier. 12 We are in a desperate situation of meeting our NOx 13 reduction obligations. We have been counting on state 14 efforts by the Smog Check 2, which is no longer available to 15 us. 16 We have a major NOx reduction commitment. We are 17 not as far along as we need to be. We do not have all the 18 funding we need to do that NOx reduction. 19 We know it costs money to get it out of the 20 atmosphere, so we really need a broad plan of participation, 21 and certainly reformulated fuel that absolutely reduces those 22 emissions as much as possible, it is fundamental to our 23 success. 24 We have 1.7 million people in our region. Our air 25 quality is among the 10 worst in the nation. So we have a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 112 1 big job to do. 2 We really need help at the state level, and we are 3 counting on you assisting us in this way. 4 I certainly want to thank Michael Kenny and staff, 5 too, for the great cooperation they have been giving us in 6 attempting to find strategies that will work. 7 CHAIRMAN LLOYD: Thank you very much indeed. 8 Next is Rosario Marin, Mayor, of Huntington Park. 9 MS. MARIN: Thank you, Mr. Chairman, and good 10 morning distinguished Board Members. 11 My name is Rosario Marin. I am the Mayor of the 12 City of Huntington Park, a 93-year-old, three-square-mile 13 city. 14 It is considered the second or third dense city in 15 the state, and 98 percent of its population is Latino. 16 Based on the recent multiple air toxics exposure 17 study conducted by the AQMD, our friends in the LA Times run 18 an article suggesting we are the most polluted city in 19 Southern California. 20 According to that study, much of the pollution is 21 due to the diesel trucks and buses. The report also states 22 that diesel emissions account for 71 percent of the cancer 23 risk from air pollution and, more importantly, that the risk 24 of cancer from air pollution in the area is 21 percent higher 25 than the regional average. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 113 1 In addition to causing cancer, air pollution can 2 increase the risk of emphysema, bronchitis, asthma and other 3 respiratory illnesses, and it affects children and the 4 elderly the most severely. 5 Just for your information, there are 20,000 6 students attending schools in our city, and 30 percent of our 7 population is less than 10 years of age. 8 I am developing a plan to address the problem of 9 air pollution in my city, and I am afraid that such effort 10 may be undermined by the ARB's proposed new regulations for 11 gasoline. 12 I have recently appointed a task force to propose a 13 comprehensive plan for cutting air pollution in our city. 14 The task force will examine ways to improve the air quality 15 in the area by reducing the number of diesel trucks that 16 travel through our city. 17 The reason that I am here before you is because I 18 understand that the Board is considering a new formula for 19 gas, one that appears likely to include ethanol. 20 If I am correct, I understand that ethanol will 21 have to be transported by diesel trucks and that many of 22 those trucks would be traveling through our communities and 23 down some of the already most polluted freeways in the state. 24 The City of Huntington Park, by its geographic 25 location, is an innocent bystander of all these toxic PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 114 1 emissions. 2 We are located at the heart of the problem. We are 3 between the industrial city of Vernon and the Ports of Long 4 Beach and Los Angeles. 5 I have to express my very serious reservations 6 about the impact that this extra trucking would have in our 7 already unacceptable toxic environment. We are deeply 8 worried that ethanol transfer could have significant diesel 9 emissions to our air and believe that the Air Board should 10 examine this issue more thoroughly before it makes any 11 decision on ethanol or any other gas formula. 12 I implore you to schedule hearings in our region 13 where air pollution is the most severe and where your 14 decisions will have the greatest impact. 15 As a matter of fact, I am extending an invitation 16 for an ARB hearing in the City of Huntington Park. I would 17 gladly host such a meaningful event. 18 I invite you to come to our City to help us deal 19 with the environmental injustices we have been victims of. I 20 am trying to protect the health of our residents, especially 21 of our children. 22 I honestly believe we cannot be expected to suffer 23 the impact of worse air pollution. 24 Mr. Chairman, I am confident your statement on 25 November 18 to the LA Times that ARB is trying to crack down PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 115 1 on all sources of diesel will include an effort by the Board 2 to address this potentially significant increase in diesel 3 emissions. 4 As an elected official, I'm keenly aware of the law 5 of unintended consequences. I believe whole heartedly, you 6 want to do the right thing. 7 I would caution that in the haste of solving one 8 problem, it may be costing another or exacerbating in our 9 case an existing one. 10 I commend your sensitivity to this issue, and for 11 our collective work, I wish you success in your delegated 12 endeavors. 13 I am here to offer our desire to work with you in 14 the normal course of improving air quality, and I generally 15 hope that you will agree to come down to Huntington Park 16 before you make such important decisions. 17 Thank you, Mr. Chairman. 18 CHAIRMAN LLOYD: Thank you very much, Mayor. 19 I particularly appreciate you taking the time out 20 of your busy schedule to come and address us today, and your 21 message is very, very important, and I will ask staff to look 22 into the possibility of taking you up on your offer. 23 On some of the technical issues, I just would like 24 to be clear, I think that the issue of increased trucks are 25 going to be addressed through the permitting process, and I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 116 1 think whether there will or will not be more trucks, I think 2 will come out during that process. 3 However, they need not necessarily be diesel 4 trucks. We are very fortunate that the state has got the Dr. 5 Carl Moyer Fund, which has been administered through the Air 6 Resources Board in the local districts to in fact cleanup 7 those trucks. 8 So that there are trucks to look at that part of 9 it. I would hope that we work very closely with the South 10 Coast Air Quality Management District, Dr. Chung Liu is going 11 to testify today, and I think that he is very sensitive to 12 those issues, and we are committed to working with the oil 13 companies on that part of it. 14 We are all looking at cleaning up diesel as well. 15 We are looking at reducing sulfur. 16 We have the excellent example of Arco reducing 17 sulfur and cleaning diesel up there. So we can use the new 18 technology, and believe me, we are doing everything we can, 19 as fast as we can, to try and address that issue, and also 20 that the technology is being used in diesel engines now is 21 getting us to a point where it is cleaning things up rapidly 22 by a combination of cleaner fuels and much cleaner engines. 23 So, we will work with you, and whatever we can do 24 we will definitely do everything we can. 25 MS. MARIN: Thank you, Mr. Chairman. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 117 1 I really appreciate your time. We are working with 2 the AQMD. In fact, the AQMD is part of the task force that I 3 have created. 4 They are working with us very, very closely on it. 5 As far as CEQA is concerned, I have reservations about that. 6 I would want to make sure that the Air Resources Board would 7 take a very strong stand. 8 I do not know whether in fact they will be able to 9 assure that the process is that strong. I would hope that 10 they will get your message, but I am a little bit concerned 11 about that. 12 CHAIRMAN LLOYD: Staff will definitely work with 13 you, and I am personally committed to working with you to 14 address these issues and come up with a solution that gets us 15 where we need to go and not further degrade and hopefully 16 improve air quality in your area and come to Huntington Park. 17 MS. MARIN: Don't go to the beach. Come to the 18 park. 19 CHAIRMAN LLOYD: I got the message. 20 Thank you very much, indeed. 21 Now, I would like to again give some order here in 22 the order of people presenting so that they understand that. 23 We have Duane Bordvick, Doug Henderson, Al Jessel 24 and Ed Manning. 25 First we have Duane Bordvick, Vice President of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 118 1 Environmental and External Affairs of Tosco. 2 MR. BORDVICK: Thank you, Chairman Lloyd, Members 3 of the Board. 4 My name is Duane Bordvick, with Tosco Corporation. 5 I am very pleased to be here today and provide some very 6 brief comments supporting cleaner gasoline, cleaner air and 7 cleaner water for California. 8 Tosco is the second largest refiner of gasoline in 9 California, and we market over two billion gallons of 10 gasoline annually through our network of approximately 1600 11 retail outlets under the Union 76 and Circle K brands. 12 We are also a major supplier to the independent 13 markets. 14 Tosco has long been a supporter of clean fuels and 15 in eliminating MTBE from California gasoline. Our primary 16 business is making and selling gasoline, and we want gasoline 17 to be the fuel of the future. 18 We want to provide our customers with products that 19 are environmentally friendly and that are of good value. 20 To that end, Tosco is pleased to unconditionally 21 support the staff's proposal for Phase 3 cleaner burning 22 gasoline. 23 Our major reasons for support of the staff's 24 recommendation I think have already been covered today, but 25 briefly, Phase 3 will eliminate MTBE in California in three PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 119 1 years, per the Governor's order. 2 Phase 3 will provide flexibility needed to minimize 3 potential production and economic impacts of MTBE phase-out, 4 and it will prevent air quality degradation that could 5 otherwise be associated with removing MTBE. 6 Finally, it will provide some additional air 7 quality benefits beyond that provided by Phase 2. 8 So, overall we believe that considering the 9 objectives of eliminating MTBE, improving air quality, 10 minimizing supply and market place impacts, the staff's 11 proposal strikes the balance to protect our water resources 12 while enhancing air quality. 13 On Monday, we announced that we would eliminate 14 MTBE from gasoline sold at all of our Union 76 and Circle K 15 stations two years early, if the EPA grants California's 16 request for a waiver of the Federal oxygenate mandate in the 17 next 90 days. 18 We'll also make this non-MTBE fuel available to our 19 independent gasoline customers as well. 20 While this commitment to be MTBE free by December 21 15, 2000 is contingent on this Federal action, we think that 22 granting the waiver should be a no brainer. 23 The waiver allows us, and hopefully others, to get 24 rid of MTBE sooner at significantly less cost. The risk to 25 our water resources is reduced, and air quality is preserved. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 120 1 Finally, with regard to the important issue of cost 2 for Tosco, we believe that there will be no net increase for 3 producing our non-MTBE gasoline for our stations and 4 customers. 5 I have kept my comments simple and short, because I 6 believe that the Air Resources Board and Energy Commission 7 staff's have done an excellent job in analyzing the issue and 8 developing the solution. Therefore, I do not have a lot to 9 add. 10 However, I have provided some additional comments 11 in written submittal that I believe you have. 12 Thank you very much. 13 CHAIRMAN LLOYD: Thank you very much, indeed. 14 Questions from the Board? 15 Supervisor DeSaulnier. 16 BOARD MEMBER DeSAULNIER: Duane, it is nice to see 17 you in a non-controversial atmosphere. 18 With that, and since you are the first speaker from 19 your industry, could you address the issue of sulfur for 20 Tosco, and basically the point of whether you have the 21 ability in your facilities to go to a lower limit and at a 22 cost-effective way now, or would it be better to phase it? 23 MR. BORDVICK: You are talking about lowering? 24 We do support the 20 ppm. As I said, we generally 25 support cleaner gasoline. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 121 1 We support the Federal level of 30 ppm. We think 2 20 is right now. We do not recommend and would not support 3 it going any lower than that today, because of potential 4 impacts on the cost of producing it. 5 The supply, for our company it would take 6 considerably more capital investment to go below 20. 7 Again, considering the balance of what we are 8 trying to accomplish here today, I think 20 does strike the 9 right balance. I do not support anything less than that. 10 CHAIRMAN LLOYD: Thank you. 11 Supervisor Roberts. 12 BOARD MEMBER ROBERTS: Well, actually my question 13 was going to be along similar lines, but I wanted to take it 14 a little bit further. 15 Are there any estimates of what it would cost to go 16 to five parts per million? 17 MR. BORDVICK: No, I don't, I can't say that I have 18 an estimate for Tosco for that. 19 I know where we are talking about major new pieces 20 of processing equipment that are in the $10 or $100 million 21 usually for that type of hardware, but I don't have a number 22 for you today, sir. 23 BOARD MEMBER ROBERTS: The recommendations that are 24 before us today, you would expect that those would have zero 25 new cost then? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 122 1 MR. BORDVICK: Yes. 2 We believe, and then part of my response is 3 associated with granting of the waiver which has a 4 significant impact on reducing the cost, because it gives us 5 a flexibility to make our gasoline. 6 There will be some investment cost associated with 7 phasing out MTBE. They're relatively modest, not large 8 capital investments. 9 We believe based on our own projections that the 10 savings that we would realize between the cost of MTBE and 11 the cost of ethanol would be close to breaking even. 12 Everyone has their own assumption with regard to 13 what those prices will be, but based on our economics, we are 14 pretty optimistic that it will be pretty much be a wash. 15 BOARD MEMBER ROBERTS: Do you have a feeling as to 16 whether we might expect more imports into California or less 17 imports? 18 MR. BORDVICK: Well, I do think that the Energy 19 Commission has predicted that there will be more imports, and 20 I think they are right. 21 I think we would anticipate some additional imports 22 ourselves. There will be no decrease in production in our 23 refineries, however, to maintain the supply that we are 24 committed to do for all of our customers. 25 We will import some additional material as PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 123 1 blendstocks, yes. 2 BOARD MEMBER ROBERTS: That might get us over these 3 problems, and when we see almost any incident which seems to 4 happen weekly at the refineries where we have some type of a 5 crisis, that increases the imports, that might help to 6 stabilize the situation? 7 MR. BORDVICK: Well, I have heard that theory, and 8 I am not sure. 9 I cannot say for sure, but I understand the 10 rationale or the reason that given an import is more ratable, 11 that you can count on, and that says that there are more 12 people in the world cranking out this product, and therefore, 13 perhaps they can adjust their flow as needed, if we do have a 14 problem in the state. 15 So, I am not sure. 16 I can say that it is quite possible that will 17 improve the situation rather than hurt it. 18 BOARD MEMBER ROBERTS: One last question, Mr. 19 Chairman. 20 Why is it that you think there will be more 21 imports? 22 MR. BORDVICK: Well, because I think in the short 23 run, in order to produce the Phase 3 gasoline and produce a 24 gasoline without MTBE, you are going to have some volume 25 impact, just the volume of the oxygenate itself. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 124 1 You are going to have to back out some light ends 2 from your blends. That is going to have to be replaced with 3 something. 4 Right now, the refineries, speaking for my 5 refinery, we cannot turn the crank. The crank is already 6 open. We cannot turn it to produce more. 7 We are going to have to make up some of that volume 8 loss through imports. Most typically, it is alkylate, 9 because it is a clean, higher octane blendstock. So, we do 10 have to make up some of that volume loss, switching from MTBE 11 to an ethanol based product. 12 BOARD MEMBER ROBERTS: If I am hearing you 13 correctly, we are going to have to have imports just to have 14 the capacity that we need? 15 MR. BORDVICK: Yes, I think so. 16 I don't know if that is going to last forever. 17 I think that our industry and my company certainly 18 would be looking at making some changes in the facility to 19 make those necessary blendstocks ourselves. 20 We certainly will be looking at increasing our 21 capacity to make alkylate in our California or West Coast 22 refineries. That may not happen in the first couple of 23 years, but I think it will happen. 24 BOARD MEMBER ROBERTS: The point is that we are 25 actually going to need those imports, and part of our problem PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 125 1 is that we have been operating so close to the maximum 2 capacity that any little problem has been a big problem, and 3 now you are saying we are really going to have to reduce the 4 capacity internally, and we are going to be dependent on 5 someone to make up the gap. 6 I was thinking that maybe the imports were going to 7 give us some safety margin, but without the imports -- 8 CHAIRMAN LLOYD: I would say, Supervisor, that as 9 long as one out of two vehicles sold in California are SUV's, 10 and we continue to increase the population of our robust 11 economy, as I think staff was pointing out, we are going to 12 import more and more. 13 So, it seems to me that this is the ideal time when 14 we should be looking at where our energy supplies are, 15 otherwise it is inevitable we are going to get more and more, 16 because it is the way that the public is going. 17 BOARD MEMBER DeSAULNIER: Unless the price goes up. 18 I'm only kidding. I did not say you were 19 advocating for higher prices, Mr. Chairman. 20 CHAIRMAN LLOYD: I think on the other hand the good 21 part about that is that with all the new technology, we are 22 going to have a choice of technologies in the next 10 years, 23 and also that technology will allow us for about probably the 24 first time where the public can choose between a vehicle that 25 maybe gets less than 10 miles per gallon or about 80 miles PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 126 1 per gallon. 2 The point is, I do not pretend to predict public 3 behavior. That is, Supervisor Roberts, maybe that is more of 4 your field, and I think it is a tough job. 5 MR. ROBERTS: I am not going to pretend to do that 6 either, Mr. Chairman. 7 I am just trying to get the benefit of our 8 witness's predictions along with our other state agencies 9 here, and I am trying to understand this whole picture, which 10 is really what are the capacities going to be, and if the 11 capacities are sort of balanced precariously against the 12 demands, and we have these incidents at the refineries, I 13 mean there was hardly a week that went by that I didn't hear 14 about one that was an explanation for why we were having the 15 latest round of pricing. 16 I would like a better feeling for what we are 17 entering into, because I have got to tell you there were a 18 lot of surprises after those last round of changes. 19 CHAIRMAN LLOYD: I was just trying to point out, 20 backing up the staff, it is my understanding, Supervisor, 21 that when we try to differentiate between our regulations and 22 the general increase in demand through other factors, 23 completely outside of our regulations, and that is the 24 balancing point, but I hear you. 25 Any other questions? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 127 1 Yes, MS. D'Adamo. 2 BOARD MEMBER D'ADAMO: I know we need to get moving 3 along, but I just want to really compliment your company for 4 being so visionary and for taking this bold step. 5 I think this is where the public wants you to be, 6 and the administration wants you to be, and I just want to 7 compliment you for that. 8 CHAIRMAN LLOYD: I strongly echo that leadership 9 that is shown. 10 I am sure we will hear from some of your 11 colleagues. 12 Thank you very much. 13 The next one is Doug Henderson, from WSPA. 14 MR. HENDERSON: Good afternoon, Mr. Chairman and 15 Members of the Board. 16 I'm pleased to be back with you once again to 17 review our industry's support for your progress toward 18 cleaner air in California. 19 We began this process in the late 1980's and are 20 continuing to support your Air Resources Board's efforts to 21 good science and rely on ideas that work. 22 WSPA is proud of the progress we have made together 23 with two phases of reformulated gasoline. 24 Today, our focus is on complying with the 25 Governor's Executive Order to eliminate MTBE from gasoline in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 128 1 California. 2 California's current cleaner burning gasoline 3 standards are already the strictest in the nation, and the 4 MTBE phase-out will not weaken those standards. 5 CARB should focus on ensuring refiners flexibility 6 to cost-effectively implement the MTBE phase-out. WSPA 7 worked diligently with all of its stakeholders to shape a 8 rational MTBE phase-out strategy. 9 This is an important task, and we aggressively 10 support the Governor's plan. 11 As you have already heard, we have had differences 12 with CARB's staff over how to reach that goal of removing 13 MTBE, and we differ on what staff calls the real world 14 benefits in what we regard as our compliance margin. 15 Through the good work of our companies, your 16 agency, we have achieved benefits well beyond what was 17 planned in 1996 with the roll out of your Phase 2 cleaner 18 burning fuel. 19 The fundamental underpinning of WSPA's approach has 20 been to maximize flexibility within the constraints of Senate 21 Bill 989, which mandated that the baseline for judging 22 emissions benefits be the in-use fuel in 1998, not your Phase 23 2 specifications. 24 The in-use fuel is much cleaner than standard 25 because of the compliance margin I mentioned earlier. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 129 1 Achieving equivalency between RFG 2 and RFG 3 should be your 2 goal. 3 CARB should do everything possible to enhance 4 flexibility to minimize loss of refinery capacity. 5 California's fuel producing and marketing system has been 6 increasingly stressed in the past few years. 7 This stress has also been felt by our customers. 8 In short, the watch word should be flexibility in 9 equivalency not new stringencies. 10 Staff recommendation, however, goes beyond removing 11 MTBE. It takes the second step of requiring tighter gasoline 12 standards which will resolve in additional reduction of the 13 state's refining capacity over and above the changes needed 14 to remove MTBE. 15 This additional level of consumer risk is not 16 needed to comply with the Governor's Executive Order. 17 There is no statutory or regulatory requirement 18 forcing this Board to go beyond removing MTBE and maintaining 19 air benefits equivalent to the existing CARB gasoline. 20 Another key to successful compliance for our 21 members is providing adequate time to rebuild and retool to 22 meet your new formula in the Governor's deadline. Time is 23 very short. 24 Please try to make your decisions today so that the 25 changes can be permitted and implemented in time for us to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 130 1 meet your deadlines. 2 On Monday, Mr. Bordvick's company, which is one of 3 our members, announced their support for an aggressive 4 phase-out in MTBE and your staff's formula. Two things are 5 important for you to take away from this, we think. 6 First, it shows how competitive our industry really 7 is. Second, we are concerned that it appears that CARB's 8 staff stopped working on our joint efforts as soon as they 9 heard the announcement. 10 When I began, I mentioned the success WSPA and CARB 11 have enjoyed because of our reliance on good science. 12 WSPA's position has been developed using the best 13 science we can find in shaping an industry-wide position we 14 thought best to meet the Governor's Executive Order and 15 Senate Bill 989. 16 It is disappointing that we could not move closer 17 to a consensus before today. 18 Ed Manning is here to summarize our concerns about 19 compliance with the Executive Order and Senate Bill 989. Al 20 Jessel, with Chevron, Chairs our California Gasoline Task 21 Force. 22 Al and Ed and our team worked long and hard with 23 your staff to bring out our differences, bring them into 24 focus and attempted to find ways to make this effort 25 successful for CARB and for our members. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 131 1 Following Ed's remarks, Al will discuss some of the 2 ideas WSPA has for helping you reach your targets in ways 3 that maintain the benefits of your cleaner burning formula 4 without loss of California's refining capacity. 5 Mr. Chairman, if it is all right with you, we would 6 like to reverse the order of your next two witnesses. 7 CHAIRMAN LLOYD: My pleasure. 8 Go ahead. Thank you for finishing in less than 9 five minutes. 10 MR. MANNING: Thank you, Doug. 11 Mr. Chairman, Members, it is a pleasure to be here. 12 My name is Ed Manning, and I am here representing the Western 13 States Petroleum Association. 14 We appreciate all the hard work of each of you and 15 staff on this difficult issue, and as a non-engineer, I can 16 attest to the difficulty of wading through these issues. 17 I wanted to talk a little bit about 989 and the 18 Executive Order, just because that really launched the 19 framework for why we are here, and I think it sort of sets 20 the parameters for the action that the Board is about to 21 take, both what it has to do and what it can do. 22 989, it should be clear requires preservation of 23 benefits. That is one thing that it certainly requires. 24 It also requires flexibility. 25 Enhancing benefits is optional and should not come PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 132 1 at the expense of flexibility. That is really what we are 2 here to talk about, a way to preserve benefits, a way to get 3 back flexibility, both of which are mandated, but not to 4 enhance benefits to the point that it takes away flexibility, 5 and therefore, results in a volume loss at California 6 refineries. 7 The staff report talks about projected volume loss 8 and the extent of volume loss, and it talks about the volume 9 loss in the neighborhood of potentially 15 percent, and that 10 is significant in California. 11 I do not need to remind anyone here about what 12 happened last year, and as I recall the Energy Commission 13 recognized at the time that was the worst time, somewhere in 14 the neighborhood of 10 percent volume loss. 15 CHAIRMAN LLOYD: Does that 15 percent include MTBE 16 loss? 17 MR. MANNING: Yes, absolutely, and MTBE loss is 18 responsible for the majority of the volume loss. 19 I think that makes a good point, which is our point 20 is to not make a bad situation worse. 21 The fact that we have major volume loss because of 22 MTBE should not compel us to make the problem worse by trying 23 to get additional benefits, the result of an even further 24 volume loss. 25 Our point is preserve benefits absolutely. Enhance PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 133 1 them to the extent that it does not result in volume loss, 2 but the problem we have with the current CARB staff proposal 3 is we think there is additional volume that can be gained 4 back without loosing air quality benefits, and Al Jessel is 5 going to talk about that in a moment. 6 Another issue we have that is a concern is the 7 waiver. There has been a lot of discussion today about the 8 waiver and the potential of commingling. 9 The biggest concern that we have is that the staff 10 proposal builds into air emission reductions, based on the 11 assumption that the waiver will come, and that will be used 12 and therefore, commingling will have an impact. 13 We are not saying that commingling does not have a 14 potential impact, but we are saying do not assume that the 15 waiver will come and build in the emissions reductions now. 16 Do not build in emissions reductions now hoping the 17 waiver will come later. 18 If the waiver comes and the waiver is usable, which 19 is a big question, the waiver has to be issued in a timely 20 way in order for refiners to use it. 21 The conditions of the waiver have to be such that 22 the waiver can be relied on, and importantly, the waiver has 23 to be legally sustainable, which everyone recognizes is a 24 significant issue. 25 If all of those things happen, then there would be PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 134 1 a usable waiver in place, and there might be commingling, and 2 there might be an emissions impact. 3 So, what we are saying is deal with it when it 4 happens. You are already directing the Executive Officer 5 significant discretion going forward to deal with a number of 6 issues. 7 In fact, 2000 adjustment for that, revisiting, 8 commingling in a year or two, so if it comes, if it is 9 usable, deal with it then, but do not build it in now, 10 because you get an emissions reductions at the cost of 11 volume. 12 Two other quick points. One, Doug talked about the 13 difficulty of removing MTBE. 14 We face enormous permitting obstacles and all of 15 those things were highlighted by the Energy Commission report 16 last year. Those things are real, and we should not forget 17 them. 18 The other thing that we want to highlight is all 19 the cost analysis that we have been talking about is 20 primarily an average cost analysis where you look at the 21 total cost industry-wide and back that out into gasoline 22 prices. 23 That assumes a steady state. That assumes no 24 disruptions. That assumes imports are going great. All the 25 refineries are operating at 100 percent. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 135 1 We know that is not always the case. 2 The Energy Commission has in their previous reports 3 recognized that average costs what is being presented to you 4 work in steady state, but that is not what applies in the 5 market place when you are not in a steady state. 6 The Energy Commission report talks about there 7 being more volatility in the market place, and more 8 volatility means that those average cost assumptions will not 9 always be in effect. 10 In fact, they may be in less time than they had in 11 the past. So, that is another major consideration that you 12 have to take into account is that there is going to be 13 increased volatility, and then in those situations the 14 projections of average cost will not be operable in the 15 market place necessarily, and Math Pro has talked about that 16 in their previous studies, and it is in the Energy Commission 17 analysis as well. 18 In conclusion, the enhancement of air quality 19 benefits at the cost of volume loss is neither required nor 20 desired. 21 One last point, which is that we just received a 22 little while ago a copy of Trade and Commerce's analysis, 23 which we found to be very interesting in terms of the 24 concerns that were raised there, and we recommend that you 25 look at that very closely. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 136 1 They talk about the increase in gasoline prices may 2 lead to decreased business and consumer spending. 3 California's small business in particular may be 4 adversely impacted by any shifts in spending. They say that 5 ARB has also not demonstrated in the record sufficient 6 gasoline supplies exist outside the state to compensate for 7 any decrease in refinery capacity. 8 They talk about the supply disruptions and problems 9 with average cost assumptions, and then finally they talk 10 about the fact that the amendments, the proposal may not be 11 the most cost-effective means of implementing the Executive 12 Order. 13 With that, I would like to introduce Al Jessel, 14 because he is going to talk about an alternative way of the 15 Executive Order that we believe is more cost effective. 16 CHAIRMAN LLOYD: Thank you. 17 MR. JESSEL: I thank the Board very much for 18 entertaining us here. 19 I do want to say that we are the primary affected 20 industry here. We thought that we would have a little more 21 time to give our spiel. 22 Part of my talk gets into the technical aspects of 23 it. I prepared a bunch of nice slides. I would like to be 24 able to go through them. 25 I do pledge to go as quickly as I can. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 137 1 CHAIRMAN LLOYD: Your technical expertise may be 2 above some of us. 3 MR. JESSEL: If I may, I think Doug Henderson left 4 a couple of minutes on the table. 5 CHAIRMAN LLOYD: Ed quickly swallowed those up. 6 MR. JESSEL: The reason why we are really here is 7 to impress on you that we need to get flexibility back from 8 the ARB and their proposal, and we also need certainty in 9 rulemaking. 10 We do not want to have lots of questions unanswered 11 as we move beyond today. We need to say over and over again 12 that the increased emission stringency really does take away 13 from flexibility, and one more thing that I do want to add 14 that I have said in every workshop that led up to this thing, 15 is that our primary purpose as far as we are concerned here 16 is to take out MTBE and not to satisfy a lot of other 17 interests. 18 We recognize SB 989. Another goal and challenge to 19 meet is our differences with the ARB staff is just what kind 20 of flexibility that boundary actually produces. 21 Next slide. 22 So, our recommendation is that we adopt the 23 proposed predictive model which you have in front of you, 24 that we believe strongly that you can find more flexibility 25 in the rule. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 138 1 We can find another PSI and RVP another degree in 2 T50 and five more degrees on T90, and we feel very strongly 3 and support the staff proposal to delete the driveability 4 index specification. 5 Next slide. 6 We also want rapid consideration of the CARBOB 7 rule, and we support the staff proposal. 8 We also think that one issue that has not been 9 talked about a whole lot is the initial concentration of 10 allowed MTBE in gasoline as soon as the phase-out begins. We 11 think that is too high. 12 The pipeline system will cut that in half. So 13 effectively, it is half the number that you see in the staff 14 proposal for us, and that may cause the refiners to speed up 15 the process of getting MTBE out. 16 Time is short. Extremely short. 17 Small refiner exception then assures emissions 18 equivalency. 19 Next slide. 20 Very quickly, impact of removing MTBE, you can see 21 down under the fourth bullet, current predictive model 22 response, that there is a 10 percent increase in total 23 hydrocarbon, and that is very, very tough debit to try to 24 make up in the predictive model. 25 Next slide. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 139 1 Very quickly, this is the way that we look at the 2 predictive model right now. There is a lot of formulations 3 that are available inside that circle. 4 Next slide. 5 Taking away MTBE and adding the provisions of SB 6 989 take away a whole bunch of formulations that reduces our 7 flexibility, and then on the left-hand side, looking at what 8 happens when you change the sulfur limit, takes away a bunch 9 more flexibilities. 10 Next slide. 11 Now, that flexibility can be restored by changing 12 other components within the formulation. So, you can take 13 sulfur down. You can restore a fair amount of flexibility by 14 allowing other things to rise, such as T50 and T90, as staff 15 has proposed, and the next slide will show how far we think 16 staff has come. 17 We think there is more room for T50, and in fact, 18 RVP, in order to get us back to that full circle, that is 19 still smaller than the original one that we started with. 20 Next slide. 21 I am not going to try and go through all this. 22 Look at the way we view it. Staff has added flexibility per 23 the Governor's Executive Order and SB 989, but a lot of 24 flexibility has been subtracted either by things that staff 25 has done or by the simple fact that we have to get MTBE out PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 140 1 of the gasoline. 2 Next slide. 3 CHAIRMAN LLOYD: Didn't we drop the DI 4 specifications on the bottom? 5 MR. JESSEL: I am sorry. I left that on here. 6 I am hussling to keep up with your staff. I 7 apologize for that, except I so want to be sure that it does 8 not somehow creep back into the Agenda before the end of the 9 day. 10 WSPA and Math Pro analysis has gone one step 11 further. We have asked Math Pro, the same people that did 12 the CEC work, to do a couple of other cases, and we are 13 calling those our preserving benefits case, and then a waiver 14 case is a case which is the preserving benefits case, the 15 perfect preservation from our point of view, that reduces RVP 16 to 6.9, and then the staff proposal, we modified only a 17 couple of small assumptions. 18 The first one there, in an attempt to see, to get 19 some scale on the amount of imports that come in, CEC 20 analysis capped the amount of imports that the model was 21 allowed to bring in, and we wanted to uncap that to see what 22 would happen. 23 Next slide, please. 24 So that the cases that we have, what we are calling 25 SB 989, and that is the rebalance of emissions that we could PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 141 1 come up with, we think that balance that preserves the best 2 that can be done for practical sense, we have the waiver case 3 where a tenth of PSI and RVP have been taken off, and of 4 course, staff proposal, and then we have the current staff 5 proposal on the right. 6 Next slide. 7 So, remember those guys -- 8 The SB 989 case is a preserving benefits as far as 9 we are concerned. If you look at the middle set of three, 10 you see that NOx, the total hydrocarbon, and toxics are all 11 negative. 12 We say that is the test of preserving benefits. 13 That the waiver case, with a tenth PSI knocked off, RVP gives 14 you a fair amount more emission benefits, and these are all 15 compared to the 1998 in-use fuel that CEC used in all their 16 studies. 17 So, these are actual benefits based on in-use fuels 18 of the different cases. 19 CARB proposal has been talked about before today, 20 actually adds more stringency. Our position is that the 21 left-hand case is what the Governor envisioned and what SB 22 989 envisioned. 23 It produces reductions in NOx of 12.1 tons per day, 24 not very much in total hydrocarbons, because that balances 25 almost perfectly, and the total NOx plus hydrocarbon of 12.7. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 142 1 On the very bottom we see what we call flexibility 2 ranking through a computer simulation. We have estimated the 3 number of blends that would still be allowed under the 4 different cases. 5 You can see under SB 989 case flexibility in this 6 particular part of the certification program actually 7 increases. That is a net positive taken away by a bunch of 8 other things, which I can get into later, if you want to. 9 For this part of it, it is a net increase in flex. 10 The waiver case is in a decreasing flex, but not a whole lot, 11 but the CARB proposal is an enormous decrease in flexibility. 12 Next slide, please. 13 Cost effectiveness comparing the two cases to the 14 CARB proposal. The SB 989 case, we came up with a 55 ton per 15 day cost, a dollar per ton cost effectiveness, out of the 16 normal control range, and comparing it to the 6.9 PSI, what 17 we are calling waiver case, the one that we think ought to be 18 triggered only if the Federal Government issues an oxy 19 waiver, zooms up to $80 per ton. 20 Next slide. 21 The key consideration for the Board, I think we are 22 just reiterating what you have heard before, is that every 23 little bit of added stringency and emissions reduction is 24 going to impact refinery producability and production cost 25 and increase reliance on imports, and we think that goes PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 143 1 beyond what is really necessary here. 2 Next slide. 3 We do have some other uncertainties out there that 4 we recognize as not maybe a lot we can do about them today. 5 The MFAC 2000 was not heard. 6 So, my understanding is that we have the potential 7 for a model sometime next year, which of course, we have not 8 been able to evaluate, so we do not know the impact of it. 9 CARBOB provisions were too complex to deal with 10 this year, and we look forward to working with staff on those 11 next year. 12 Those can have an enormous impact on the ability 13 for the distribution systems to actually move gasoline from 14 refineries to consumers, and then we also see this as a 15 reanalysis of commingling, which could bring about 16 unpredictable results at this point. 17 All these things can change the way the refineries 18 have to comply with rules to get MTBE out in time to meet the 19 Governor's suggested deadline. 20 Next slide. 21 CHAIRMAN LLOYD: I think your deadline is gone. 22 MR. JESSEL: Next one -- let me -- do you want to 23 ask me about sulfur, or do want to go ahead? 24 Okay. Forward to the next one, and the next one, 25 okay. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 144 1 First, we are concerned reducing sulfur below the 2 20 ppm level right now is an enormous mistake, and probably 3 the biggest reason is the one that you see written up there, 4 and that is it simply takes away an enormous amount of 5 flexibility, and remember that circle chart I had and how 6 much sulfur waxed that flexibility. 7 Reducing sulfur is the main way that refiners are 8 going to be able to meet the California gasoline standards at 9 the same time taking MTBE out, if you reduce the flat spec, 10 you are in fact increasing the stringency of the whole 11 regulation taking away our ability to reduce sulfur to 12 actually make up the benefits in cleaner burning gasoline to 13 get MTBE out, and we think that would be an enormous mistake 14 at this point. 15 Next slide. 16 I think we have gone through that one. This is 17 just reiteration, and the next one, once again, a 18 reiteration, and I think that is it. 19 I didn't do too bad, and I will be pleased to 20 answer questions. 21 CHAIRMAN LLOYD: Questions from the Board? 22 BOARD MEMBER CALHOUN: One question for Mr. Jessel. 23 Have the proposed changes been discussed with the 24 staff? 25 MR. JESSEL: Yes, they have. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 145 1 BOARD MEMBER CALHOUN: I won't ask the staff to 2 respond at this time, because I suspect we will have other 3 people repeating the same one, and maybe it would be more 4 appropriate for staff to comment later. 5 MR. KENNY: The one thing that I would like to add 6 is that although Mr. Jessel has done a great job going 7 through the issues, that there really is kind of a 8 fundamental assumption difference of opinion here, and that 9 really drives pretty much everything that you just saw, and 10 that assumption difference of opinion is how much cleaner 11 than the Phase 2 specs is the existing gasoline that we have 12 in the market place? 13 If in fact you assume that it is, I am just going 14 to rough numbers here, but if you assume, for example, it is 15 three percent cleaner, you get one set of baselines that 16 essentially drives you toward one set of results. 17 If you assume it is two percent cleaner, you get a 18 different set of baselines. 19 What has happened here is that we have a difference 20 of opinion. We think that the gasoline that is out there is 21 actually a little bit cleaner than Mr. Jessel and members of 22 WSPA think it is. 23 If you have a gasoline that is a little bit 24 dirtier, then basically your baseline is dirtier, so when you 25 are doing your comparison, what ends up happening is you can PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 146 1 have a greater level of flexibility in terms of newer specs. 2 What we are trying to do here is ensure that in 3 fact we do preserve the air quality benefits that we have 4 achieved through Phase 2. So, what you are seeing here from 5 the staff is basically a concern, in fact as we play in this 6 very close margin now where this gray exists, we do not want 7 to err on the side essentially harming the air. 8 If we want to err, we want to err on the side of 9 preserving the air quality benefits, and that is what we are 10 trying to do. 11 We think that we actually have provided 12 flexibility. In fact, just in the last couple of days, we 13 raised the T50 number by two degrees. We provided additional 14 flexibility with regard to the early introduction of 15 MTBE-free gasoline. 16 We talked about dropping the driveability index. 17 We have talked about essentially going back and looking at 18 the CARBOB specifications. 19 So, we have tried to provide flexibility throughout 20 this process, because it is very important to us that we have 21 that flexibility, because without the flexibility, we will 22 have supply problems. 23 So, what you really are seeing from the staff's 24 proposal is an effort to try to balance supplies with air 25 quality preservation, and we think we have provided you today PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 147 1 with our best estimate of what that is. 2 BOARD MEMBER C.H. FRIEDMAN: Just a quick question. 3 The real world benefits that we're mandated to 4 preserve, what is your database for that? 5 MR. KENNY: Which? 6 Actually we had two databases that we relied upon. 7 The initial database that we used were California specs that 8 we had, but it was a fairly small database. 9 It was approximately 60 data points, and that is 10 where we originally came out with our, for example, 211 11 degree T50 specification. 12 As we worked with the oil industry, they made a 13 proposal to us that in fact our database was probably too 14 limited and probably in error. So, we worked with them, and 15 we actually increased the database to about 2000 data points. 16 When we included in fact the database was too 17 limited, and that the broader database with the greater 18 number of points was a more robust data set, that actually 19 did demonstrate that in fact the gasoline was less clean than 20 we had originally anticipated. 21 So, that is why you see today the staff proposal to 22 add those additional two degrees to T50, because we are 23 trying to provide greater flexibility, and relying upon that 24 data, we have learned that in fact the gasoline was not quite 25 as clean as we had originally anticipated, so that is the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 148 1 flexibility that has been provided. 2 MR. JESSEL: May I respond to one thing, Mr. 3 Chairman? 4 The ARB staff and WSPA do not disagree on the 5 characteristics of the 1998 summer fuel that SB 989 sets up 6 for the standard. 7 The differences that we have is how to predict and 8 what the future fuel under CARB Phase 3 gasoline is really 9 going to look like. That required making a set of 10 assumptions. 11 We think that the CARB made some very conservative 12 assumptions where it ended up, and we think that you do not 13 need to make those conservative assumptions, especially in 14 the light of the risk we have on producible, and so we made 15 the assumption which we think are a lot more realistic and 16 probably less then what we call an insurance policy to make 17 sure that benefits are preserved. 18 We think staff has gone farther than they needed to 19 go. 20 CHAIRMAN LLOYD: Mr. Bordvick is very happy where 21 the staff has gone. 22 MR. JESSEL: That is Mr. Bordvick's right to say 23 so. 24 BOARD MEMBER CALHOUN: I guess what I am hearing 25 from you is that, what you view as a compliance margin, the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 149 1 staff has taken that margin and trying to reduce the levels 2 from that point; is that correct? 3 MR. JESSEL: That is a simplistic way of looking at 4 it. 5 I think we can wrap all this up in discussion of 6 what the compliance margin should be, what we predict the 7 over compliance would be on refiners part, if RFG 3 is a lot 8 more than what CARB thinks it would be. 9 CHAIRMAN LLOYD: Yes, Supervisor Roberts. 10 BOARD MEMBER ROBERTS: Thank you. 11 Mr. Jessel, I am looking at your presentation and 12 some of those numbers of $50,000 per ton and $80,000 per ton. 13 I am wondering when we have testimony from one of 14 your largest members that there is no cost increase expected, 15 why is there such a difference in opinion between you and -- 16 MR. JESSEL: The best explanation that I have, and 17 remember I represent WSPA here. 18 I am representing the whole industry. Refiners are 19 all different. Every refinery is different, and I cannot say 20 Tosco costs are zero. 21 The modeling that we have done, the modeling that 22 the Energy Commission has done looked at the industry as an 23 aggregate and produced the results based on the industry 24 aggregate. 25 It does not intend to predict any one company's PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 150 1 cost of compliance. 2 The other thing that is not found in -- I will stop 3 there, because I do not want to confuse things any further. 4 CHAIRMAN LLOYD: One last question from Ms. 5 D'Adamo. 6 BOARD MEMBER D'ADAMO: Could you go back to the 7 slide that shows a chart of where you would like to be. 8 I think it has got T50 and T90. I think it is 9 about 5 or 6 slides back. 10 MR. JESSEL: Is that where we would like to be, is 11 that what you are -- 12 BOARD MEMBER D'ADAMO: No. 13 You had a chart that had vertical and horizontal 14 lines. 15 It was, maybe -- so, you are proposing the SB 989 16 scenario of 214 for T50, for example? 17 MR. JESSEL: 310 for T90 and 70 for RVP, but we 18 think it is probably wise that if the waiver were actually 19 granted, the oxy waiver for the state, that commingling 20 should be taken into account, and 6.9 would be the right RVP 21 should the waiver actually be issued and become effective, 22 which brings us to the middle column. 23 We do believe that triggers an important piece of 24 the argument. 25 BOARD MEMBER D'ADAMO: I would not want to attempt PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 151 1 to engage in a debate here about the science and the figures 2 you have here, because I am completely lost, but you are 3 pushing for more flexibility, and the flat limits right now 4 for RFG 2 are 210 for T50 and 300 for T90, correct? 5 The staff is proposing that those be increased to 6 provide for increased flexibility, 213 and 305 respectively. 7 Now I see that you are not quibbling on the sulfur change, 8 which is a reduction from 40 to 20. 9 MR. JESSEL: We are not opposing it. 10 Quibble may not be the right word. 11 BOARD MEMBER D'ADAMO: Now, what would you say the 12 average is right now for your members in term of the sulfur 13 content, because I understand it is quite a bit lower than 14 what is required? 15 MR. JESSEL: We have a specific number. 16 Maybe the Energy Commission could give it to us 17 based on their data analysis. I did not bring it with me. 18 MR. SCHEIBLE: I believe it is 22. 19 MR. JESSEL: We have not attempted to quarrel with 20 that. 21 We accept the Energy Commission analysis. We 22 supplied a lot of the information which went into it. 23 BOARD MEMBER D'ADAMO: I guess the reason I am 24 asking that is because it is my understanding that especially 25 if the level changes nationally, it will be easier to go down PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 152 1 further than 20, for example, right now you are down below 2 where you are actually required, you are down below 40. 3 MR. JESSEL: That is likely to continue even lower. 4 BOARD MEMBER D'ADAMO: That is likely to occur, and 5 we would like to see that occur. 6 So, the reason I am asking about sulfur is that, 7 isn't it true that if you are able to go down somewhere in 8 the teens on sulfur, then you would be able to receive 9 increased flexibility, you would actually be able to take 10 advantage of the flexibility provided for in the proposed -- 11 MR. JESSEL: It is actually the very opposite. 12 The way the reg works, and you are asking a 13 question that is going to get you into just what you did not 14 want to get into, but the way the regulation works is that 15 there is a set of flat specifications, and that is what the 16 CARB proposal sets our standard, that is what all gasoline 17 has to be to stay as clean as that, and the predictive model 18 allows you to choose other parameters that lets you pick a 19 different formulation as long as it still has the same or 20 better emissions. 21 If you were to lower the sulfur, and the predictive 22 model lets us go all over the place on sulfur as long as we 23 can make it up with something else, if you change the sulfur 24 standard here in the flat spec, then what you have done is 25 increased the emissions stringency or the emissions PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 153 1 performance of the flat spec fuel. 2 That will constrain the predictive model as much as 3 it constrains anybody trying to actually make the flat spec 4 fuel. 5 What I am trying to say is that if sulfur is high, 6 then we can voluntarily, as refiners, lower it, because lower 7 sulfur in the predictive model creates much lower emissions, 8 and then we can raise something else to get back to the same 9 or better level, and at the same time, it would take MTBE 10 out. 11 So, when you say lower the sulfur flat spec, you 12 are really increasing the stringency from our point of view, 13 increasing the emissions performance to the point, especially 14 on sulfur, where now we do not have what we need to have to 15 get MTBE out, to make up the deficit that taking MTBE out 16 creates for us. 17 It is not a matter of can we make it. It is a 18 matter of what flexibilities are allowed in the model to let 19 us make up for the loss of MTBE. 20 BOARD MEMBER D'ADAMO: Right, but it actually 21 sounds like there is flexibility in what you just described. 22 Could staff comment as well? 23 MR. JESSEL: There is flexibility in the predictive 24 model all by itself, and staff has granted more flexibility 25 since the statement of reasons came out in the first place, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 154 1 and we are very grateful for that. 2 We just think that staff could go a little farther. 3 MR. JENNINGS: Let me comment. 4 There might be a confusion on flexibility. I think 5 when Dee Dee was asking the question, she was referring to if 6 you have a flat limit of 20 and you bring the alternative 7 spec for your predictive model back below 20, that gives you 8 flexibility to go higher on the others. 9 I think you thought she was saying if you bring the 10 flat spec in the regulation below 20, which is what I do not 11 think she was referring to -- 12 MR. JESSEL: That was my misunderstanding. 13 What is the most damaging thing you could do is to 14 reduce the 20 ppm flat spec. 15 BOARD MEMBER D'ADAMO: I am referring to just 16 leaving it alone, and if we just leave it alone at 20, it is 17 highly likely that on the average your refiners are going to 18 go down in the teens somewhere, then that will give you quite 19 a bit of flexibility, depending on the individual company. 20 MR. JESSEL: Correct. 21 We were on the same side. I am sorry. 22 All the analysis that I have seen so far, the 23 Energy Commission analysis, our own analysis, say, yes, 24 sulfur will go down, because the model incentives for 25 lowering sulfur to create flexibility will get the MTBE out, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 155 1 the lack of MTBE. 2 CHAIRMAN LLOYD: Thank you very much, Al. 3 We are going to take just one more witness here, 4 and then I have to give a 10-minute break for the court 5 reporter. 6 We are running into some difficulties with people 7 who have got to catch planes here. So, we need to take that 8 time to let us know exactly when people have to leave with no 9 margin of safety. 10 So, Mr. Charles Franiken. 11 MR. FRANIKEN: Thank you, Chairman Lloyd, and Air 12 Resources Board Members. 13 My name is Charles Franiken. I represent Ultramar, 14 Diamond Shamrock Corporation, a large independent refining 15 and marketing company, headquartered in San Antonio, Texas. 16 Ultramar Incorporated operates a refinery in 17 Wellington, California, that is capable of producing 70,000 18 gallons per day of CARB gasoline. We market gasoline through 19 several hundred Ultramar-Beacon gasoline stations throughout 20 California. 21 We are a predecessor company and have been refining 22 market petroleum products in California for more than 60 23 years. 24 I will be very brief in my oral comments in support 25 of our written comments. We commend the CARB and CEC staff's PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 156 1 great effort to bring this proposed regulation before the 2 Board by the end of 1999. We support much of the proposed 3 regulation, including the additional flexibility provided by 4 the new staff proposal to increase the T50 flat limits to 213 5 degrees Farenheit. 6 That is very much appreciated. 7 This flexibility will translate into additional 8 CARB Phase 3 RFG that can be manufactured by California 9 refiners for California consumers. We also appreciate the 10 staff recommendation to remove the driveability index or DI 11 provision. 12 We support the additional cost effective NOx and 13 potency related toxic reductions provided by setting the flat 14 limits for sulfur at 20 ppm and benzene at eight-tenths of a 15 percent by volume. 16 Having recognized where we agree, we would 17 appreciate additional flexibility to produce even more Phase 18 3 RFG for blending components produced at our California 19 refinery. 20 We support the WSPA contention that additional 21 flexibility may be gained through slight increases in the 22 flat limit for RVP T50, or T90, and still preserve existing 23 air quality benefits for total hydrocarbons while gaining 24 additional reductions of NOx and toxic emissions above those 25 achieved by Phase 2 RFG. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 157 1 There is one point that we specifically want to 2 address. We do specifically oppose one revision recommended 3 by CARB staff. 4 We oppose the lowering of the cap limits for T50 5 and T90 from 225 degrees Fahrenheit and 335 degrees 6 Fahrenheit respectively to those limits currently specified 7 for CARB Phase 2 RFG. 8 We believe increasing the cap limits for T50 and 9 T90 by the originally proposed five degrees Fahrenheit 10 provides additional flexibility that can allow California 11 refiners to produce additional volume of fully complying 12 Phase 3 RFG with no measurable impact on emission 13 performance. 14 From our analysis, based on our Wellington 15 refinery, the T90 cap increase in particular provides 16 additional flexibility that may be very useful in 2003 and 17 beyond. 18 I want to stress one thing very carefully, raising 19 the cap limits do not represent environmental backsliding. 20 Under the Phase 3 RFG regulations, emission equivalency of 21 various blends of Phase 3 RFG will be determined in 22 comparison to the flat or average limits in the predictive 23 model, just as blends of Phase 2 RFG are evaluated currently. 24 Each blend must demonstrate equivalency for HC, NOx 25 and potency weighted toxics when evaluated against either the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 158 1 flat or averaging limits. 2 Cap limits do not directly control emission levels 3 but simply define the upper or lower balance to the possible 4 universe of one characteristics. Cap limits are necessary to 5 unable enforcement efforts and to make sure all possible 6 combinations of parameters are equitably predicted by the 7 terms of the model. 8 I would take at this point one issue with the 9 statement made by CARB staff in their presentation. We 10 believe that the good DI performance of CARB gasolines are 11 not due primarily to the caps but they are do primarily to 12 the flat limits that control the actual emission levels and 13 the DI of the fuel produced. 14 In the list of proposed revisions, CARB staff 15 indirectly ties the lower cap limits for T50 and T90 to the 16 removing of the DI provision. 17 With these coordinated adjustments are a political 18 solution for the current rulemaking effort, and to address 19 concerns as stakeholders for national limits that may be 20 influenced by your adoption or rejection of the driveability 21 index provision, we believe that the proposed cap levels for 22 T50 and T90 and driveability index should be decided on their 23 own merits or in the case of driveability index, the merits. 24 We believe that the issues and agenda is not 25 directly related to air quality in California or the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 159 1 availability in cost of gasoline in California should not be 2 germane to consideration. We request that the Board adopt 3 the T90 cap limit of 335 degrees as originally proposed by 4 the CARB staff. 5 We believe the Board should decide to increase the 6 T90 cap level on the basis of only two questions. One, if 7 the cap limit for T90 is increased to 335 degrees F, what are 8 the impacts on emissions performance of in-use Phase 3 RFG? 9 The answer, in our opinion, is it is negligible 10 effect or none. 11 Two, does the increase in T90 cap limit provide 12 flexibility to the California gasoline supplier to aid in the 13 phase-out of MTBE? 14 The answer to that question, for at least one 15 California refiner, is yes. 16 Thank you all for your time and attention. 17 CHAIRMAN LLOYD: Thank you very much. 18 Any questions from the Board Members? 19 Thank you very much. 20 We are going to take a 10-minute break here for the 21 court reporter, but then if Greg Dana, I am going to take a 22 few people out of order here, after that, Greg Dana, I will 23 also take William Piel, and then Michael Scippa. 24 We will take them right at 10 after 1:00. 25 (Thereupon a brief recess was taken.) PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 160 1 CHAIRMAN LLOYD: Is Greg Dana here, or did he 2 leave? 3 Oh, sorry, Greg. Be aware, Greg, your voice is 4 being piped in while Board Members finish their lunch, but it 5 was said that you need to leave and others do, too, so if you 6 would identify yourself, since you are taken out of order 7 here. 8 MR. DANA: My name is Greg Dana. I am Vice 9 President of Environmental Affairs, the Alliance of 10 Automobile Manufacturers. 11 The Alliance is a coalition of car and light truck 12 manufacturers, representing more then 90 percent of U.S. 13 vehicle sales. 14 On behalf of our members, we appreciate this 15 opportunity to comment on the proposed changes to 16 California's reformulated gasoline and regulations, and I 17 especially appreciate you taking me earlier. 18 I am trying to fight Tier-2 back in Washington and 19 here, and both of them are very important to us. The 20 rulemaking is extremely important to the Alliance members, 21 because of the ability of their products to perform as 22 designed depends heavily on the quality of the gasoline used. 23 Vehicles will emit the least tailpipe and 24 evaporative emissions and perform at their best if they use 25 the best quality fuel. The gasoline specifications that you PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 161 1 are reviewing today will make a difference for cleaner air, 2 which is why we are here. 3 California Phase 2 RFG or cleaner burning gasoline 4 certainly has made a difference. 5 When this fuel was implemented in January of 1996, 6 the environmental impact of this new gasoline passed all 7 expectations. ARB staff credited the problem with reducing 8 ozone in the heavily polluted South Coast Basin by a 9 substantial 15 percent in the first year, and an improvement 10 that has continued since then. 11 Haze and particulate levels also declined to the 12 extent where the mountains of Los Angeles now are routinely 13 visible from the city. Other pollutants such as toxics also 14 have been greatly reduced. 15 CARB deserves much credit for having taken such a 16 leadership position. Despite the progress that has been 17 made, the state's air quality still has not reached the goal 18 set by the Board. 19 Ambient air quality continues to drive the ARB and 20 the air quality management districts to look for even Moore 21 emission reductions from all sectors of the economy, 22 including from such small sources as nail polish. 23 This brings us to the matter at hand which is a 24 Phase 3 specifications for California reformulated gasoline. 25 The Governor and the Legislature have identified PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 162 1 two primary goals for the new gasoline formula. One, must 2 provide refiners with flexibility as they phase out the use 3 of MTBE. 4 The other was to maintain the fuel's value for 5 reducing emissions. Further improvements in fuel quality for 6 air quality needs in combination with the cleaner vehicles, 7 our members are bringing to the market will be key to 8 reducing mobile emissions further and to helping the state 9 achieve its air quality goals. 10 One of the alliance recommendations for achieving 11 greater reduction is to limit sulfur to five PPM. 12 While the ARB staff's proposed limits are a step in 13 the right direction, they stop short of achieving technically 14 feasible low cost emission reductions that you claim 15 California needs. 16 All the research is clear and convincing. The 17 lower the sulfur level, the lower the emissions is from both 18 the existing fleet of vehicles and the next generation of 19 vehicle technology. 20 In a few years, automakers will be delivering a new 21 generation of technology to meet LEV 2 standards. 22 Very low sulfur will enable their catalyst to 23 operate at maximum efficiency. Near zero sulfur levels in 24 particular will enable automakers to introduce new highly 25 fuel efficient technologies, such as lean burning engines, in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 163 1 the market place. 2 At the levels proposed for Phase 3 RFG, the sulfur 3 will cause severe and permanent poisoning of the 4 sophisticated lean NOx catalyst these engines require. So, 5 the proposed sulfur before you today will prevent this 6 technology, which could help reduce gasoline demand from 7 being introduced. 8 Yet, it is attributable that fuel economy will 9 reemerge as an issue putting pressure on the industry to 10 market such technology. 11 We believe the five PPM sulfur level is both 12 feasible and cost effective. Clearly, one-third of the 13 gasoline pool in California today is already below 10 PPM 14 sulfur. 15 Our study of the cost of moving sulfur to 5 PPM in 16 the rest of the country which has much further to go in terms 17 of lowering sulfur when you only add 2 to 3 cents per gallon 18 on average to the cost, a large part of the effort would not 19 even involve investing in new desulfurization equipment or 20 technology, which is making rapid advances and capability in 21 reduced cost. 22 Rather, much of the effort would go to improving 23 best operating practice. 24 In most sectors of America, industry frequent 25 random outages and unplanned shut downs will be considered an PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 164 1 unacceptable mode of operation. 2 Ironically, improving operating practices probably 3 will help refiners improve their operating efficiency and 4 probability in addition to getting the sulfur out of 5 gasoline. 6 Besides sulfur, other fuel properties also play a 7 key role in vehicle emissions. In particular, we are 8 concerned about the fuels mid range volatility as represented 9 by T50, T90, and distillation index corrected for oxygenate. 10 While many contribute to success of Phase 2 11 gasoline to its reduced sulfur levels, the fuel's 12 restrictions on mid range volatility also deserve a lot of 13 the credit. 14 We estimate that the Phase 2 limits on T50 and T90 15 are responsible for 50 percent of the VOC benefits and 15 16 percent of the toxic benefits of the program. Relaxing these 17 parameters could increase emissions and impair vehicle 18 performance. 19 The staff's newly revised proposal to cap T50 and 20 T90 and the Phase 2 levels is an important step towards a 21 more sensible outcome for today's hearing, but again it does 22 not go far enough. 23 The gasoline formula taken as a whole including the 24 lower RVP limits could lead to the distillation index 25 exceeding 1200 much more of the time even with the Phase 2 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 165 1 caps. 2 Also, the Board should keep in mind that while the 3 T50 and T90 caps are important to them, the T50 and T90 4 averages in flat limits would have an impact on real world 5 emissions. 6 Given that relaxing the current Phase 2 limits may 7 not serve any useful purpose and that California still needs 8 more emission reductions, we recommend that the Board retain 9 the current T50 and T90 specifications to help preserve the 10 significant air quality gains achieved by Phase 2 RFG. 11 This will provide in effect distillation index cap 12 of 1200 that we have been seeking and eliminate the need to 13 add another specification to prevent backsliding. 14 Ultimately, we believe the T50 cap, flat limit and 15 average should be lowered below the Phase 2 level by 10 16 degrees as further emission reductions are sought. 17 CHAIRMAN LLOYD: Okay. Are you nearly finished 18 there? 19 I thought your plane was going at 1:05? 20 MR. DANA: Just about. 21 The refiner should have no problem in continuing to 22 meet the T50, T90 specifications of Phase 2 RFG even without 23 the help of oxygenates. 24 With Chevron already providing Phase 2 compliant 25 MTBE gasoline and BPM and Tosco both pledging to provide MTBE PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 166 1 free gasoline ahead of schedule, it is difficult to 2 understand why the industry needs flexibility in these 3 parameters. 4 We understand that California is in a difficult 5 position, and while we can accept some flexibility during 6 this transition period, we think increasing both the flat 7 limits and averages for T50 and T90 gives refiners too much 8 flexibility. 9 We do not believe this much flexibility is needed, 10 and we fear it will compromise air quality and driveability. 11 If the Board must relax one, it should focus on the 12 average and keep the flat limit of Phase 2 level. In any 13 case, CARB should not allow this flexibility to continue, and 14 definitely give the oil industry what is essentially a 15 permanent variance from the Phase 2 limits, instead to the 16 extent that the Board does decide to relax any of the 17 standards today, it should at least sense the changes so that 18 they revert to the cleaner Phase 2 limits with a reasonable 19 amount of time. 20 We also recommend the Board consider reducing 21 sulfur level to less than 5 PPM by 2004 to allow the maximum 22 emission reductions from to LEV 2 vehicles and to enable 23 introduction of new vehicle technologies in California. 24 The staff has made numerous assumptions, and if any 25 of these prove wrong, California could find itself needing PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 167 1 major corrections since the proposed formula provides very 2 little margin for error. 3 We do have a real concern about increasing 4 emissions caused by commingling ethanol blended gasoline with 5 non-ethanol blended gasoline. 6 Even if California receives a waiver to sell RFG 7 without oxygenate, the use of ethanol will increase. We 8 estimate that the commingling effect could actually 9 overshadow any benefit of the staff's proposal for Phase 3 10 RFG. 11 CHAIRMAN LLOYD: In conclusion -- 12 MR. DANA: In conclusion, we appreciate the staff's 13 presentation that request for a resolution asking to limit DI 14 nationally to 1200. 15 We also think the resolution to reduce sulfur to 16 California levels as quickly as possible, and we heartedly 17 endorse such a resolution. 18 CHAIRMAN LLOYD: Do we have a copy of your written 19 statement? 20 Thank you very much. 21 Any questions? 22 BOARD MEMBER CALHOUN: Let me make one observation 23 here. 24 Mr. Dana, you make a case for driving the sulfur 25 limit down, and we are moving in that direction now, and I PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 168 1 suspect that in the near future, and I do not know what I 2 mean by the near future besides the date that there will 3 probably be more emphasis on driving the sulfur down, because 4 of the point that you made, and then all of this other 5 technology at work, it is going to be essential that the 6 sulfur level be at a certain point. 7 MR. DANA: We recognize that there are constraints 8 right now because of the flexibility need on refineries, but 9 we still think that we need to keep moving down towards 5 PPM 10 fuel. 11 That is critical for us. 12 CHAIRMAN LLOYD: Supervisor Roberts. 13 BOARD MEMBER ROBERTS: I wanted to understand 14 better the relationship between the 5 PPM and the LEV 15 program. 16 You were talking to the year 2004 that we really 17 should be trying to get to that point, and to the extent that 18 we have a limit of 20 rather than 5, and in spite of all the 19 flexibility, we do not see the averages change dramatically, 20 what happens to those efforts then? 21 How does it effect what we might expect to 22 otherwise say? 23 MR. DANA: There are two ways to look at that. 24 One is we see lower sulfur fuel bing an enabler for 25 the tighter requirements we have to meet in the future. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 169 1 We think it makes the job of getting a little bit 2 easier, because we are not sure at least with the full line 3 of vehicles we have if we are going to get there at this 4 point. We are still working on the technology. 5 We are committed to doing it, but we do not know 6 for sure, and sulfur will help that. The other thing is, as 7 I mentioned in my statement, is as we look at bringing into 8 the market place lean burn engines, direct injection gasoline 9 engines, the type of lean NOx catalyst they use is 10 absolutely, cannot handle sulfur whatsoever, even more so 11 than current automotive catalyst. 12 So, if you look at that possibility that technology 13 coming in the market for better fuel efficiency, that is 14 where it really becomes a very critical aspect of the fuel. 15 BOARD MEMBER ROBERTS: And the difference between 5 16 and 20 is especially so, with respect to that? 17 MR. DANA: With respect to the lean NOx catalyst, 18 yes. 19 There is a big difference between 5 and 20. 20 MR. KENNY: If I can add one thing to that, 21 Supervisor Roberts. 22 We have recently certified super ULEV vehicles, and 23 so they have extraordinarily low emission levels, and they 24 are being certified in an essentially existing gasoline, and 25 so as we look to the future, we would agree that lower sulfur PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 170 1 is appropriate, but it is not absolutely necessary in terms 2 of where we are right now in the LEV program. 3 MR. DANA: I might add those relatively small force 4 of cars, I am speaking about enabling trucks up to 8500 5 pounds meeting those standards. 6 CHAIRMAN LLOYD: Thank you very much, Greg. 7 The next speaker is William Piel, from the 8 Oxygenated Fuel Association, again, who has to leave early. 9 MR. PIEL: Again, my name is William Piel, of Piel 10 Associates. 11 I am here on behalf of the Oxygenated Fuel 12 Association, and I would like to present the testimony. The 13 Oxygenated Fuel Association has a history of providing 14 guidance on the use of oxygenates for the purpose of 15 producing higher performance fuels as well as cleaner burning 16 fuels throughout the world. 17 In that capacity, OFA would like to revise some 18 comments for improving the regulations and preserving real 19 world emission benefits, realize what the current oxygenate 20 program. 21 However, before providing comments of concerns on 22 these proposed regulations, a number of overall observation 23 on the programing can be made based on information provided 24 by Air Resources Board and others. 25 This regulation will have the following impacts on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 171 1 California as implemented, in addition to cost, the 2 California economy and costing the consumers up to $100 3 billion a year in higher gasoline cost, this regulation will 4 also reduce the states internal supply of gasoline by 10 to 5 15 percent. 6 This will make the state gasoline market more 7 vulnerable to refiner supply constrictions and more dependent 8 on gasoline imports which then contributes to our price 9 volatility and price spikes. 10 So, ARB's report suggests that total pollutants may 11 increase by 20.5 tons per day. A switch to ethanol from 12 oxygenates can potentially increase VOC by as much as 50 tons 13 per day, to commingling of gasoline purchases and also 14 increase toxics by 4 percent, assuming the oxygenate 15 standards are retained. 16 Should California request for the oxygenate waiver 17 be granted, emissions from off road gasoline energy sources 18 can also increase VOC by up to 24 tons per day and CO 19 emissions by up to 400 tons per day, with only a small off 20 setting increase of NOx emissions of less than 10 tons per 21 day. 22 No significant water benefits will likely be 23 realized from this regulation in the sense that California's 24 underground storage regulations appear to be successful in 25 eliminating the long and lingering gasoline tank leaks PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 172 1 typical of the past that contribute to gross water 2 contamination problems, such as Santa Monica, South Lake 3 Tahoe and Glendale. 4 In addition, the recent passed regulation has 5 targeted specific improvement that will further the strength 6 of regulation from blending or minimizing a risk of future 7 water contamination from leaking gasoline tanks. 8 OFA continues to support progressive regulations 9 that will ensure improved air quality, lower cost, increased 10 flexibility and or provide significant environmental 11 benefits. 12 However, it appears that this proposal as written 13 will not accomplish these objectives. Though increased 14 emissions can by compensated for improving the emission 15 reductions performance target of the fuel, the gasoline cost 16 will increase further for consumers. 17 Should the use of MTBE eventually be eliminated, 18 the current flexibility in the proposed regulation will 19 prevent increase emissions from occurring in sources affected 20 by the use of octanes in gasoline. 21 The amount of increased emissions can be, depending 22 on the oxygen standard, emission increase will be greatest if 23 the oxygen standard eventually weighs, if the oxygen standard 24 continues, ethanol will be used to satisfy the oxygen 25 requirement. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 173 1 This introduces the very likely possible RVP 2 increase occurring in vehicle gasoline tanks where consumers 3 mix purchases of gasoline that contain ethanol with purchases 4 that do not contain ethanol. 5 The average RVP increase can be as high as .5 PSI 6 or more depending on the market share of ethanol and amount 7 of commingling. As an example for possible average for RVP 8 increase of only .4 PSI, potential increase evaporated 9 emissions by 50 tons per day. 10 ARB can easily prevent this RVP increase occurring 11 by required minimum oxygen content per gallon at one percent 12 oxygen which is similar to the 1.5 million per gallon. 13 Mixing specifications, RFG's contain at least one 14 percent oxygen methanol, will prevent RVP increase and by the 15 VOC increases, unlike the EPA's complex model for predictive 16 emissions, neither ARB's current predictive model, RFG 2 17 model or the proposed RFG 3 model show any significant 18 difference between toxic emissions for oxygen from methanol 19 versus oxygen from MTBE. 20 This lack of difference concerns the phase, since 21 the emission phase such as those from auto world show higher 22 toxics from methanol blends at similar oxygen levels. 23 Holding all other fuel properties constant, EPA's 24 complex model predicts that toxins will be 3 to 4 percent 25 higher when using ethanol, and depending on whether the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 174 1 oxygen averaging is used, since the EPA complex model is 2 consistent with other studies, the OFA believes that ARB 3 should make these adjustments to prevent toxic increases 4 occurring when the ethanol is used. 5 If the oxygen standard is eventually waived, 6 potential increases will be even greater from all the 7 hydrocarbon placements for MTBE, since all the hydrocarbon 8 placements for MTBE will increase the gasoline's distillation 9 temperatures and require the increased use of aromatics to 10 replace the octane provided by MTBE. 11 ARB regulation apparently recognizes this necessary 12 change since the proposed specification raised the flat limit 13 for the 50 percent boiling temperature and also the cap for 14 the aromatic level. 15 ARB now also supports the observed increase toxic 16 emission benefits associated with the real world RFG, when 17 MTBE used to be standard, using the actual RFG gasoline 18 properties for 1998 summer and excess toxic benefit -- 19 BOARD MEMBER C.H. FRIEDMAN: Can you conclude, Mr. 20 Piel? Your time has expired. 21 MR. PIEL: -- is observed when the RFG predictive 22 model is safe. 23 There is probably no rational economical reason to 24 support that. 25 What I want to finish up and reiterate at the end PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 175 1 is for the reasons as discussed above the current proposed 2 regulation will lead to significant emission increases from 3 sources other than the tail pipe of cars, and therefore, will 4 not preserve the air quality achievement with the current 5 program. 6 These emission increases from other sources will be 7 much greater than the 20 tons per day reduction identified by 8 ARB. 9 BOARD MEMBER C.H. FRIEDMAN: Thank you very much 10 Mr. Piel. 11 Any questions? 12 We appreciate it. I hope you make your plane. 13 There is one more request. In the absence of the 14 Chair, I was asked to take this on, one other request out of 15 order, Mr. Michael Scippa, from CRASH. 16 MR. SCIPPA: Mr. Chairman and distinguished Board 17 Members, I am Michael Scippa, Executive Director of CRASH, 18 Citizens for Reliable and Safe Highways. 19 CRASH is a national nonprofit organization of over 20 40,000 people, with 6,000 right here in California. 21 Our mission is to reduce the numbers of heavy truck 22 involved crashes, facilities, and injuries which occur every 23 year. 24 I am here today to raise an issue which I do not 25 believe has yet been addressed, and that is the possibility PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 176 1 of greatly increased numbers of tanker trucks traveling 2 highly congested roads and highways, carrying extremely 3 hazardous material. 4 Apparently ethanol cannot be distributed through 5 pipelines, so it is estimated that in the first three years 6 of MTBE ban, starting in 2003, there will be over 210,000 7 additional diesel truck trips traveling over 15 million miles 8 on neighborhood streets and highways. 9 With an average 400 truck crash fatalities and 10 10,000 injuries per year in California, it is already one of 11 the most dangerous states in the country for motorists. 12 We are extremely concerned that a majority of the 13 projected extra tanker trips will occur in areas already 14 suffering from excessively dense traffic. Refineries and 15 distribution systems are clustered in the San Francisco Bay 16 Area and in Los Angeles. 17 Many of the facilities in the LA area are along 18 what the LA Times has called the most dangerous mile, the 19 intersection of I-5 and 710 freeways. 20 The motorists who travel in these areas do not need 21 the greatly increased danger of sharing the roads with 70,000 22 additional rolling time bombs each year. 23 While we all have heard about the horrible tragic 24 accidents that have occurred over the past few years in the 25 refineries, nothing has been said about those who have been PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 177 1 killed, injured or detained for hours when tanker trucks 2 carrying hazardous materials crash on our congested freeways. 3 It does not happen often, but when it does, the 4 consequences are catastrophic, and it happens far more 5 frequently than accidents in refineries. 6 California roads were meant for the safe 7 transportation of people as well as goods and commodities. 8 We are opposed to making conditions any more dangerous, as 9 what may happen with the shipment of ethanol. 10 We suggest that more time be taken to study this 11 critical public safety issue. 12 Thank you. 13 BOARD MEMBER C.H. FRIEDMAN: Thank you. 14 Any questions? 15 Thank you very much. 16 I think we are back on our normal list, and that 17 would be Mr. Kulaskowski, from Equilon Enterprises. 18 MR. KULAKOWSKI: Thank you, sir. Good afternoon. 19 My name is Mike Kulakowski, and I am representing 20 Equilon Enterprises. For those of you not familiar with 21 Equilon, we are a refiner and marketing joint venture between 22 Shell and Texaco. 23 We operate three refineries in the State of 24 California, and we are a major stakeholder in the issue 25 before you today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 178 1 We appreciate the opportunity to comment here, and 2 we have submitted written comments for the record. In 3 addition, we are a member of the Western States Petroleum 4 Association, and we support the comments they have made 5 today. 6 Finally, by way of introduction, I would like to 7 recognize the staff and the accessibility that they have 8 provided through this process. 9 They have had to endure more meetings than is 10 humanly possible, and we appreciate their efforts. 11 Equilon, is committed to getting MTBE out of 12 gasoline by the end of 2002 as required by the Governor's 13 Executive Order. We have taken a number of steps very 14 recently to demonstrate that commitment by taking gasoline 15 out of limited volumes where we find that possible. 16 As I said, we operate three refineries in the State 17 of California. Two of those are producing limited volumes of 18 gasoline without MTBE. 19 We are supplying on the order of 200 retail 20 stations between one and three grades of non-MTBE gasoline in 21 the San Francisco area, in the Central Valley and in South 22 Lake Tahoe. 23 Again, we are committed to getting MTBE out of 24 gasoline. Today, I would like to address four key issues 25 with the staff's proposal. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 179 1 First is the underlying specifications. Second is 2 the resolution of some of the lose ends that are left by the 3 proposal. 4 Third is permitting, and fourth is the small 5 refinery exception. 6 BOARD MEMBER C.H. FRIEDMAN: That is a pretty 7 ambitious agenda for two and a half minutes. 8 MR. KULAKOWSKI: About a minute each. 9 On the underlying specifications, we believe 10 flexibility can be added without any emissions detriment as 11 shown by WSPA today. 12 The way we summarize the issue, staff has raised a 13 bunch of concerns and a bunch of issues, and what they are 14 asking you to do is to buy insurance. 15 They are asking you to buy that insurance with my 16 flexibility. If someone else were paying for my insurance, I 17 would be insured to a much higher level than I am today. 18 I ask the Board to consider what level of insurance 19 is appropriate, and we ask you to consider the WSPA analysis 20 and the specifications brought forth by the organization. 21 Second issue is the driveability index 22 specification. We believe that the driveability index 23 specification is a performance issue not an emissions issue. 24 We find that one of the peer reviewers, Dr. Lucas, I believe, 25 agrees with us. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 180 1 In his peer review, he says it does not have a 2 direct connection to emissions. 3 BOARD MEMBER C.H. FRIEDMAN: That has been 4 withdrawn, I believe, so why don't you move on. 5 MR. KULAKOWSKI: I was unaware of that. 6 We support the staff's proposal to withdraw the 7 driveability index specification. 8 CHAIRMAN LLOYD: Such a quick study. 9 MR. KULAKOWSKI: This process is all about 10 flexibility, and I'm showing that I am learning. 11 The third topic that I would like to address is the 12 topic of the loose ends. 13 One of these is CARBOB. CARBOB resolution is 14 critical to my company. We plan on using a significant 15 amount of ethanol in our refineries. 16 We request that when staff does consider the CARBOB 17 issue, they maximize flexibility and preserve the nature of 18 the distribution system in California. 19 The other loose end that we see are the levels of 20 MTBE in gasoline. We support staff's prohibition of the 21 intentional addition of MTBE to gasoline, but we have concern 22 that the levels that are specified are too low and could 23 prohibit imports from areas of the country where MTBE is 24 still used in refineries. 25 Staff has indicated that they will make a review of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 181 1 the ultimate level of MTBE in the year 2002. We strongly 2 recommend that the staff open up this review to all levels, 3 not just the ultimate levels, and that they begin that review 4 and try to complete it consequential with the CARBOB review 5 in 2000. 6 Discuss permitting very quickly, we see it as huge 7 challenge. Never before have we done so much in so little 8 time. We appreciate staff's commitment to help, and we have 9 a suggestion for one more step you can take. 10 That is the preparation of resource documents that 11 address issues common to all applicants. This way we can 12 have something we can append to our permit without having to 13 reinvent the wheel. 14 We believe this type of partnership will allow the 15 applicant to focus on site specific issues without having to 16 deal with issues of statewide concern. 17 CHAIRMAN LLOYD: I see staff nodding. 18 MR. KULAKOWSKI: Finally, small refiners. Equilon 19 supports uniform application of these rules, and therefore, 20 we oppose these exemptions for small refiners. 21 If the Board does adopt or plan to adopt or agree 22 to adopt the staff recommendation, we believe that they 23 should take some steps. 24 First is to mitigate emission increases. Second is 25 to enforce these caps. Third, require all refiners remove PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 182 1 MTBE at the same time. 2 Fourth is to review compliance cost to assure that 3 there is no economic advantage, and fifth, only allow the 4 refiners who are operating in 1999 access to the exemption, 5 and we do note that the proposal addresses most of these 6 conditions we have laid out. 7 CHAIRMAN LLOYD: I think your time is up there, 8 Mike. 9 MR. KULAKOWSKI: One more point. 10 They say the details in small refinery exemption, 11 we are going to look very closely at the mitigation procedure 12 proposed by staff and try to understand how all emissions are 13 going to be mitigated, and we request that the Board direct 14 staff to require a mitigation of the emission increases to 15 the extent feasible. 16 CHAIRMAN LLOYD: Thank you very much. 17 BOARD MEMBER CALHOUN: Could we get the staff 18 reaction? 19 I gather that the staff has already taken into 20 consideration some of these items that we have proposed? 21 MR. KULAKOWSKI: As I say, on the small refinery 22 exemption, the proposal out there addresses the bulk of our 23 recommendations, with the one wild card being we have not 24 seen the mitigation procedure yet. 25 MR. VENTURINI: I will respond just very briefly. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 183 1 Except for his first comment on the specifications, 2 which we have issues with, with respect to the CARBOB, we are 3 committing and proposing to the Board that we do commit to 4 revisit the CARBOB specifications. 5 We are aware of the concerns regarding the residual 6 MTBE levels, and we are suggesting that when we look at that, 7 we look at all the levels, and so we can address that. 8 There is just too much to deal with at this point. 9 Regarding the permitting as we did, when we worked 10 following the introduction of Phase 2, we did resource 11 documents at that time, and we will be happy to work with 12 these individuals to prepare these resource documents to 13 expedite the permitting process, and with respect to the 14 smaller refiners, I think our proposal does basically 15 encompass the points that Mr. Kulakowski has made. 16 CHAIRMAN LLOYD: Thank you. 17 I would like to reiterate that, again, I would like 18 to use a free market approach here and use market 19 flexibility, but on the other hand, I am willing to exercise 20 command and control. 21 So, each speaker has the option of packaging his 22 comments in five minutes or run the risk that it will be cut 23 off, and then you will not get to the punch line. 24 So, I prefer the former, but I am going to have to 25 enforce the later. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 184 1 Sorry. Again, I'm pleased that we have brought 2 Chad Tuttle, from Kern Oil and Refining, which again we can 3 get the small refiner position. 4 MR. TUTTEL: Thank you, Chairman Lloyd. 5 Again, my name is Chad Tuttle. I am with Kern Oil 6 and Refining Company. I have submitted written comments. 7 First of all, I would like to state that Kern 8 appreciates the substantial effort put forth by the staff to 9 achieve the very tight and aggressive deadline. 10 Secondly, please note that these comments are 11 presented from the perspective of a small company which has 12 made extensive financial investment and commercial commitment 13 to enable it to comply with California and Federal 14 reformulated gasoline regulations. 15 Kern Oil is a small independent refinery in 16 Bakersfield, California. Kern is the only small independent 17 refiner currently producing California Phase 2 reformulated 18 gasoline, having spent millions of dollars to upgrade. 19 Kern employs 107 people and has supplied petroleum 20 products for 65 years. It is important to note that Kern 21 markets gasoline to both the independent and branded 22 marketing sectors in the San Joaquin Valley, high desert, and 23 central coast and as the only small independent gasoline 24 producer in California, Kern plays a significant role in 25 leveling the market's economic and supply playing fields, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 185 1 particularly in the Central Valley. 2 The only other gasoline producer in the San Joaquin 3 Valley is a major oil company refiner. We do make a 4 difference. 5 For Kern, a fundamental and necessary component of 6 producing California reformulated gasoline has been a 7 two-part strategy, including the oxygenate MTBE and refinery 8 modifications. Neither has been mutually exclusive. 9 Kern has spent the last nine months under intense 10 endeavor to try and determine if we could feasibly achieve 11 compliance with the new Phase 3 regulations. 12 This work has included preparing numerous 13 laboratory test blends, researching available blend 14 components, researching available technology and reviewing 15 potential crude oil input changes. 16 This data has conclusively shown that Kern cannot 17 meet the new Phase 3 requirements. 18 This data has also been shared with the California 19 Energy Commission, the Air Resources Board staff. Based on 20 work and in conjunction with CEC, below are four key elements 21 that support permanent small refiners specification 22 flexibility that we seek today. 23 Number one, the success of small refiner Phase 3 24 flexibility is critical, or Kern will go out of business and 25 an element of competition will be lost. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 186 1 Item 2, Kern is economically disadvantaged. Kern's 2 capital cost, based upon a cost per gallon of gasoline 3 produced, exceeds that of the large oil companies. 4 The proposed smaller refiners specifications equate 5 to differential increase total cost of 5 to 6 cents per 6 gallon more than that of the major oil companies. The 7 benefits will be preserved. 8 Any gasoline emission increase will be fully 9 mitigated for the entire volume applied to the volume cap by 10 reducing diesel fuel emissions. Mitigation cost are in 11 addition to our gasoline production cost. 12 Item 4, Kern's gasoline production will be capped. 13 Kern will not have an unfair business advantage. 14 I would like to note that Kern's supporting data 15 has been independently reviewed by a third party technical 16 consultant under contract with CEC. 17 Kern has also utilized its own third party 18 technical consultant to further verify the validity of our 19 work. That information has also been shared with CEC and ARB. 20 In closing, Kern concurs with the overall staff 21 recommendations and conclusions in their report and closes 22 with the following remarks, there are no feasible solutions 23 for Kern to continue producing California reformulated 24 gasoline without permanent specification flexibility. 25 California's economy is dependent on the element of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 187 1 competition that Kern provides. Without the critical small 2 refiner gasoline flexibility, Kern will go out of business. 3 Again, I would like to say that Kern appreciates 4 the hard work from the staff. 5 That concludes my remarks. Thank you. 6 CHAIRMAN LLOYD: Thank you very much. 7 Yes, Supervisor Roberts. 8 BOARD MEMBER ROBERTS: If I could, first of all, do 9 I understand that you say that you would be the only refiner 10 that would qualify under these provisions? 11 MR. TUTTLE: I believe as the staff's report is 12 currently written, that is correct. 13 BOARD MEMBER ROBERTS: Okay. 14 You are in agreement with the provisions? 15 MR. TUTTLE: Yes, we are. 16 BOARD MEMBERS ROBERTS: Do you have a feeling for 17 what this is going to do cost wise to you? 18 MR. TUTTLE: The numbers we have today are at a 5 19 percent higher cost per gallon number compared to the major 20 oil companies, and that data was developed from some 21 independent consulting companies, including Math Pro, 5 to 6 22 cents per gallon over and above what the major oil companies 23 have stated their costs. 24 BOARD MEMBER ROBERTS: You're saying yours to be 5 25 to 6 cents more than that? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 188 1 So, somewhere in the 10 to 12 cents a gallon? 2 MR. TUTTLE: Depending on how you look at the 3 range, that's right. 4 BOARD MEMBER ROBERTS: Okay. Thank you. 5 CHAIRMAN LLOYD: Thank you. 6 Thank you very much, Chad. 7 Our next presenter is John Wright, Cenco Refining 8 Company. 9 Then after that, we will have Jay McKeeman, Paul 10 Knepprath and Sandra Spelliscy. 11 MR. WRIGHT: Good afternoon. 12 My name is John Wright. I am an Executive Vice 13 President for Planning and Development for Cenco Refining 14 Company. 15 Our company appreciates the chance to share our 16 views with you today. My company purchased a 50,000 barrel a 17 day plant in Los Angeles last year. 18 We have developed a program, an extensive upgrading 19 program for this plant. We expect to resume operations next 20 year. 21 The refinery will be a new source capable of 22 producing CARB fuels, both gasoline and diesel. Our concerns 23 with the rulemaking are purely in nature we expect to be able 24 to meet the specifications as proposed. 25 My company intends to upgrade the refinery in a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 189 1 comprehensive way so we can have a safe environmental 2 conformity and economically efficient plan. It is going to 3 cost a great deal of money and impact new capital for the 4 rule being discussed today is a concern to our company. 5 The request that we brought in our written 6 submittal is for some kind of delay in implementation for our 7 company similar to what was done for smaller refiners in the 8 Phase 2 program, simply extending the compliance not the 9 removal of MTBE, but the compliance for the rest of the 10 specifications for something like two years. 11 This is based on the fact that first of all as a 12 fundamental matter we will be the smallest refiner in Los 13 Angeles and then suffer from difficulties of scale on that 14 basis. 15 Capital cost of the additional facilities required 16 for compliance with the proposed rule will consume the bulk 17 of our projected cash flow for the first two years of our 18 operation. 19 Our options are purchase of alkylate, which is 20 something more skeptical about the availability when the rule 21 is finally implemented, but in any case our estimate is about 22 a $10 million a year loss from our base financial 23 projections. 24 Or we can invest in additional facilities, as I 25 described, but the capital cost of that is in the range of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 190 1 $40 million. 2 I'm trying to meet your challenge, Mr. Chairman, on 3 time. 4 CHAIRMAN LLOYD: I appreciate it. 5 MR. WRIGHT: Looking at the CEC publications on the 6 impact of MTBE removal and their estimates of costs for 7 facilities, we think ours will be 59 percent higher than the 8 average competitor in the LA basin on a per barrel basis. 9 So, we believe we can do it. We simply need the 10 time to do it. We have yet to complete the financing of our 11 upgrading. 12 We are willing to accept mitigation measures 13 similar to what has been described in some way. We are 14 confident that we can work that out somehow, but this is the 15 only complex refinery available for restart resuming 16 operations in Southern California, in particular, where the 17 member from San Diego, I think, would like to see our product 18 at the market place. 19 BOARD MEMBER ROBERTS: I would say love to see 20 rather than like to see. 21 MR. WRIGHT: We are not asking for any permanent 22 give away. 23 We are perfectly willing to be a competitor in the 24 market place once we get over all the financial barriers of 25 entry, but we need your help in initial compliance. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 191 1 Can I answer any questions? 2 CHAIRMAN LLOYD: Questions from anyone? 3 BOARD MEMBER ROBERTS: Could the staff respond? 4 CHAIRMAN LLOYD: Yes. 5 MR. KENNY: We have actually looked at this issue, 6 and the key thing for us is that we feel uncomfortable about 7 essentially allowing dirtier fuel to come into the state at 8 the same time we are requiring all the other refiners to 9 bring in cleaner fuel. 10 We do think that in the Kern situation there is an 11 exception there, and the reason for that is that in the Kern 12 situation we have a refiner which has been complying. 13 They have been producing Phase 2 gasoline. They 14 have been making every effort to essentially move towards 15 Phase 3. 16 We do not want to put them out of business when 17 they have actually been doing everything they can to come 18 into compliance, and they are also proposing to mitigate the 19 actual consequences of at least the difference between Phase 20 3 gasoline and Phase 2 gasoline. 21 In this particular situation, we believe that this 22 sends somewhat the wrong message that in fact we would start 23 up new refineries in the state and allow them to come in with 24 dirtier fuel than we are currently requiring of those who are 25 operating in the state. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 192 1 MR. WRIGHT: May I respond to that, please? 2 First of all, we are proposing some sort of 3 mitigation measures that makes the net impact of all of the 4 fuel products that we make neutral. 5 If I understand the proposal for Kern, that is what 6 they are proposing to do; is that correct? 7 MR. KENNY: The proposal for Kern is to allow them 8 to mitigate the difference between Phase 2 and Phase 3. 9 MR. WRIGHT: We would like to be subject to a 10 similar rulemaking, but one other thing that I would say is 11 that whereas the plant was not in operation in 1998 or 1999, 12 it exists and it is fully permitted with AQMD operating 13 permits to operate, so we are an existing piece of machinery 14 down there, and we think it is unfair, particularly given the 15 supply problems that California faces, to exclude us on the 16 basis that was not running. 17 We would like very much for it to be. 18 CHAIRMAN LLOYD: I think what we are going do is to 19 have you continue to work with staff on the issue. 20 Mr. Kenny, do you have any other comments? 21 MR. KENNY: The only other comment that I would 22 make is that essentially that is has been fairly common 23 knowledge that MTBE was a problem and that the Governor's 24 statement with regard to getting MTBE out of the fuel was 25 made in March, and to the extent that Cenco had an PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 193 1 opportunity to essentially come into the state with a new 2 refinery, we would love to have the supplies, I think that is 3 absolutely fabulous, but we think that they ought to come in 4 with cleaner supplies. 5 BOARD MEMBER ROBERTS: Mr. Chairman, I guess I'm 6 having trouble. 7 I am hearing that they are willing to mitigate so 8 that maybe the differences in what I am hearing our staff 9 say, I mean I am hearing the speaker say they are willing to 10 mitigate in the same way the other firm is willing to do it, 11 and yet we are setting an obstacle. 12 I am hearing repeatedly that we have got capacity 13 problems that are going to be there with us and everything 14 that we are doing is driving the price and minimizing the 15 competition. We have an asset, and we are saying, yeah, but 16 we do not want to go there. 17 CHAIRMAN LLOYD: I was suggesting, Supervisor 18 Roberts, in fact, we actually ask staff to work with Cenco 19 some more and come back to us with some more of the details, 20 because I think I understand exactly where you are coming 21 from, but at this time, I am not aware of all the details 22 there and how we trade off like with Kern. 23 BOARD MEMBER ROBERTS: I just get concerned when we 24 say work on them. 25 You know, I guess I have been on these boards too PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 194 1 long, and things tend to, staff's, and I'm not saying this 2 one, other staff's take that as a license not to resolve the 3 issue in a way that I would like to see it. 4 BOARD MEMBER C.H. FRIEDMAN: This is not the County 5 of San Diego. 6 BOARD MEMBER ROBERTS: Believe me, I know that. 7 BOARD MEMBER C.H. FRIEDMAN: As a resident, I can 8 say that and as a friend. 9 CHAIRMAN LLOYD: Supervisor Roberts, who is 10 throwing the challenge down, we will specifically ask staff 11 to work with Cenco on that and look at those issues and come 12 back to us with all parameters. 13 It clearly is a complex issue that I do not think 14 we can resolve. 15 BOARD MEMBER ROBERTS: Had they not been working on 16 this, I mean is this the first time we have seen this 17 speaker? 18 MR. KENNY: It is not the first time. 19 We have been made aware of this issue. 20 BOARD MEMBER ROBERTS: You feel that you need more 21 time, I mean I was hearing from you that you already made up 22 your mind, so the Chairman is saying maybe more time to 23 understand this, but if we have all the information before us 24 and they feel they have all the information before us, I 25 think there is a policy decision to make. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 195 1 CHAIRMAN LLOYD: I do not feel that I have all the 2 information before me. 3 MR. SCHEIBLE: We had a very extensive and many 4 meetings with Kern to go through their exact situation and 5 convince us that it was truly economically impossible or 6 unreasonable for them to produce a complying fuel, and they 7 had to pass that test. 8 For Cenco, they have not passed that test. We have 9 not had the opportunity to go through any of the same detail 10 and determine whether their situation is truly the same as 11 Kern's with respect to that criteria. 12 MR. WRIGHT: We are not asking for some kind of 13 permanent exemption. 14 We believe that we can make the fuels that any 15 other complex California refinery can make and intend to do 16 that, if it does not push us over the edge financially or we 17 are sitting there with our heels on the edge about to fall 18 over given the amount of money we have to raise to do this in 19 the first place. 20 So, I appreciate what you are saying, Mr. Chairman, 21 and we would like to work with staff to see if there is a 22 place to go. 23 BOARD MEMBER FRIEDMAN: I appreciate that this 24 relief that you are requesting isn't forever. 25 How long do you think it needs to be? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 196 1 The deadline is December of 2002, and you would 2 like to December of 2004? 3 MR. WRIGHT: Something like a two-year, that was 4 the previous plan for small refiners when CARB Phase 2 was 5 put into effect in March '96, there was that two-year 6 forgiveness of certain specifications. 7 Obviously, we would not suggest that we put MTBE in 8 our gasoline. 9 CHAIRMAN LLOYD: What does staff feel that you 10 would consider a reasonable time which to come back to the 11 Board with a follow-up on this? 12 MR. SCHEIBLE: We could make it part of the October 13 item when we have to come back anyway. 14 CHAIRMAN LLOYD: Okay. Thank you very much. 15 Next speaker is Jay McKeeman. 16 MR. MCKEEMAN: Mr. Chairman, I would like to ask 17 your indulgence, after my brief testimony, I would like you 18 to allow Mr. Guyer, our Government Relations Director, he is 19 at the end of the testimony schedule, and he needs to get 20 back to Modesto, so if you would be willing to do that. 21 CHAIRMAN LLOYD: That is a very clever 22 introduction, yes. 23 MR. MCKEEMAN: Thank you. My name is Jay McKeeman. 24 I. 25 Am with the California Independent Oil Marketers PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 197 1 Association. Our association is made up of 500 members whose 2 basic business is working with our core members in supplying 3 fuel to a variety of customers. Our core members are family 4 owned small and medium sized businesses. 5 We have supplied comments in a variety of 6 locations. We had a letter to ARB on August 30. A letter to 7 the California Energy Commission on December 1, and we have 8 had several meetings with ARB staff, CalEPA and the 9 Governor's office regarding the issues involved in this 10 discussion. 11 Today, we have no response regarding any of our 12 concerns. 13 We do not believe that our concerns are independent 14 or out of line. Two agencies confirm that our concerns are 15 valid and need to be considered. 16 Recently the Attorney General issued a report and 17 confirmed what we have been saying all along that the 18 California fuel regulations do create market imbalance here 19 and have specific impacts on our members ability to compete 20 in the market place. 21 Secondly, the trade and commerce agency commented 22 that there is insufficient analysis that has been performed 23 on this regulatory package. 24 For the record, these regulations will have a 25 direct and negative affect on the ability of independent PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 198 1 marketers to compete. 2 Let me give you a brief example of that. Recently 3 the Air Resources Board established a regulation about MTBE 4 labeling and also created some conditions in Lake Tahoe where 5 MTBE-free gasoline could be marketed. 6 Our members have had difficulty in obtaining 7 MTBE-free gasoline. One of our members had to give up his 8 independent brand and rebrand to a major brand to be able to 9 secure access to supplies. 10 We believe that Phase 3 regulations when played out 11 will continue to erode our ability to market fuels to the 12 California economy, and our fuels tend to be the lowest price 13 fuels. 14 Because we have access to unbranded fuels, which 15 are typically the lowest cost fuels, we have very significant 16 concerns about the ability of our members to continue to gain 17 access to unbranded fuels as a result of these regulations. 18 We have asked the Energy Commission, and we have 19 pointed that out to you. 20 Today we have seen no analysis supplied on the 21 impact of these regulations on supplies of unbranded 22 gasoline. 23 Secondly, we believe the Energy Commission's 24 analysis of ethanol cost is very conservative. We need to 25 see what the cost of ethanol is going to be in a highly PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 199 1 competitive market place. 2 The rest of the nation watches California. There 3 are other states considering MTBE bans. That is going to 4 have a direct effect on ethanol availability and cost. 5 Third, the question is whether there are going to 6 be reliable sources of out-of-state materials to come in. We 7 have heard that everybody thinks that because of California 8 refinery margins that there will be material that comes in. 9 But nobody has done truth testing on this. Nobody 10 has gone out to the out-of-state refineries or world 11 refineries to determine whether there are in fact going to be 12 reliable and safe sources for delivery in the state, and we 13 believe it imperative to do that. 14 Finally, is there sufficient and reliable and safe 15 infrastructure to meet the increased movements? 16 We believe that there is a problem in that 17 situation, and it has not adequately been analyzed. 18 A key question that you have to ask yourselves, and 19 I would suggest you have to answer before you adopt the 20 regulations, is what is the effect of Phase 3 on competition 21 in the fuels market place? 22 The previous testifier I think illustrates the 23 problem. On one hand you want cleaner fuels. On the other 24 hand, it is extremely difficult for the small players to play 25 in that market, and that creates a problem. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 200 1 I think a bigger question is what is the legacy 2 that ARB and the Governor want to leave with this state? Is 3 it $2.50 a gallon gasoline and another MTBE fiasco, or is it 4 sound decisions based on good science, and I think a lot more 5 homework needs to be done before we are at that point. 6 Thank you. 7 CHAIRMAN LLOYD: Thank you. 8 Any questions? 9 Are you implying today that MTBE fiasco, we are 10 doing the ethanol fate and transport use? 11 MR. MCKEEMAN: What I am suggesting is that no 12 studies have been done to date as to whether the new fuel 13 blends will create any problems that MTBE has created in the 14 containment infrastructure that we have dealt with. 15 So, we do not know those answers, and as far as I 16 know, there is no trigger in the regulation that would say if 17 we encounter that problem, then we would withdraw the 18 regulation. 19 CHAIRMAN LLOYD: I think that will be an issue 20 addressed on January 18 with the Environmental Council, and I 21 encourage you to come and present your comments there. 22 I appreciate it very much. 23 BOARD MEMBER C.H. FRIEDMAN: Mr. Chairman, I want 24 to reiterate what I heard earlier. 25 This is chapter one in the trilogy, and the water PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 201 1 people and the others are going to be working hand in glove 2 to do what reasonably can be done to ensure that we do not 3 have that problem. 4 MR. MCKEEMAN: We think that the taxpayers and the 5 fuel consumers in this state need to know what the impacts 6 are on a reliable basis, and we do not think that there has 7 been sufficient investigation in the key issues to really be 8 able to answer the questions. 9 CHAIRMAN LLOYD: Rest assured that we will do 10 everything to comply with what you ask for. 11 The Governor is asking us for nothing less. 12 BOARD MEMBER C.H. FRIEDMAN: We have got a mandate 13 as I understand it from both the Governor and the Legislature 14 with a timeline. 15 Then, you are right, we are all entitled to know 16 that, and we are doing the best we can. 17 Do you have any specific knowledge or information 18 that you can share on that? 19 MR. MCKEEMAN: We have been at the table all along 20 and have supplied any information that we have available. 21 It is just the questions have not been answered. 22 CHAIRMAN LLOYD: Thank you, Jay. 23 BOARD MEMBER ROBERTS: The statement that was made 24 that we are going to erode the ability to market the 25 unbranded fuels, is staff, I mean has that been part of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 202 1 analysis, does anybody want to comment on that? 2 MR. SIMEROTH: The regulations will not change the 3 number of suppliers in California. 4 You heard earlier that our ability to import fuels 5 from out-of-state are still preserved. 6 BOARD MEMBER ROBERTS: So, you do not think this is 7 going to have any effect? 8 MR. SIMEROTH: Well, the regulations themselves are 9 not. 10 Their basic problem there is other economic forces 11 at work. There are mergers and other things that are 12 happening through major oil companies that are changing the 13 number of companies supplying this. 14 BOARD MEMBER ROBERTS: Can I get you to say it, 15 that you do not think that this change is going to have any 16 affect on the erosion, the ability to market unbranded fuels? 17 MR. SIMEROTH: We do not think this change will 18 have any effect. 19 MR. MCKEEMAN: We disagree. 20 CHAIRMAN LLOYD: I also want to point out, I know 21 that Secretary Hickox and I, and I think Mike Scheible, met 22 with Jay, to discuss an issue, and I will expose on my ex 23 parte, but I think the type of problems that Jay was asking 24 us to fix goes far beyond what we are trying to do here and 25 gets into the free market economics, so while we are PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 203 1 sympathetic to what you are saying, it is beyond our 2 capability to solve those issues beyond what we were required 3 to do by the Executive Order here. 4 MR. MCKEEMAN: I appreciate that view point, but 5 California already has impacted their free market. 6 This is not a free market here. This is a 7 controlled market. 8 Our suggestion is that Phase 3 will go even further 9 to make it difficult for the independent marketer and the 10 independent refiner to operate in this market. 11 CHAIRMAN LLOYD: We look forward to hearing more on 12 January 18. 13 I guess your colleague is going to say something. 14 I will also ask, I just noticed, by the way, here, that Jim 15 Lyons, if he is still here, made a special plea to actually 16 testify early, because of some personal issue. 17 If Jim is around, I was going to call on him next. 18 MR. GUYER: Good afternoon. 19 Thank you, Mr. Chair, Ladies and Gentlemen of the 20 Board. 21 I appreciate you letting me address my concerns 22 earlier then anticipated. My name is Paul Guyer. I am an 23 unbranded independent fuel marketer from the Central Valley. 24 My major concern is with the availability of 25 unbranded fuel in the market place. We serve customers PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 204 1 throughout the agricultural sectors, schools, emergency 2 forces and municipalities. 3 Since the inception of RFG, I have noticed 4 increased problems with acquiring supply and equality in the 5 price of unbranded fuel. I am afraid the adoption of CARB 3 6 will continue this problem. 7 I ask that you seek more information on who can and 8 who will supply CARB 3 and in what quantities. 9 Imports will only arrive when huge amounts of 10 profits can be made. Ask yourself this question, if I can 11 make CARB 3, why ship tomorrow for one cent when I can ship 12 it 30 days from now for 35 cents a gallon? 13 Supply will be satisfied or price will be directly 14 affected. When RFG was first adopted, price went up 33 cents 15 a gallon. 16 It's the volatility in the market supply which 17 creates higher prices. The availability of unbranded fuel is 18 vital to my business to survive. 19 Please do more research in maintaining a 20 significant supply of fuel to benefit the California consumer 21 from paying even higher prices for gasoline. 22 CHAIRMAN LLOYD: Thank you. 23 Staff, would you like to comment? 24 MR. SIMEROTH: Well, the price going up when Phase 25 2 came in was directly related to the Shell refinery PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 205 1 explosion and refinery going down and the state unexpectedly 2 losing 10 percent of its market. 3 In terms of the regulations, the regulations 4 themselves are not changing the production situation in 5 California. Other factors are at work doing that, and it is 6 a number of companies, not the number of refineries that are 7 changing. 8 CHAIRMAN LLOYD: As I recollect, about a year ago, 9 we were really bathing in the joys of all time low gasoline 10 prices historically. 11 MR. SIMEROTH: That is correct. 12 In 1998, the prices were as less than they had been 13 in a very long -- 14 CHAIRMAN LLOYD: That was with Phase 2? 15 MR. SIMEROTH: That was with Phase 2. 16 CHAIRMAN LLOYD: I hear your point very much, but I 17 think again I have made the same comment as I made to Jay, I 18 think this is part of a much bigger issue, and again, we will 19 try to address this a little bit more in detail at the 20 January 18 meeting. 21 Jim. Sorry. I did not pick up on your request 22 earlier there. 23 This is Jim Lyons, from Sierra Research. 24 MR. LYONS: Thank you very much for honoring my 25 request, Chairman Lloyd. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 206 1 You have to excuse me. I have a little bit of a 2 cold as well. I am going to talk today briefly about the 3 commingling issue, the effect of mixing ethanol containing 4 gasolines with both MTBE containing and non oxygenated fuels. 5 Our work has been sponsored by the American 6 Methanol Institute. 7 CHAIRMAN LLOYD: Still five minutes. 8 MR. LYONS: I understand. I have cut the 9 presentation back considerably. 10 Basically, we looked at two cases. Case one has 11 ethanol with MTBE, 67 RVP initially on both fuels, and that 12 is a scenario that could occur as early as next summer. 13 Case two is 69 ethanol containing fuels with the 65 14 RVP non oxygenated fuel as outlined in the staff report, and 15 that is a future situation that we have evaluated in 2005. 16 The impact of commingling varies depending on 17 brand, loyalty, how full the tank is when people refill it. 18 I guess I should also point that when I talk about 19 commingling here, I am only talking about the act of a 20 motorist with non ethanol fuel pulling up to the gas station 21 and putting in an ethanol containing fuel, nothing upstream 22 of that. 23 Basically, the bottom curve shows the effect of 24 commingling and RVP as a function of ethanol. Market share, 25 the upper dash line, is the effect based on our analysis. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 207 1 The lower dash line is the minimum affect, with the 2 solid line being the average. This is for the South Coast 3 and the year 2000, and on the upper set of curves is the 4 emission effect which shows that, depending on the market 5 penetration of ethanol, you can get somewhere as high as 6 almost a 12 percent increase in evaporative emissions. 7 This is for the second case, in 2005, and as you 8 see, the RVP effects are even greater, as much as four-tenths 9 of PSI, potentially with emissions increases potentially as 10 high as 20 percent. 11 Converting from -- it's okay. The bars will still 12 look the same. 13 Converting from percentage increase to tons per 14 day, these numbers for the year 2000, computed in with the 15 model, what you see is again, depending on ethanol market 16 share, that our average results would suggest as much as a 6 17 ton per day increase with a maximum case over 12. 18 The lower part of the bar shows the minimum impacts 19 so that there would be an impact in all cases except at 90 20 percent market shows something like 2 tons per day if ethanol 21 containing gasolines are not 100 percent in the market place, 22 or if they are not completely eliminated from the market 23 place. 24 This is the second case for 2005, and because of 25 the RVP effects were greater, the tons per day is higher. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 208 1 The evaporative emissions inventory has been reduced down to 2 more newer vehicles certified to more stringent evaporative 3 standards in the fleet. 4 I would just like to compare the potential emission 5 increase as associated with commingling to some other 6 regulations that you have adopted to reduce evaporative 7 emissions. 8 The top red bar shows the emissions increase in 9 2005. That is case 2. 10 The next one down is the case 1, 2000 emissions 11 increase, which as I have mentioned, could occur as early as 12 next summer, and what you see is that the magnitude of the 13 emission increases associated with commingling are on the 14 same order as regulations you have adopted, such as the LEV 15 2, more stringent EVAP standards in both the years, 2010 and 16 2020, and it will be on the same order of magnitude as it is 17 enhanced stage 2 vapor recovery regulation that you are going 18 to be considering next year. 19 On to the conclusions, fuel RVP will increase due 20 to commingling unless there is zero ethanol or 100 percent 21 ethanol in place in the market. The increase in evaporative 22 emissions may occur prior to the Phase 2 regs, which as I 23 have mentioned could be as soon as next summer. 24 The magnitude of the emissions increase caused by 25 elevated RVP due to commingling could be substantial, and the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 209 1 emissions benefits of California Reformulated Gas 3 may be 2 offset due to the increase in commingling. 3 I would just like to add a couple of other things, 4 while I prepared this presentation knowing that the staff was 5 going to consider a study in December of 2001, so that 6 addresses the Phase 3 gasoline issue, however it does not 7 address the potential for the impact of ethanol to raise RVP 8 in 2000 and 2001. 9 CHAIRMAN LLOYD: You heard that there is a request 10 from WSPA that in fact we delay sort of looking at this 11 issue, taking it too seriously, compared to staff. 12 How would you respond to that? 13 MR. LYONS: I do not know refiner plans with 14 respect to the introduction of ethanol to the market place 15 during the MTBE phase-out, and staff probably knows better 16 than I, but if there is going to be any significant 17 introduction of ethanol into the market place next summer, 18 there is going to be an RVP increase, and there is going be 19 higher evaporative emissions as a result. 20 CHAIRMAN LLOYD: Thank you. 21 Questions from the Board? 22 BOARD MEMBER CALHOUN: Can we go back to the 23 conclusion. 24 CHAIRMAN LLOYD: Yes, Mr. Calhoun. 25 BOARD MEMBER CALHOUN: Put the view graph back up. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 210 1 The magnitude of emissions increase caused by 2 elevated RVP value is substantial, but when you make the 3 presentation, you say could be substantial. 4 Is it or could be? 5 MR. LYONS: Well, that conclusion rests on the 6 assumption that there will be ethanol introduced into the 7 market place. 8 If that occurs, then it will be substantial. 9 BOARD MEMBER CALHOUN: That's fine. 10 We have already discussed that. 11 CHAIRMAN LLOYD: Thank you very much, Jim. Thank 12 you. 13 Next speaker is Paul Knepprath, then Sandra 14 Spelliscy and Brooke Coleman. 15 MR. KNEPPRATH: Thank you, Chairman Lloyd and 16 Members of the Board. 17 My name is Paul Knepprath, representing the 18 American Lung Association. 19 Well, I am going to stay within my five minutes. 20 Our medical arm of the California Thoracics Society, I have 21 submitted a letter to you, so I am not going to go exactly 22 verbatim, but I do have a couple of comments and a couple of 23 recommendations that I want to make. 24 The first point is that the American Lung 25 Association is into this thing because our whole goal is to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 211 1 get to cleaner air, healthier lungs and the elimination of 2 lung disease. 3 In looking at Phase 3 program, we want to, one, 4 maintain real world emission reductions and the public health 5 benefits that have been achieved under the current program, 6 and these are particularly significant in terms of exceeding 7 a predictive model resulting in cleaner air that we breathe, 8 and this being a huge benefit for public health, especially 9 for those who have lung disease. 10 I might add and remind the Board that in California 11 we do have about 3.5 million individuals that suffer from 12 chronic and acute lung disease and an additional 2.5 million 13 people with asthma, which includes about half a million 14 children in California. 15 So, for them this is a critical issue. It is not 16 so much about price hikes or the availability of fuel or the 17 technical issues that you have been hearing about today. 18 This is an issue about breathing cleaner air. 19 We urge the Board to consider and guard against the 20 uncertainties of the fuel in the next three years. We are 21 concerned about the so-called commingling effect. 22 When gasoline containing ethanol and non-ethanol 23 are mixed, the RVP of the fuel is increased up to one PSI, 24 and this occurs even when both fuels meet the 6.9 PSI flat 25 standard that is currently contained in the staff proposal. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 212 1 Even the commingling affect degrades the average 2 RVP of the fuel pool, and in a given area, by .02 PSI can 3 result in significant increases in evaporative emissions. 4 I think you have heard some of this from some of 5 the previous speakers. We are concerned as others have 6 mentioned that such an impact is particularly more 7 importantly now than previously believed in the near doubling 8 of the contribution evaporative emissions that have been 9 recognized in the MFAC 2000. 10 A couple of recommendations that we have to make 11 include lowering the flat limit RVP to 6.8 PSI and reducing 12 sulfur to 5 PPM. 13 While the CARB staff analysis of the emission 14 benefits of the Phase 3 proposal calculates a small air 15 quality benefit, the assumption on which the analysis are 16 based represent really a best guess. 17 Should some of these associates be around here the 18 air quality benefits may not be realized. So, to provide a 19 greater certainty of the Phase 3 program, we of the American 20 Lung Association recommend lowering the flat limit for RVP 21 from 6.9 or 6.8 PSI. 22 Secondly, on the sulfur issue, and this has been 23 raised, there has been quite a bit of discussion about this 24 already. 25 We do support getting down to as low as 5 PPM as PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 213 1 possible. This not only gives us greater assurances that we 2 are going to meet the air quality benefits and the public 3 health benefits from such a reduction, but also, we believe 4 that the automobile manufacturers would have the ability to 5 introduce even cleaner vehicle technology in getting the 6 sulfur down. 7 Also of concern to the American Lung Association is 8 that we would like to see the air be closely monitored in the 9 ambient levels of PAN as Phase 3 is implemented. The CalEPA 10 report we believe is not infinitive about the ability for the 11 current models to accurately match the predicted and the 12 observed levels of PAN, and since these atmosphere products 13 are particularly lung irritants as well as eye irritants and 14 other problematic properties to sensitive populations, we 15 want to make sure that those, as the program has implemented, 16 that there is a monitoring effort that ensures -- 17 The last major issue that we want to touch on, how 18 is my time, I have one minute left. 19 The last issue that we want to touch on is the 20 recommendation that we should revisit the Phase 3 program if 21 the EPA waiver is granted. 22 Many people have raised this issue, and I think you 23 will hear more from others on this. We think you should 24 commit today to revisiting if the oxygen waiver is granted. 25 We believe that the substantial benefits in granting the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 214 1 waiver should be captured on behalf of air quality, not just 2 on refiner flexibility and all that. 3 Also, should the ARB decide not to lower the sulfur 4 as we have recommended, it should commit to revisit this 5 decision if the oxygen waiver is granted. 6 It would also be important to reexamine the need 7 for additional measures to offset what will be likely be an 8 increase in the commingling effect in Phase 3. If there is 9 no minimum oxygen requirement, it would be the EPA waiver 10 that has been requested. 11 Those are our comments. We appreciate your time 12 and energy. 13 CHAIRMAN LLOYD: Paul, I know PAN will be monitored 14 not just calculated. 15 Any questions? 16 Thank you. 17 MS. SPELLISCY: Good afternoon, Mr. Chairman and 18 Members of the Board. 19 My name is Sandra Spelliscy. I'm General Counsel 20 for the Planning and Conservation League. 21 PCL is a statewide environmental group based here 22 in Sacramento that represents thousands of individual members 23 as well as dozens of group organizations in the state. 24 Thank you for the opportunity to be here. 25 In general, PCL is supportive of the proposed PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 215 1 regulations and would like to commend staff for its really 2 admirable work in navigating through this difficult and 3 complex issue and also how it involves stakeholders in the 4 process. 5 Today, I am just going to touch on a couple of 6 specific issues involving the regs and then focusing on some 7 overarching policy considerations that I hope the Board will 8 think are important in this decision-making process. 9 First, let me acknowledge that we realize that it 10 was very difficult for the staff to devise an appropriate 11 regulation without certainty as to the future of the Federal 12 Clean Air Act's minimum oxygen requirement in California. 13 PCL has been 100 percent supportive of the 14 Governor's effort to seek a waiver of the requirement and 15 also the congressional efforts to exempt California from the 16 mandate, and we will continue to work with all stakeholders 17 to press the Federal Government to grant the waiver, because 18 we firmly believe that only with such relief will the 19 California RFG program have the flexibility necessary to 20 achieve the greatest emission benefits. 21 Specifically, comments on the regs, PCL, also with 22 several other environmental and health organizations, 23 recommends that the Board adopt a RVP flat limit of 6.8 24 instead of the proposed 6.9 or 7.0, and this, again, is 25 because of all the uncertainties surrounding the effects of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 216 1 commingling testimony that you heard just a couple of 2 witnesses earlier. 3 The 6.8 limit will provide much greater security 4 against loss of benefits, the assumption contained in the 5 proposed regs that commingling will only have a modest effect 6 on our RVP may prove to be overly optimistic, we are afraid 7 that is the case. 8 Having a lower RVP baseline will provide the extra 9 margin of safety against increased emissions. We also think 10 that lowering the flat limit now is a more prudent approach 11 than the recent staff suggestion that we simply reanalyze the 12 impact of commingling at the end of 2001, because at that 13 point the loss of benefits may already have occurred and 14 industry capital investments will also have been made. 15 PCL also joins the other groups in urging the Board 16 to consider a much lower sulfur reduction in the proposed 17 regulations. We would recommend a 5 PPM limit in place of 18 the proposed 20 PPM. 19 As it is repeatedly stated throughout the staff 20 report, sulfur is the fuel parameter that simultaneously 21 reduces emission of hydrocarbon, NOx and toxics. 22 Sulfur reduction is also one of the easiest and 23 most cost-effective changes that can be made at the refinery 24 level. Lower sulfur levels will result in tremendous 25 emission reductions at relatively low cost, a fact that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 217 1 should be given greater weight in the proposed regulations, I 2 believe. 3 At the very least, the Board should direct staff to 4 conduct a near term study of the costs and benefits of 5 additional sulfur reductions so the Board will have a clear 6 picture of what lower sulfur levels can provide should it 7 decide to make additional adjustments to the fuel formulation 8 in the future, and specifically, we also agree that should 9 EPA grant California's request for an oxygenate waiver, the 10 Board should commit to use the increased flexibility in cost 11 savings to capture greater air quality benefits. 12 The whole issue of lower sulfur benefits and lower 13 sulfur levels and getting greater emission benefits goes to 14 the heart of sort of an overall policy consideration that 15 arises from this rulemaking, and I would really like the 16 Board to think very strongly about and that goes to how to 17 ensure public health and environment when we are talking 18 about evaluating very complex technical details and whether 19 this rulemaking should be used as an opportunity to make 20 greater progress in reaching State and Federal air quality 21 goals. 22 There is a lot of talk about backsliding and 23 equivalency, flexibility, increasing benefits. I know the 24 industry is trying to recapture some of the flexibility they 25 lost when MTBE was added to gasoline, but we really believe PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 218 1 that first of all because of the uncertainties surrounding 2 actually putting together the numbers for this regulation, it 3 is really imperative that the Board err on the side of 4 caution and setting levels that we know will not cause any 5 backsliding, any loss of day to day benefits, that goes to 6 the sulfur issue as well. 7 We believe that this is a once in a decade 8 opportunity to capture greater air quality benefits and make 9 greater strides in reaching our air quality goals. We know 10 we have a huge deficit in the SIP that we are going to 11 somehow have to try and fill. 12 The statewide I and M program has not reached its 13 full potential, and maybe never will, so this fuel program 14 along with LEV 2 is really our single greatest opportunity to 15 dramatically lower emissions. 16 Finally, the Chair mentioned this morning about 17 price and whether or not it is appropriate to be considering 18 the price. 19 I really think that, I hope you take the price 20 issue for what it is as one component, but not an overriding 21 component, because really until the state decides as a state 22 to tackle the policy issue of the demand side of price, we 23 should not be dealing with public health and environmental 24 regulations based on price when we fail to address the demand 25 side of the equation. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 219 1 So, that is what I think is our responsibility, if 2 we ever have the hope to provide clean and healthy air for 3 every citizen. 4 Thank you very much. 5 CHAIRMAN LLOYD: Thank you. 6 Any questions or comments? 7 Thank you very much. 8 Next is Brooke Coleman, followed by Mark Nelson, 9 Janet Hathaway and Larry Greene. 10 MR. COLEMAN: Good afternoon. My name is Brooke 11 Coleman. 12 I am the spokesman, Clean Fuels Director for Blue 13 Water Network, and I am also speaking on behalf of CAW, 14 Californians for Clean Waste -- wait, it doesn't make any 15 sense -- Californians Against Waste, or Clean Waste -- if you 16 don't mind, Mr. Chairman, I am going to handout a three-page 17 pamphlet, just so that you can follow along with the 18 testimony today. 19 My testimony today centers around interpretation of 20 the statute requiring ARB to achieve equivalency in Phase 3. 21 I have submitted for the record a letter from an 22 attorney representing Blue Water Network, and that is 23 actually at the bottom of that packet. I will make copies as 24 soon as I finish testifying here. The attorney is urging the 25 Board not to adopt the proposed regulation. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 220 1 I have handed out a packet for the Board's 2 referral. 3 On page 1, you will note that Senate Bill 989 4 requires ARB to assure, quote, unquote, that the proposed 5 regulations maintain or improve upon the emissions in air 6 quality benefits achieved by Phase 2. 7 I think you guys are aware of that at this point. 8 In an effort to demonstrate the baseline emission 9 scenario ensured by the regulation itself, I have compared 10 the emissions performances using the predictive model of the 11 1998 in-use fuel specified in the staff report and the 12 proposed flat limits. 13 The results are on page 2 of the pamphlet I have 14 provided. This comparison is useful to realize the baseline 15 scenario required by the regulation. 16 ARB correctly points out that refiners will likely 17 produce gasoline with compliance margins, and as a result the 18 staff's emission analysis assumes that existing compliance 19 margins will be maintained in Phase 3. 20 However, because compliance margins assumed by the 21 staff cannot be ensured by the regulation, and in this case 22 are not insured by the regulation, and in fact, we are 23 concerned about flexibility decreasing compliance margins, 24 that is an intuitive thing, interpretation that we have come 25 to, the emissions analysis does not provide a definite answer PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 221 1 as to whether or not existing benefits are maintained. 2 It is clear from page 2 that the worst case 3 scenario is not protective of existing benefits by a wide 4 margin. 5 This moves to my next issue, and I am going to have 6 to start cruising here a little bit, the emissions analysis. 7 Equivalency is maintained by an extremely small margin in the 8 emissions analysis provided by staff. 9 This is true even with existing and somewhat 10 speculative compliance margins built into the analysis. Our 11 primary concern is the fact that actual Phase 3 in-use fuels 12 could be significantly dirtier than the representative future 13 fuel, quote unquote, used in the analysis, a fuel which 14 narrowly maintains the benefits. 15 I hope that the Board will look closely at the 16 representative future fuel scenario used in the emissions 17 analysis, because we have serious concerns about the entire 18 premise of this regulation that T90, T50 aromatics can 19 potentially, olefins might need to be increased in a flexible 20 scenario, and the industry testified on November 15, they 21 accept aromatics, T50 and T90 and olefins in Phase 3. 22 If you look at a comparison of the 1998 in-use fuel 23 in that staff report compared to a representative future 24 fuel, the representative future fuel for Phase 3, you will 25 see that only T50 is predicted to increase. T90 goes down, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 222 1 aromatics go down and olefins go down. 2 The regulation does not ensure that the predicted 3 levels in those parameters cannot go up, and that is what we 4 are concerned about. 5 ARB staff has confirmed that the representative of 6 future fuel is not what ARB staff expects future fuels to 7 look like. Analysis of existing fuels in refineries may not 8 maintain the RVP level set in the analysis at 6.7. It will 9 likely increase T90 levels. 10 In terms of the representative future fuel 11 scenario, there is room for refiners to make dirtier fuel, as 12 I have said, without offsetting those adjustments. 13 If either of these adjustments are made, the 14 equivalency is lost. 15 I would also like to mention that we are 16 disappointed that ARB staff has decided to incorporate CEC 17 reporting data to reconfigure the baseline in the emissions 18 analysis and justify further flexibility just a few days 19 before this hearing. 20 The entire issue of equivalency hinges upon the 21 analysis, and changing the inputs prevents us from conducting 22 a proper review of the data. 23 We hope that this regulation will not be passed 24 until we give it proper time, and that does not include 25 passing it today and giving us 15 days to analyze this data. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 223 1 We do not feel like that is enough time. 2 My final point concerns carbon monoxide, and again, 3 I point to the Sher language which specifies that maintaining 4 benefits, that the new regulation must maintain benefits, 5 quote, unquote, including emission reductions for all 6 pollutants, including ozone precursor, that was not put up on 7 the screen in the presentation made by ARB staff. 8 ARB's staff failure to incorporate a CO debit for 9 fuels containing less then 23 percent oxygen allows refiners 10 to produce a gasoline with greater CO emissions. 11 The analysis, on the third page, I will hurry along 12 here, on the package shows that ARB data confirms that even 13 after speculated T50 and sulfur adjustments, Phase 3 fails to 14 offset anywhere from 142 to 507 tons per day of CO emissions. 15 A CO debit for reducing oxygen must be incorporated 16 into the regulation to reflect the real world benefits of non 17 oxy fuel scenarios, and most importantly to comply with the 18 statute. 19 I would like to conclude that we fully support the 20 recommendations made by environmental organizations at this 21 hearing to reduce the baseline RVP and sulfur limits and to 22 ensure that in the event of an oxygen waiver, more stringent 23 limits are proposed. 24 I hope also there will be a trigger if in 2004 and 25 hopefully earlier we test fuels that are not maintaining PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 224 1 existing benefits. 2 However, the critical point in this regulation is 3 the emissions analysis, and it stands, the analysis does not 4 adequately reflect the real world impacts of Phase 3, yet 5 makes clear that the regulation does not ensure benefits are 6 maintained. 7 We recommend to the Board that this regulation is 8 not passed until a more thorough and intense emissions 9 analysis is completed and stakeholders are given the 10 opportunity to review all the new data. 11 Only through this process will we be able to 12 determine whether the statute is being withheld. 13 Thank you. 14 CHAIRMAN LLOYD: Staff, comments? 15 MR. SCHEIBLE: Okay. 16 On the first issue, in terms of our methodology, we 17 projected what types of fuels, given that the refiners have 18 to include a compliance margin, which our assumption was that 19 the existing compliance margins in terms of the testing that 20 they do, they leave themselves room between the test method 21 and what the standard is would be maintained in the future. 22 We have acknowledged as time goes on sometimes those margins 23 shrink. 24 Refiners have now had over 4 years of effort in the 25 Phase 2 regulations to shrink those margins and do things. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 225 1 We do not think that is going change much. 2 So, we believe our methodology is a perfectly 3 adequate way of demonstrating the difference between the 4 specification and a somewhat cleaner in-use fuel that must be 5 provided. 6 MR. COLEMAN: May I respond to that? 7 CHAIRMAN LLOYD: I think I would like to let him 8 finish. 9 MR. SCHEIBLE: Secondly, in terms of the future 10 fuel by each specification, there has to be a compliance 11 margin. 12 Once you get into the real world, refiners will 13 choose, for example, probably to drive sulfur lower. They 14 may decide to by doing that increase T50 and use up extra 15 emission reductions that they got by driving sulfur lower. 16 That is something that is very difficult to say 17 exactly what will be the future fuel out there, but 18 assessment of what they have to basically comply with the 19 spec minus the compliance margin, means that any fuel they 20 produce under the predictive model has to be at least that 21 good. 22 If some property goes up, other properties go down 23 to offset that emission increase. 24 CHAIRMAN LLOYD: Okay. 25 MR. COLEMAN: My quick response to that is that the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 226 1 representative future fuel is not just based on compliance 2 margins. 3 There was a level of judgment applied to olefins, 4 staff reduced olefins beyond compliance margins with the 5 expectation that they would attract sulfur. 6 We expected that to happen on the other side of the 7 coin. T50 is at 298 right now. The assumption if you look 8 at the 1998 in-use fuel, they reported at 17 over the flat 9 limit and produced fuels at 10 over the flat limit for T90. 10 Yet in the representative future fuel case, you 11 have got 298, which is 7 below the flat limit. So, if you 12 look down the line on the representative future fuel case, 13 you have a significant amount of credit accumulated that can 14 be applied somewhere. 15 The problem is it is not applied in the 16 representative future fuel case, therefore, the emissions 17 analysis is a little sketchy, to say the least, especially 18 one that has a non-margin for error at .1 percent 19 hydrocarbons, and that is what we are concerned about. 20 We don't think that the T90 is going to be at 298, 21 and there are other issues. So, it is not just a static 22 analysis in representing -- 23 CHAIRMAN LLOYD: Do you want to comment? 24 MR. SCHEIBLE: I just want to point out something, 25 that we thought sulfur would go down because obviously we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 227 1 took that from 40 to 20, so sulfur would be lower. 2 We assume that in the typical refinery process that 3 olefins would slowly go down with that. 4 In the predictive model, when you take olefins 5 down, two things happen. One is when olefins go down, 6 hydrocarbons increase. So, that actually hurts from 7 balancing the model around the critical point which is 8 hydrocarbons. 9 NOx goes down and helps you meet NOx, but since 10 sulfur had gone down, we had excellent NOx benefits. 11 This is a very, very complicated issue that staff 12 has taken cumulatively decades to understand, and we feel 13 that our assessment is very defensible. 14 With a lot of time, obviously, you could improve 15 upon it, but it provides an adequate basis for this 16 regulation. 17 CHAIRMAN LLOYD: One thing that I do understand as 18 we move ahead to the fuels of the future, again, I think we 19 are going to request staff to react and go out and get our 20 own data, because I think Brooke's comment that we do not 21 have adequate data and rather than estimate, we will see, and 22 then we will in fact be able to see what is being supplied in 23 the market place. 24 MR. COLEMAN: I hope that you decide to put a 25 trigger in for that purpose, so that we go in front of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 228 1 Board again on this regulation, if there is noncompliant 2 fuel, I hope it is sooner than 2004, especially if you are 3 offering refiners the opportunity to do it a little bit 4 earlier than that. 5 CHAIRMAN LLOYD: Prior to that, but I think Dean 6 has a burning answer. 7 MR. SIMEROTH: You can pass if you want, but 8 briefly the Energy Commission Math Pro analysis included an 9 evaluation of what they thought the future fuel would look 10 like based on our specifications. 11 We evaluated that future fuel, and it also 12 preserved the benefits. So, we have looked at this more than 13 just one way. 14 CHAIRMAN LLOYD: I know I am convinced, because I 15 have been through it with Mike, and I understand what Brooke 16 is saying, this is a highly complex issue we are clearing up 17 and getting it resolved here, but rest assured, we are trying 18 to do everything we can, Brooke, in this short time frame. 19 We are not perfection, and it will probably never 20 be given the uncertainties, but we are trying to do the best 21 we can. 22 But thank you for your comments, and I say 23 particularly fuels in the future, we will keep an eye on 24 that. 25 Thank you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 229 1 Mark Nelson, Janet Hathaway, Larry Greene. 2 MR. NELSON: Mr. Chair, Board Members, I'm Mark 3 Nelson, with Hewlett Packard Company, here this afternoon 4 representing the Cleaner Air Partnership of Sacramento. 5 The Cleaner Air Partnership is a joint effort 6 between the Sacramento Metropolitan Chamber of Commerce and 7 the Sacramento Chapter of the American Lung Association. 8 Supervisor Tom Stallard earlier presented our basic 9 position very eloquently, and in addition I believe you have 10 a letter from us signed by several members of the 11 partnership, including members of the business community, the 12 environmental community and the regulatory community. 13 The gist of that letter is that we support the 14 direction of your staff's recommendation, and we urge the 15 Board to consider further opportunities to reduce NOx. 16 The only thing that I would add to what has already 17 been said is we have heard a lot about the value of 18 flexibility. We have seen diagrams emphasizing the need for 19 us to have flexibility. 20 As a member of the Sacramento business community, I 21 can relate to that argument, although from a somewhat 22 different perspective. 23 We in the Sacramento region need to reduce our NOx 24 emissions from gasoline burning vehicles by over 50 percent 25 in the next five years, and if we don't meet that goal, the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 230 1 implications for this area are somewhat unknown, but no doubt 2 significant. 3 So, anything that you can do to help us would be 4 very helpful, because frankly reaching our goals is becoming 5 increasingly problematic, and we need all the help we can 6 get. 7 Thank you. 8 CHAIRMAN LLOYD: Thank you very much. 9 I appreciate Hewlett Packard working with the 10 district and whatnot here to help improve air quality. 11 Did you bank any time from this morning? 12 MS. HATHAWAY: Let see, I have some slides here. 13 My name is Janet Hathaway. I am with the National 14 Resources Defense Council, and I am going to move through 15 some of these slides really quickly, because they cover 16 things other people have mentioned. 17 First of all, obviously the most important and key 18 thing about this proposal, warts and all, it does remove 19 MTBE. It is going to take care of that issue, but the real 20 question that we are all debating is whether there is 21 adequate improvement, and basically from our point of view, 22 we are not looking at equivalence as necessarily everything 23 that we should look for here, but we are looking for an 24 opportunity to get all cost-effective emission reductions. 25 I think that is what the Sher Bill language did PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 231 1 request ARB to do. 2 So, it is not really enough to say we have 3 equivalence. 4 Next slide. 5 The commingling issue has been discussed. I just 6 want to highlight that the staff proposal itself suggests 7 that a wide variation of possible impacts for commingling, it 8 is very uncertain. 9 It could be as little as one-tenth of a pound per 10 square inch RVP, or it could be as large as .4 PSI. 11 Next slide. 12 The factors that effect commingling as you have 13 heard before are things like what percentage of the fuel is 14 ethanol containing versus non ethanol, how it is 15 geographically distributed, whether consumers go to the same 16 gas station time and time again, or whether they actually 17 shop around, and while those factors may be something that 18 one could study, they also are factors that one could change 19 if there is a price change. 20 Refiners could make different decisions about their 21 use of ethanol, and consumers can make different decisions 22 about where they are going to buy gasoline as you know they 23 will if they see some changes in price. 24 Next slide. 25 So, I think that it is important to keep in mind PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 232 1 that the ARB really cannot control commingling, and so that 2 is why we are urging trying to protect against it. 3 We do want to see a waiver, but if there is a 4 waiver, there is flexibility for the refiners to use or not 5 use oxygenate, and if that happens, then there will be some 6 degree of commingling. 7 That is something we are proposing a RVP reduction 8 to try to protect against. 9 Next slide. 10 So, basically what we are suggesting is that if 11 there can be a further reduction of the RVP 2 below the 6.9 12 baseline or to 6.8, you at least then have a little bit more 13 possibility that when commingling occurs, which it will, that 14 you are not actually going to increase emissions relative to 15 today. 16 Next slide. 17 Finally, one of our reasons for being so 18 inconsistent about this whole RVP issue, is every time you 19 come back to the refiners and say, oh, one more thing, now we 20 would like you to fix this problem or that problem, they will 21 rightfully respond, oh, we already may have some commitments, 22 you have made contracts, you have also changed our refinery 23 configuration in various ways based on your previous rule, 24 and it does seem to me both economically and environmentally 25 to build in as many protections as possible so there is in PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 233 1 that sense that you are nickel and diming them, that you keep 2 coming back and changing the rules as they move forward. 3 So, our proposal of 6.8 PSI as a limit, is 4 something that would give us a little bit, a slightly greater 5 cushion. 6 Next slide. 7 We wanted to second what the Lung Association 8 mentioned about the need for a continued and expanded 9 monitoring of PAN and acid aldehydes precisely, because these 10 are substances that are known to be very severe irritants, 11 they were present in large concentrations in LA air in the 12 bad ol' days, when everybody had red eyes and very much felt 13 the impact of smog. 14 We are not suggesting that ethanol will return us 15 to those bad ol' days, but just even moving in a direction 16 that increases the sensitivity of the asthmatics is something 17 we want to avoid, and there is very little data out there 18 about just what triggers PAN formation, and so to be 19 protective and given that our models are a little bit off in 20 predicting just where PAN will increase, we suggest expanded 21 monitoring. 22 Next slide. 23 I will just go right to sulfur. On sulfur, there 24 obviously was not a lot of time for the staff to look at all 25 the different possible configurations of the sulfur levels. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 234 1 What they settled on was a 20 limit. Definitely 2 that moves us in the correct direction. 3 We do know that further reductions give additional 4 benefits. It is not a linear. There is not an elimination 5 of the benefit, and we are not finding that newer studies 6 suggest that lower levels are not helpful. 7 In fact, quite the opposite. 8 Given that U.S. EPA is moving to 30, it should be 9 easier for California to import low sulfur gasoline, and the 10 very fact that CEC says that California refineries are maxing 11 out their production potential means that there will be 12 routine contracts with refineries, probably in the Gulf, but 13 elsewhere, so that we will be routinely importing. 14 That will help to protect against price shocks. 15 The very fact that we are right now importing only 16 periodically is part of our problem. 17 So, the issues of cost need to be looked at both 18 with the waiver in mind and with U.S. EPA and a 30 part per 19 million, because those two factors can help us reduce the 20 cost of our fuel. 21 To just wrap up, what NRDC would urge is that we 22 look at the possibility of a far lower sulfur level 23 eventually. Yes, going to 20 is a good step, but another 10 24 and then to 5 might be something that is very cost-effective 25 relative to our other emission control measures, and I thank PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 235 1 you for the opportunity to present our testimony. 2 CHAIRMAN LLOYD: Thank you, Janet. 3 When did you expect EPA to actively pass on the 30 4 PPM? 5 What is the implementation schedule that you expect 6 them to put into that? 7 MS. HATHAWAY: Well, they are actually supposed to, 8 well the implementation schedule they are talking about is 9 2004. 10 So, the time frame when you are talking about going 11 to 20 is when they are talking about going to 30. The 12 question would really be, does that facilitate getting low 13 sulfur feed stocks into California, and my guess would be 14 that it does. 15 Once you have desulfurization capacity in a 16 refinery, then there is just more of just an operational 17 effect. It is not like a big capital effect to reduce your 18 sulfur levels further. 19 CHAIRMAN LLOYD: I think staff recognized other 20 than the delta between the Federal and the California would 21 be much smaller, so it would be much easier to have that 22 there then. 23 MS. HATHAWAY: Really, the request is to make sure 24 that in maybe six months, a year, that is looked at, because 25 having a good signal well in advance to the refineries that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 236 1 they are going to be expected to go further down the road to 2 lower sulfur levels, I think could help reduce costs. 3 CHAIRMAN LLOYD: Any questions or comments? 4 Thank you very much. 5 Next Larry Greene, then Chung Liu, Karen Wilson, 6 and Martin Tuttle. 7 MR. GREENE: Mr. Chair, Members of the Board, I am 8 Larry Greene, President of the California Air Pollution 9 Control Officers Association, which represents 35 air 10 districts across the State of California, and also the Air 11 Pollution Control Officers of Yolo and Solano District. 12 My purpose here is to support the early staff 13 recommendation regarding RFG 3, realizing that this is an 14 interim step to improve gasoline reformulation with regard to 15 air quality. 16 Gasoline reformulation is a key strategy to lower 17 pollution levels across the state, effects every engine, 18 making each one burn cleaner in the state. 19 We ask that the reformulation under consideration 20 today be only the latest step in the use of this key strategy 21 to reduce pollution from motor vehicles. 22 Further reformulation should be considered as the 23 technology for reducing fuels advances. We also believe that 24 further reductions in the sulfur content must be considered. 25 Reducing sulfur as an ambient air quality both PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 237 1 eliminating direct emissions and allowing more advanced 2 exhaust and emission controls, a reduction of 5 parts per 3 million is feasible, and that should be considered as soon as 4 possible by the Air Resources Board. 5 I appreciate your time today, and I commend the 6 staff for this really difficult work that they have been 7 going through. 8 CHAIRMAN LLOYD: Thank you very much, Larry. 9 Any questions or comments? 10 Thank you. 11 Dr. Liu, congratulations for coming in second. 12 DR. LIU: Actually, we are fourth. 13 Some of the districts in California are with us 14 now. 15 Good afternoon, Dr. Lloyd, Members of the Board. 16 My name is Chung Liu. I am the Deputy Executive Officer for 17 South Coast Air Quality Management District. 18 The district's staff appreciates this opportunity 19 to speak before your Board today regarding the proposed Phase 20 3 gasoline regulations. 21 Significant air quality improvement has been made 22 this year in the South Coast Air Basin, as Dr. Lloyd just 23 mentioned. For the first time since air quality data has 24 been collected by the District, the Basin had no first stage 25 ozone alerts. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 238 1 We believe that Phase 2 gasoline is one of the 2 major factors behind this significant, I will say marvelous 3 achievement. The District understands the significance of 4 MTBE and water quality on our ecosystems, and we fully 5 support Governor Davis' decision to phase out MTBE in the 6 next three years. 7 We do appreciate ARB's staff efforts in striking a 8 delicate balance to achieve the MTBE phase-out while 9 maintaining the air quality gain of reformulated gasoline and 10 providing flexibility to refiners. 11 We believe that the staff proposed Phase 3 gasoline 12 regulations has done so, and we are here to support it. 13 Saying all this, we also understand significant air quality 14 benefits can be achieved by further tightening the sulfur T50 15 and T90 limits as well as requirements. 16 Additional efforts also are needed to further 17 manage the evaporative emission from commingling as a lot of 18 people were talking about today. 19 So, here we strongly recommend your Board to 20 reexamine these important issues by requiring your staff to 21 report back to you on the progress of Phase 3 gasoline 22 implementation no later than the end of 2001. Do not wait 23 until 2002. 24 At that time the Board can then further examine 25 implementation progress and efforts and make any necessary PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 239 1 revisions. 2 As Attachment 1 to our written testimony, we 3 provide a suggested approach to achieve further enhancement 4 to Phase 3 gasoline program as well as other related 5 programs. 6 Specifically, we suggest the following points be 7 considered before the end of 2001. A gradual reduction in 8 lower sulfur levels to 5 PPM, on the proposed modification to 9 T50 and T90 limits and heads downstream landing enforcement, 10 which our district does play a role, careful review of any 11 vehicle fuel commingling. 12 The South Coast Air Quality Management District is 13 ready to work with ARB on these important issues. 14 In summary, the District staff recommends your 15 approval of what the staff proposed today with the 16 requirements of reexamining the implementation program no 17 later than the year 2001. 18 Our District appreciates this opportunity to 19 present comments on this proposed regulation and related 20 public health issues. 21 This concludes my remarks. 22 CHAIRMAN LLOYD: Thank you, Chung. 23 Does the South Coast recommendation on reporting 24 back a year earlier make sense to you? 25 MR. SIMEROTH: Chairman Lloyd, the problem with PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 240 1 reporting back earlier, we would like to do that, that is not 2 the issue. 3 We need to know what the refiners are actually 4 going to be producing before we can do the studies and report 5 back earlier, and that is why we proposed our time frames the 6 way we did. 7 So, we have to get the information before we can 8 evaluate it, and we need some time. 9 CHAIRMAN LLOYD: So, if implementation is earlier, 10 whether they do it, but we do not control the schedule. 11 MR. VENTURINI: I just want to add, we did in our 12 proposal recommend we come back by the end of 2001 on the 13 commingling, because I believe at that time we think we 14 should have sufficient information to assess what that will 15 be. 16 If we can come back earlier on the others, we will 17 certainly do so. 18 CHAIRMAN LLOYD: I certainly appreciate your 19 efforts to continue to work with us on many of the programs, 20 and so, I appreciate it very much. 21 DR. LIU: I just want to stress one more thing, the 22 sulfur issue with us more on the diesel side, and we would 23 like to address that in the future with the Air Board. 24 CHAIRMAN LLOYD: Thank you. 25 Next is Karen Wilson. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 241 1 MR. TUTTLE: No, I'm not Karen Wilson, a little to 2 tall for Karen. 3 Karen is from the Sacramento Air District. I know 4 she had to leave early. 5 I am Martin Tuttel, Mr. Chairman. I thought in 6 interest of moving this along, I would come right up. 7 Thank you for the opportunity to be here today. 8 Martin Tuttle. I am the Executive Director of Sacramento 9 Area Council of Governments. 10 We are a major stakeholder in this process, like 11 MTC in the Bay Area and San Diego. 12 Our transportation planning effort is directly 13 linked to air quality improvements. In the Sacramento 14 region, we have a NOx problem. 15 Our conforming analysis, we nearly just passed here 16 earlier this year, we have a cloud of threatened litigation 17 based on our conformity findings that is linked to, as you 18 probably know, to the projected effectiveness of the enhanced 19 IM program. 20 It is a very severe issue in this region given the 21 population growth and our ability to deliver projects. I 22 will say this is not just a Sacramento problem, but it is 23 clearly a statewide problem that, again, your MTCs and your 24 transportation districts are going to have to deal with. 25 We are closely working with Mr. Kenny and the staff PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 242 1 on the issue of the enhanced I and M program and other 2 potential programs that would be available to offset that 3 shortfall and allow us to continue to be in the 4 transportation project delivery business. 5 It strikes me today from the comments that this is 6 an opportunity to look at other programs, and the sulfur 7 issue being one, it is an opportunity to look and see how we 8 can maximize the NOx reductions that you can do in the 9 reformulated fuel efforts that you are considering today. 10 Our future conformation analysis lands on finding 11 other NOx reductions. We would ask you to seriously consider 12 this as an opportunity to push a little further down on the 13 NOx or the sulfur issue, and that would generate additional 14 NOx reductions for us and allow the Sacramento region and the 15 rest of the regions in the state to continue to deliver the 16 projects that we know we need. 17 So, with that, I want to thank you, and we look 18 forward to continuing to work with your staff. 19 CHAIRMAN LLOYD: Thank you very much, Martin. 20 Are there any comments from the Board? 21 I am just going to thank you very much. 22 So, take someone out of order here, before we 23 basically get into the whole issue of ethanol, I am going to 24 take two people who have to leave early, Gene Fisher and Al 25 Sutron. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 243 1 MR. FISHER: Mr. Chairman, and Members, I'm Gene 2 Fisher. 3 I am the President of the Board of Directors for 4 the Watts Learning Center, as a charter of an elementary 5 school, I am a community activist and a former legislative 6 representative for the South Coast Air Quality Management 7 District. 8 I'm here today, however, to request that your Board 9 delay final action on the issue of a gasoline additive until 10 there is greater certainty that any reformulation of gasoline 11 is proven safe, that it protects our air quality and proposes 12 no threat to our water. 13 I believe strongly that good public health is 14 necessary for a healthy economy, especially for the low 15 income communities. 16 First, let me say that the critical decision which 17 has the potential to greatly effect the lives of millions of 18 Californians, many of whom are low-income, urban dwelling, 19 should not be made until they have their say, their input. 20 That means holding workshops and hearings in our 21 communities so for those who cannot afford to travel to 22 Sacramento will have equal access to information and a chance 23 to participate and express their concerns about the issues of 24 health and the cost of fuel. 25 The jury seems to be still out on whether the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 244 1 proposed new formulation for gasoline has been sufficiently 2 tested for air quality benefits and therefore public health. 3 It is clear that the current formula for gasoline 4 has greatly benefited air quality in Los Angeles. Air 5 pollution alerts that are down 90 percent compared to the 6 1970's. 7 The Clean Air Act demands even now that we do more. 8 There is uncertainty even in the scientific 9 community that I have heard today, and I'm not convinced that 10 the new formula being proposed will further improve or even 11 mitigate or maintain the air quality benefits currently being 12 realized. 13 The health of our school age children, a very 14 sensitive population, and I represent and I become very aware 15 of them, should not be left to chance. 16 There should be no rushing to a policy without 17 essential assurances for their health. 18 Time allowed for peer review for the staff report 19 has not had adequate time for determining the air quality and 20 the impacts using the proposed formula. 21 In my role as the President and Founding Member of 22 the Board of Directors of the Watts Learning Center, it is 23 located in south central Los Angeles, and I have become 24 highly sensitive to the public policies that affect the cost 25 of living and burden low income families with health impacts PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 245 1 such as disproportionate share of asthma and other 2 respiratory illness. 3 Yet, addition of the new formula could have a 4 significant impact on the price of gasoline, which plays a 5 role in the cost of living in our community. 6 I have heard cost estimates of over 6 cents per for 7 the proposed reformulation. The exact costs or total cost is 8 not clearly known either. 9 Our community needs to have more input and 10 additional assurances that the benefits be worth the 11 increased cost which could arise in gasoline. A cost of that 12 magnitude could signal significant financial hardships of 13 members of our community. 14 Further, if gasoline supplies are lessened or 15 interruptive as a result of production limitations, these 16 financial impacts could increase. Low-income communities are 17 traditionally hit the hardest by increased gasoline prices 18 and suffer the greatest impacts of unhealthful air quality. 19 In conclusion, Mr. Chairman and Members, a decision 20 of this magnitude should have the greatest public involvement 21 by those most impacted. 22 Potentially, the members of my community in south 23 central Los Angeles should be involved in this process, many 24 of whom cannot afford to come to Sacramento. 25 I urge you, therefore, to delay a reformulation PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 246 1 decision until such public input can be properly secured. 2 I thank you, Mr. Chairman, for taking me out of 3 order and for hearing me today, and it is good to see you 4 again. 5 CHAIRMAN LLOYD: Thank you, Gene. 6 Also, I am actually delighted to see that and again 7 I think we share your concerns about the children down there, 8 because I think this agency started the children's health 9 study based in Los Angeles, very close to Watts, 10 headquartered at USC, and so we are very much with you and 11 look forward to working with you on that program which now I 12 think has been going about six years. 13 We feel that is a very important issue that we are 14 right on top of, and we will be delighted to work with you. 15 I think on the other issues, too, as you know, working on the 16 permitting side with the districts somewhat down there will 17 be important, but I think we hear you also by trying to get 18 around and talking to some of these people as well. 19 BOARD MEMBER CALHOUN: I have a question. 20 CHAIRMAN LLOYD: Yes, Mr. Calhoun. 21 BOARD MEMBER CALHOUN: Gene Fisher has hit up on 22 something that I have always been concerned about. 23 How does the notice to some of these areas, how do 24 people get the word, so to speak, and I think the same thing 25 was sort of hinted to by this one lady from Huntington Park, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 247 1 because somehow, I have looked in the newspapers and tried to 2 listen to see if notices of public hearings are published in 3 those papers, and in many cases they are. 4 I guess the people who normally subscribe to the 5 papers do not recognize the true significance of it all, for 6 some reason or another. That just does not seem to be the 7 kind of response that you would expect to address the 8 concerns that you are talking about, but I think it is 9 something that we ought to sort of reach out and make sure 10 that we get the notice to them, whether or not they come to 11 the hearings or not. 12 Thank you. 13 MR. FISHER: I look forward to working with the 14 staff. 15 Thank you. 16 CHAIRMAN LLOYD: Thank you very much. 17 Mr. Al Sutron. 18 MR. SUTRON: Thank you, Ladies and Gentlemen of the 19 Board. 20 My name is Al Sutron. I am President of the 21 Vietnam Veterans Association of America, Number 713, in Los 22 Angeles. I am speaking as a veteran and also as part of my 23 larger community. 24 You know that veterans have often been exposed to 25 unknown, untested chemicals and compounds, and Veterans have PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 248 1 had a significantly greater risk than our larger community 2 because of this. 3 The health effects of those are obvious, even 4 though we do not admit them. The overall quality for life 5 for a lot of Veterans have been impacted to change forever, 6 because of their exposure to these things. 7 I am concerned that the ARB is planning to require 8 California refiners to produce a fuel that has never been 9 manufactured or sold anywhere. It worries me because my 10 children live in south central. 11 The biggest thing that worries me is what I have 12 heard here, I do not understand all, but I do know this I 13 have heard a lot of guesstimates. I heard a lot of 14 estimates, and I have heard a lot of maybe's, and what if we 15 did this and what if we added T50, I do not know about all of 16 these things, but I do live in a community that is 17 surrounded, Wilmington, Long Beach, Compton, these areas are 18 surrounded by oil refineries. 19 So, I am concerned that we change or mandate for 20 what the Governor asked for, I'm concerned about the traffic. 21 I'm concerned about those fuel trucks that nobody really 22 knows how many we are going to have. 23 I'm concerned about those trains, because we have a 24 multitude of railways that run throughout my community, and 25 I'm concerned about the refitting and refurnishing of these PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 249 1 refineries, because we live there. 2 We see these fires. We don't just hear about them 3 on television. We knew about these leaks, and we knew about 4 the stuff that goes through the air. 5 We feel that the state officials are moving a 6 little too quickly to work with something that nobody seems 7 to fully understand. 8 We know that California is the nation's largest 9 gasoline market. There is no lab test that you can give that 10 is going to determine how this is going to come out. 11 The government is asking veterans and now my family 12 to act as guinea pigs for this change. This chemical 13 compound we know nothing about. 14 We are uneasy about this in my community, and we 15 simply ask that you slow down this ethanol train that seems 16 to be running into the State of California without any 17 brakes. 18 You have the ability to slow it down. 19 This is not Vietnam. There is no need to spread 20 Agent Orange or Agent Blue or Agent Pink. We can slow this 21 down. 22 Get a grip on it. By the time you bring it to my 23 community, maybe I will feel that my kids will be safe. 24 Thank you. 25 CHAIRMAN LLOYD: Thank you very much and thank you PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 250 1 for taking the time to come up today. 2 Maybe we will slow the ethanol train just a little 3 bit by giving the court reporter 10 minutes before we take 4 testimony here. 5 So, we will just take a 10 minute break for the 6 court reporters. Let's get back at 2:30. 7 (Thereupon a brief recess was taken.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 251 1 CHAIRMAN LLOYD: Can we restart, please. 2 I thought that we had one speaker here who wanted 3 60 seconds. Mr. Franco Reyna. 4 Thank you. Do we have Mr. Franco Reyna to speak? 5 He's requested 60 seconds before we get into the 6 presentations from the ethanol industry and oxygenated 7 fuels. 8 MR. REYNA: Good afternoon. Thank you for the 9 opportunity to speak to you today, Mr. Chairman and members 10 of the Air Resources Board. My name is Franco Reyna. I'm 11 here today representing the Multi-cultural Area Health 12 Education Center, a community-based agency in Los Angeles, 13 specifically East Los Angeles. 14 I am also representing some other members of the 15 local communities around the area that weren't able to come 16 here before you. 17 We greatly appreciate the recent work of the Air 18 Resources Board to mitigate the harmful effects of fuel 19 emissions from our environment, but we are concerned that 20 the effort to come up with a new formula for California's 21 gasoline may mean that our communities will be suffering the 22 impact more, not less, toxic emissions in the years to come. 23 Our communities in Southern California, 24 particularly Los Angeles, have already been identified as 25 having some of the worst air problems in the state. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 252 1 We understand that the ARB is currently 2 considering ethanol as a new fuel to help California's fuel 3 burn cleaner. 4 A study by the California Energy Commission 5 suggested because of the ethanol -- ethanol's affinity for 6 water, the transporting ethanol will require more diesel 7 trucks to drive through some of our already most polluted 8 areas of the state. How many more trucks will be traveling 9 through our communities? How much more pollution will this 10 cause? How much more added traffic will this produce? 11 We feel that the ARB is moving too swiftly to make 12 a decision without studying these types of questions or 13 problems that may be ahead. 14 As you're aware, the health impacts of air 15 pollution are severe and affect our children, specially our 16 seniors. Before any new formulas for gasoline are adopted 17 by the Air Recourses Board, we ask that you not let an 18 unknown fuel put members of our community at risk. 19 We are asking that you not rush to make this 20 important decision and allow some of the members of our 21 local communities to be heard, that you involve the people 22 that will be most affected, specially in those communities 23 where those terminals are, where the roadways are, where the 24 railways are, where most of the traffic will be greatly 25 added or multiplied. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 253 1 We further are willing to host any meetings if 2 you -- or community hearings if you're willing to come to 3 Los Angeles, just as the major of Huntington Park had 4 mentioned earlier, and we are willing to work with you. 5 And once again we thank you for giving us the 6 opportunity to come here and for you to listen to our 7 concerns. Thank you. 8 CHAIRMAN LLOYD: Thank you very much indeed. 9 Thank you for coming. 10 Any questions? 11 Thank you. 12 Now, we've got John McClellan, then Dr. Graboski, 13 Alison Pollack, Neil Koehler. 14 MR. McCLELLAND: Dr. Lloyd, how are you. 15 CHAIRMAN LLOYD: Good. 16 MR. McCLELLAND: Good to see you again. 17 Members of the board and distinguished members of 18 the ARB staff, I am John McClellan. I'm director of energy 19 and analysis for the National Corn Growers' Association, and 20 a grass-roots organization representing corn growers in 26 21 states, including some right here. When our board was out 22 here a few weeks ago having a meeting we had an opportunity 23 to have dinner with several of our members who live right in 24 around the Sacramento area. So it was very good to see 25 that. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 254 1 We really appreciate the opportunity to be able to 2 comment on the staff's proposals on Phase 3 RFG here in 3 California. 4 NCGA has asked Dr. Michael Graboski of the 5 Colorado School of Mines, and Ms. Alison Pollack of Environ 6 to conduct expert analysis on issues involved in changes in 7 the predictive model used to certify California RFG. 8 And based on their analysis, we believe that the 9 predictive model is biased towards clean vehicles and does 10 not properly reflect how the fleet may respond to changes in 11 fuel composition. 12 Therefore, we recommend that the board not approve 13 the model as proposed. 14 Instead, we suggest that ARB staff re-estimate the 15 predictive model so that it is internally consistent to the 16 greatest extent possible with the EMFAC 2000 inventory 17 model, motor vehicle manufacturer sales data for California, 18 and emissions distribution data derived from California's 19 surveillance and remote sensing programs. 20 Dr. Graboski and Ms. Pollack, as Dr. Lloyd said, 21 are here and they will follow me with a presentation of 22 their technical comments in just a moment. 23 By way of a little background, before I took up my 24 post at the National Corn Growers, I worked for the chief 25 economist at the US Department of Agriculture as the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 255 1 associate director of the Office of Energy there. So I've 2 been familiar with the regulatory process, particularly in 3 reformulated gasoline, federal reformulated gasoline, for 4 quite some time, so I thought I'd spend a little bit of time 5 talking to you about some of my views that may at least 6 address or shed some light on some of the questions that 7 you've had about costs. 8 CHAIRMAN LLOYD: Can you define a little bit as 9 two minutes? 10 MR. McCLELLAND: Yes. 11 What I want to say is that regulations set 12 boundaries that define the playing fields for regulated 13 parties and, regardless of what the technical specifications 14 of any particular regulation are, they always have one 15 overriding result, and that is that they cause regulated 16 parties to make economic decisions that affect everybody in 17 the regulated market. 18 So if a regulation is promulgated using an 19 incorrect specification, then the resulting economic 20 decisions will be inefficient, which is an economist's way 21 of saying that you're going to waste some money someplace. 22 In the present case, if our analysis is correct 23 and the predictive model is biased in favor of clean 24 vehicles, then there's going to be some particular economic 25 consequences. And I think that you will get an idea of what PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 256 1 those are when you hear Dr. Graboski's analysis and 2 Ms. Pollack's analysis. 3 One of the other things that I would like to say 4 is that on the waiver issue, I think that there was 5 something that was just said, if you don't have a waiver 6 you're not going to have a commingling problem. 7 And one of the things I'd like to say with regard 8 to the regulation that what we've heard is that, well, maybe 9 we ought to lower RVP a little bit to worry about that, or 10 maybe we ought to make some adjustments here. 11 Those things all set the rules of the game and 12 they all are associated with costs. So there isn't a free 13 lunch here. And I think that that's something that's 14 important for the board to remember as they make their 15 deliberations. 16 I should also tell the board that NCGA is on the 17 record opposing any legislative or regulatory proposal that 18 only provides, only provides, a waiver for California. 19 However, we are committed to working with the ARB, 20 with the federal EPA and with other stakeholders and with 21 the Congress to craft a comprehensive solution that 22 addresses your concerns in many of these areas. 23 I think it's important for you to know that. 24 Finally, Mr. Lloyd, we are aware of the 25 extraordinarily difficult task that has been put on the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 257 1 shoulders of the ARB and the staff, and we appreciate the 2 job that you're doing and the consideration you have shown 3 us throughout this process. We want to help make this 4 process work so that all of us could be assured that the 5 final regulation works for everyone. 6 I thank you for your time and I'll be happy to 7 answer any questions at this time. 8 CHAIRMAN LLOYD: Thank you very much, John. 9 Probably the question will come up in the 10 technical presentations there, unless board members have any 11 questions. 12 MR. McCLELLAND: Very good. 13 CHAIRMAN LLOYD: Thank you. 14 The next we have Dr. Graboski, then Alison 15 Pollack, Neil Koehler and Gary Whitten. 16 DR. GRABOSKI: Dr. Lloyd and members of the panel, 17 I'm Mike Graboski. I'm the director of the Colorado 18 Institute for Fuels and Engine Research at Colorado School 19 of Mines in Golden, Colorado, and I'm probably one of the 20 very few people here who's ever actually measured an 21 emission, so I might know something that a lot of people 22 here don't know. 23 CHAIRMAN LLOYD: I wouldn't estimate the audience 24 and certainly staff. 25 DR. GRABOSKI: Okay. I've provided written PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 258 1 comment earlier this week in two mailings to the clerk, and 2 I hope that the board has an opportunity to review my 3 comments in detail. 4 In general, Alison Pollack and I are here to talk 5 about some efforts that we've made to look at the predictive 6 model, and we generally agree that the predictive model is 7 moving in the right direction in order to allow one to 8 produce cleaner fuels in California. 9 But we are not sure that the model has been 10 crafted in such a sense that it's representative of what is 11 actually on the road in California. 12 And as Alison will point out in some detail, the 13 predictive model database isn't consistent with the EMFAC in 14 terms of emitter regimes. The database is biased toward 15 normal emitters, and high emitters are not considered 16 properly. 17 And we had a comment from Dr. Lucas, who has asked 18 the board and staff to quantify the effects of high emitters 19 when looking at the predictive model and we agree with that 20 comment. 21 The model doesn't properly reflect the mix of 22 manufacturers or cars and trucks on the road, and we don't 23 believe that it's consistent with remote sensory data and 24 surveillance data, which will allow us to distribute how 25 actual the vehicle population is distributed between normal PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 259 1 and high emitters. 2 And so what we would like the board to do is to 3 recommend to ARB staff, not to yourselves, to ensure that 4 the predictive model is internally consistent with EMFAC 5 2000, also with vehicle sales data that we've been 6 collecting and analyzing and to make sure that in-use 7 surveillance data and to the greatest extent possible -- is 8 used to the greatest extent possible. 9 Now, the issue is that we don't disagree that 10 reducing sulfur is a good thing. We think it is. 11 What we want to make sure is that when refiners 12 are asked to invest money that they also properly reflect 13 other fuel changes. Those other fuel changes are the 14 benefits that might occur or disbenefits that might occur 15 from using oxygen in aromatics. 16 And it turns out that high emitters are much more 17 sensitive to fuel properties like oxygen and aromatics and a 18 lot less sensitive to fuel properties like sulfur. So we 19 don't want to spend money reducing sulfur if we don't get 20 the benefits. 21 Now, I wanted to briefly talk about Senate Bill 22 989. And Senate Bill 989 requires that all environmental 23 benefits of CaRFG2 be preserved, and also the bill asks for 24 flexibility so that in eliminating oxygenates the 25 environmental benefits are kept. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 260 1 There are a number of peer reviewed research 2 studies out now that indicate that oxygenates reduce PM 2.5, 3 primary PM 2.5 black carbon-type emissions from the 4 tailpipe. We think that these are primarily made from 5 diesels, but some studies indicate that automobiles produce 6 a significant amount of PM 2.5, and when you put oxygenated 7 gasoline, you get a significant reduction in those PM 8 materials. And I provided written information to you. 9 But typically like 30 percent of the particulate 10 from car tailpipes is reduced. 11 In addition, studies show that polynuclear 12 aromatic hydrocarbons are reduced. 13 Now, benzene is a toxic and if you measure on a 14 potency scale it has a unit potency. 15 PNAs, at least according to NESCAUM, are 7.1 times 16 more potent than benzene, which means that PNAs are a much 17 worse carcinogen than benzene is and when you put 18 aromatics -- or when you put oxygenates in the tailpipe, you 19 reduce polynuclear aromatic hydrocarbons considerably too. 20 Now, just to finish up, go on to the next one. 21 The issue is that refiners will probably trade off 22 oxygenates and aromatics in a non-oxy gasoline world. Right 23 now we have oxygen in gasoline and we're getting PNA 24 benefits and we're getting particulate benefits. 25 If we go to non-oxy gasoline world, we want to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 261 1 make sure that the benefits that we're getting from the use 2 of oxygenates are preserved with non-oxy gasoline. And we 3 haven't seen any analysis in staff up to this point that 4 have considered these other pollutants which Senate Bill 989 5 really says we should be considering. 6 So it's our recommendation that we take a look at 7 this and if there are some offsets that need to be included 8 in the California RFG rule, that we establish what they are. 9 I think I'll quit there. 10 CHAIRMAN LLOYD: The studies you quoted in terms 11 of fine particles from gasoline vehicles and the PNAs, where 12 were they carried out? 13 DR. GRABOSKI: I've cited the references for you. 14 The primary studies that have been carried out, 15 one set on particulate was done in conjunction with the 16 State of Alaska, but as a part of the testing, measurements 17 were made in EPA laboratories in North Carolina also. 18 The other set of studies that went on most 19 recently was carried out in the State of Colorado and I know 20 about it because I was a peer reviewer of the study. 21 And in that study, particulate was collected at 22 initially on FTP cycle, 35 F study, which doesn't apply to 23 California, but there were hot unified cycles and hot repo 5 24 cycles run, aggressive cycles, and on tier zero and tier one 25 cars we basically saw particulate reductions in both sets. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 262 1 Plus, high emitter fleet of tier zero and tier one 2 cars were run where there was even a more substantial 3 particulate reduction, not only in the cold cycles, but in 4 the warm cycles also. 5 And if you analyze the EPA data and the Alaska 6 data and the Colorado data together, what you find is that 7 there's a strong temperature effect on particulate, but that 8 the oxygenate effect basically falls out as a fractional 9 reduction of particulate, and I provided that to you. 10 As far as PAH is concerned -- 11 CHAIRMAN LLOYD: Any of those data, any of those 12 studies been carried out in California? 13 DR. GRABOSKI: The only -- there have been studies 14 carried out in California where exhaust particulate has been 15 measured, but unfortunately they were only carried out on 16 the in-use fuel, which was an MTBE fuel on IM 240 testing on 17 the road, and so we don't know what the benefits were. 18 But the point is that oxygen, oxygen has been 19 shown in a number of cases to impact particulate and impact 20 hydro -- PAH emissions and, you know, I mean, we should look 21 at this. We should consider it, because these are things 22 that Senate Bill 989 has asked us to address. 23 CHAIRMAN LLOYD: Dean, you want to comment? 24 MR. SIMEROTH: Yes. My concern is what fuels were 25 they carried out on. I looked at your paper submitted, and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 263 1 for the high emitter part you talked about the Auto/Oil high 2 emitter model, but the conclusion of the Auto/Oil study on 3 the high emitters is once you adjust for how the vehicle's 4 operating, all the fuel effects are representative of how 5 you expect from the normal emitter cars. 6 If you're -- 7 DR. GRABOSKI: I was going to say, that's a bit of 8 a separate issue, but let's talk about that. 9 Sure, if you fix the higher emitter cars and you 10 truly can fix them, which means in some cases you replace 11 the catalyst if that's what's gone wrong with them or if you 12 have an oxygen sensor, so you bring the car back in 13 calibration -- 14 CHAIRMAN LLOYD: I don't think we can just idly 15 say we can just go ahead and fix them. 16 DR. GRABOSKI: No, but that's what I'm saying is 17 that Dean's point is that the fuel effects are properly 18 predicted if you fix the cars. And the point is that you 19 can't find all these cars on the road that they're operating 20 in non stochiametric fashion often either on the rich side 21 or the lean side or they have failed catalysts. 22 Those vehicles, especially vehicles that have 23 failed or weakening catalysts, have a lot less sensitivity 24 to sulfur than cars that are either tier one or moving 25 toward the LEV side where you're asking for 90 and plus PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 264 1 percent conversion. And so loss on one percent catalyst 2 efficiency for sulfur has a big effect on emissions. 3 When you look at cars who are not getting the 4 benefits of high catalyst efficiency, changing sulfur 5 doesn't do anything at all, but changing aromatics and 6 changing oxygen can have a big effect on the emissions. 7 MR. SIMEROTH: If I could, actually that was not 8 my point. 9 My point was that the fuels were doing what they 10 were supposed to. The variability in the emissions in 11 trying to do the testing was masking the fuel effect. And 12 the fuel effects were still there, as they should be. 13 DR. GRABOSKI: No, I don't necessarily agree that 14 the fuel effects -- 15 MR. SIMEROTH: This is a conclusion of the 16 Auto/Oil study. 17 DR. GRABOSKI: Well, if you look at Auto/Oil's 18 high emitter data, what you see is that the sulfur effect on 19 high emitters is positive. We'll at least admit it's 20 probably zero. And that's the one that we're talking about 21 here. 22 If a significant portion of the emission inventory 23 is made up from very high and super emitters, high and very 24 high super emitters, cars that have a weakened sulfur 25 effect, and we incorporate that into the models, so we put a PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 265 1 bigger benefit for sulfur in there than may truly exist, and 2 we don't look at the benefits of oxygenates and the 3 disbenefit of aromatics, then we're not going to get the 4 emission benefits that we would expect to get based on a 5 predictive model. 6 And so, I mean, our point and our only point is 7 let's get this right for the State of California and let's 8 bring into the predictive model the -- have it mirror the 9 fleet that exists on the outside. 10 And Alison is going to come up and she's going to 11 show you what happens when you make that effort. 12 CHAIRMAN LLOYD: I look forward to that. 13 DR. GRABOSKI: Okay. 14 CHAIRMAN LLOYD: Alison. 15 MS. POLLACK: Dr. Lloyd, members of the board, my 16 name is Alison Pollack and I'm a principal with Environ 17 Corporation, an air quality consulting firm here in 18 California. 19 I'd like to take a few minutes to address some 20 important technical issues with the predictive model. I'll 21 provide a quick summary here and my comments are provided in 22 more detail in my written submission. 23 The problem with the predictive model database 24 that I want to address is that the database used to develop 25 the model is not representative of the California in-use PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 266 1 fleet. Because ARB staff have not accounted for this in the 2 predictive model, the result is a biased model. 3 The vehicles in the predictive model database are 4 not a statistically representative sample of California 5 in-use vehicles. Rather, the database was constructed from 6 available test data from about 35 test programs conducted 7 over the last decade or so, mostly outside of California. 8 The predictive model database does not properly 9 represent California fleet in two important areas. 10 First, the database contains far fewer higher 11 emitting vehicles than in the California fleet. As vehicles 12 and emissions control systems age, the emissions increase 13 above the emissions increase. As emissions control systems 14 deteriorate, the effects of sulfur in reducing emissions 15 becomes less important and the effects of other fuel 16 components such as oxygenates, aromatics, NT 90 become more 17 important. 18 Second, the predictive model database does not 19 properly reflect car and truck populations by manufacturer 20 in the California fleet. Cars and trucks are driven and 21 used differently, and manufacturers have different 22 calibrations for the emission control systems. 23 Our detailed review shows that the vehicle fleet 24 used to develop the predictive model is not representative 25 of the California fleet on road, either now or in 2005. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 267 1 We have reevaluated the predictive model, taking 2 these two factors into account and found significant 3 differences from the current ARB staff model. 4 Some specifics on these two issues. 5 Again, issue one, the predictive model database is 6 heavily weighted towards normal-emitting vehicles. As 7 defined by ARB's EMFAC 2000 model, normal-emitting vehicles 8 are those that meet their emission standards. 9 EMFAC 2000 defines four additional categories of 10 vehicles with emissions above the standard, referred to as 11 moderate, high, very high and super, with excessively higher 12 levels of emissions above their standards. 13 The EMFAC 2000 model places more and more vehicles 14 into the higher emitter categories as the vehicles age. 15 Using the EMFAC definitions, and this is EMFAC 16 2000, the version that was released on October 28th, we've 17 classified the vehicles in the predictive model database by 18 emitter category. 19 For tech 4 vehicles, our analyses clearly show 20 that the predictive model database has far more emissions 21 from normal vehicles than estimated by EMFAC. 22 Detailed results are provided in our written 23 comments, but as a quick summary for hydrocarbons, for 24 example, EMFAC 2000 estimates that only that one and a half 25 percent of tech 4 vehicle emissions are from normal vehicles PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 268 1 in 2005, but the predictive model database has almost 30 2 percent of emissions from normal emitting vehicles. 3 For NOx, there's also a very large discrepancy. 4 EMFAC 2000 says 21 percent of 2005 emissions are from normal 5 tech 4 vehicles, but the predictive model database has 67 6 percent of the emissions from normal vehicles. 7 For the tech 5 vehicles, almost all of the 8 vehicles in the database are normal emitters. 9 The second issue again is that the predictive 10 model database does not properly represent the vehicle class 11 as in car versus truck and manufacturer distribution of 12 vehicles in use in California. 13 We obtained the DMV database of California 14 light-duty vehicles. The database classifies vehicles by 15 manufacturer and by vehicle class, car versus light-duty 16 trucks. 17 Light-duty trucks are clearly underrepresented in 18 the predictive model database. The on-road light-duty fleet 19 is about 36 percent trucks, but there are only 16 percent 20 trucks in the predictive model database. 21 The database also does not properly represent the 22 distribution of vehicles by manufacturer. For example, 23 about 16 percent of the cars on the road are from General 24 Motors. Not to pick on anybody, but about 28 percent of the 25 cars in the database are General Motors. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 269 1 We reevaluated the predictive model using standard 2 statistical procedures to account for the differences 3 between the actual on-road fleet and what is in the model 4 database. The detailed results are provided in our written 5 comments, but we did find significant changes in the 6 predictive model terms for aromatics, oxygen content and 7 fuel sulfur level. 8 To summarize, we believe that the final predictive 9 model coefficients must reflect EMFAC 2000 and the on-road 10 fleet and therefore that the predictive model should use the 11 vehicles weighted to properly represent the California 12 fleet. 13 We recommend that the board not approve the 14 predictive model as currently proposed and instead direct 15 ARB to rework the models so that it has vehicle weights that 16 are representative of the California fleet. 17 Thank you. 18 CHAIRMAN LLOYD: Thank you very much. 19 Staff want to respond? 20 MR. SCHEIBLE: Yes, Chairman Lloyd. 21 When we tried to predict the predictive model in 22 1994, originally tried to go and actually segregate the test 23 data and make it line up precisely with the inventory 24 presentation, model year, emission class, manufacturer, and 25 what we found out was the data, which took ten years and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 270 1 well over $20 million to collect, simply doesn't have the 2 number of vehicles and the distribution to match up with the 3 fleet, and that we couldn't find successful techniques of 4 doing the effort in the way supported by the witness, which, 5 if you had the data would be a better method. We know of no 6 way where we could enter into a process and do that. 7 So we've used a much simpler analysis where we 8 say, where we aggregate effects according to general 9 technology classes. We believe that's all the data is 10 available to derive at this point. And we are a very large 11 testing program and extremely large amount of time away from 12 being able to handle things such as high emitters and 13 anything close to their actual contribution to the fleet. 14 So we don't think this is a feasible alternative 15 for us to do, even if we were willing to take more time. 16 MS. POLLACK: I believe you said that was 1994 17 when you did that analysis, and there's a lot more testing 18 data since then. 19 We also have a brand new version of the EMFAC 20 model. 21 I believe there are statistical methods that can 22 be used and we actually have a meeting with ARB staff 23 tomorrow morning to discuss the proposal that we've got and 24 to hopefully work with ARB to refine the predictive model. 25 MR. SCHEIBLE: The other point I'd like to make is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 271 1 we developed this as a consensus item in 1994 with the full 2 involvement of the fuels industry and the auto industry. We 3 basically have their support in this update. So we have had 4 with basically the people affected by the regulations and 5 with the most knowledge of vehicle emissions in our staff a 6 very good process that says we've done pretty much the best 7 job you can do with the data. If we can do a better job and 8 look at new techniques, we're willing to do that, but we 9 will not recommend a delay that we could somehow in a brief 10 period of time come up with a much better result. 11 CHAIRMAN LLOYD: One thing I would like to explore 12 is, because I've heard it come up a lot of times, obviously 13 the high emitter is still, how you do it, how do you 14 identify the remote sensing and what not, and it is getting 15 more mainstream, but it's still somewhat can be 16 controversial, depending on the application. 17 And also the question of off-road. 18 And I think it would be nice if we can look at 19 ways or look at costs in which maybe we could join with the 20 industry there to look at how we can do better, get better 21 data, because I think we'd all benefit from that. 22 Again, I don't know that we can look at this in 23 this sort of time frame, but on the other hand we always 24 update, we always look at these things. Anything we can 25 work together to try to come up with a much better database PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 272 1 and in which to move forward more into the future, I think 2 would welcome. 3 But, you know, we're going to have to look at the 4 industry there, I guess, to, in this case probably the 5 ethanol industry is being heavy into this, to look at maybe 6 some strong support, financial support, to improve that 7 database. 8 MS. POLLACK: Just one other comment on time, 9 we've been wanting to look at this issue for quite some 10 time, but the EMFAC model was finally released, at least in 11 draft form, only on October 28th, so we've not had very much 12 time to look at that. Wish we had more time. 13 CHAIRMAN LLOYD: Have you had more time to look at 14 the mobile model? 15 MS. POLLACK: Not out yet. 16 CHAIRMAN LLOYD: Good point. 17 Next speaker is Neil Koehler, then Gary Whitten 18 and Bruce Heine. 19 MR. KOEHLER: Chairman Lloyd, other members of the 20 board, thank you for the opportunity to testify. My name is 21 Neil Koehler. I'm the president of Parallel Products. We 22 convert waste products from the food and beverage industry 23 into ethanol in Southern California. We invite any and all 24 of you to come and visit our fairly intriguing operations in 25 Southern California at any time. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 273 1 I'm here today representing my company, the 2 ethanol industry, most importantly my three young boys who 3 I'm trying to raise as healthy California citizens right 4 here in the Sacramento Valley. Certainly this area is, as 5 is true of many areas in California, is quite challenged by 6 the air. 7 I'd like to start by absolutely enthusiastically 8 endorsing the Governor's Executive Order and the Senate Bill 9 989 by Senator Sher, which I think has provided an excellent 10 backdrop to move quickly out of MTBE and to protect and 11 enhance the environmental benefits of our clean air programs 12 here in California. 13 But also like to compliment the Governor on what I 14 consider to be an ideal choice for chairman of this board, 15 Dr. Lloyd, who I think has both the technical and leadership 16 abilities to deal with these very very complicated issues. 17 That being said, that was a little plug, because I 18 think that there's a need to provide a little leadership on 19 the proposals before you today, because, unfortunately, I 20 feel that they're lacking in responding adequately to the 21 challenge and the charge of both the Governor and Senator 22 Sher. 23 I'd like to move to the first slide. And very 24 simple, what I consider to be straightforward and very 25 accurate analysis of what's going on here, and what you do PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 274 1 with it is certainly your choice and your prerogative, but 2 in my very straightforward view, these proposals clearly do 3 not protect the existing benefits of in-use fuels and that 4 is not consistent with either the Executive Order or SB 989. 5 The chart you see before you here is comparing the 6 flat limit Phase 3 specification with the 1998 in-use fuel 7 as revised by the California Energy Commission. 8 This does not show up in the staff report. 9 Instead there's all this talk about compliance margins and 10 future speculation as to what fuels will be. We've already 11 seen arguments today on if that's right or not. 12 The only thing that we truly know is that there's 13 a flat limit that you are proposing and a predictive model 14 around that. The fuel that is modeled and is represented in 15 that flat limit is a legal fuel. That fuel would pass in 16 today's world compared to the '98 fuel that we were talking 17 about. That is what you would see in terms of environmental 18 backsliding. 19 Now, we can sit here and agree that there's going 20 to be all this overcompliance and we're going to make up for 21 3.6 percent hydrocarbons and 8.7 percent toxics. 22 I don't believe that. And my 23 four-and-a-half-month-old boy I don't think believes that 24 either, because he hasn't been able to benefit from the 25 higher math that has come up with some of the other PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 275 1 conclusions. 2 So I mean, not meaning to be factitious, I think 3 that we need to look at this and say is it really true that 4 what we expect and the compliance margins are going to 5 protect the environment and that we are going to be able to 6 say that this legal fuel in California won't happen, and 7 that we have actually protected the environmental benefits? 8 I do not think so. 9 I believe that the compliance margins are 10 speculative, at best. They represent refinery choices that 11 are hard to predict, that the whole issue of flexibility 12 that I applaud, I think it's important, but the whole issue 13 of flexibility is to take away compliance margins as much as 14 possible. 15 I would also argue that the enabling effects of 16 oxygenates have allowed for some of the benefits of the '98 17 fuel, and that it's not all about compliance margins, the 18 toxics reduction, the dilution effects. 19 So I'd like to move on quickly to the second 20 slide, and that is a very significant issue as well, is that 21 under a waiver you take away the oxygen requirement. The 22 staff has done a very good job proposing that we credit CO 23 from two percent oxygen and above, but from two percent and 24 below there is an absolute and definitive loss of carbon 25 monoxide benefits. And based on staff's own numbers on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 276 1 calculating the credit it's 577 tons per day of carbon 2 monoxide benefits that will be lost with the use of 3 non-oxygenated fuels. 4 I'm all for flexibility for non-oxygenated fuels, 5 but this has to be dealt with. And it is not -- we 6 certainly have talked about it for over a year. It had been 7 in the report that a CO debit would be part of the proposal 8 and it is not. And I would like to know how the board is 9 proposing to handle that. 10 In closing, my proposal is that we can do better 11 across the board. That's certainly up to the Governor and 12 this board, but I would recommend that we try to lower 13 sulfur, we try to push the spec harder than we are. And 14 very specifically I would ask that the board direct staff to 15 deal with the CO debit issue and come back to it, either 16 with the EMFAC or at the next possible board meeting, but 17 that it's absolutely imperative that the real-world benefits 18 of the CO benefits of the use of oxygen be protected in 19 these regulations. 20 Thank you. 21 CHAIRMAN LLOYD: Thank you, Neil. 22 I'm sure staff would like to respond. 23 MR. SCHEIBLE: Yes, Chairman Lloyd. 24 The first issue is, is it a fair test to take the 25 specifications in the reg and say that they must outperform PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 277 1 the real in-use 1998 fuel. We think the clear answer is no, 2 that refiners must provide a compliance margin based on 3 testing. 4 The clearest example I can give is the current 5 flat limit for RVP is 7.0. The average RVP of the fuel out 6 there, according to the 1998 survey, was 6.78. That means 7 about half the samples are going to be below that. 8 Refiners didn't produce that fuel because they 9 wanted to. They produced that fuel because they needed the 10 cushion when they produced the fuel to make sure they come 11 in below the margin. 12 The second thing, our compliance margins were from 13 batches of fuel where the refiner declared a spec, they told 14 us sulfur would be 25 parts per million. When we actually 15 went out and measured the fuel, we found it was 22. We 16 found that consistently from property to property. They 17 must, in order to meet the specification, provide themselves 18 with enough room so that they stay in compliance. 19 And I don't think this is at all a controversial 20 issue. The exact level and how much overcompliance is where 21 we did not disagree. 22 Where we would not agree with WSPA over what of 23 the past compliance that was beyond the compliance margins 24 that they have to give us for compliance purposes would be. 25 Second, we very carefully considered the issue and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 278 1 agreed to look at CO and treat CO as a ozone precursor in 2 the model. We decided that when you went from two percent 3 oxygen to 3.5, a credit was appropriate, that you would 4 produce additional CO reductions and that they weren't 5 otherwise reflected and there should be a credit for that 6 that the environment would accrue. 7 When we looked at the second issue, which is what 8 happens when you reduce oxygen from two percent down to 9 zero, which is the only really feasible scenario with 10 ethanol, you either have two percent oxygen or you have 11 zero, because at two percent you generate the tax credit for 12 ethanol and you don't go to one and a half or one percent 13 because then you're having RVP effects and you're not 14 qualifying for the tax credit. 15 There is a loss in benefits of CO that we 16 calculated that's quite a bit smaller than that shown in the 17 chart. It's in the order of 100 and some tons per day. 18 We also found when we looked at that fuel that 19 fuels with zero oxygen have lower permeation rates than 20 fuels with ethanol or fuels with MTBE. 21 We quantified that as best we could and found out 22 that that benefit in lower hydrocarbons emissions because 23 the fuel would permeate less through the vehicle tank and 24 through the hoses and other things during resting and during 25 vehicle operation, more than offset the loss in CO PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 279 1 emissions. 2 So we determined that there was no need to 3 establish a credit and, of course, for CO reductions and a 4 corresponding debit for permeation losses that would equal 5 out. The environment didn't need a CO credit in order to be 6 protected. 7 I guess I have to say in retrospect that we did 8 not quantify sufficiently the permeation loss until we got 9 into looking at this issue after the staff report was put 10 out. If we were to be faulted for anything, it's for not 11 including that issue as you go to higher percent oxygen and 12 considering that permeation emissions might increase. I 13 think it's okay to do that because when we quantified the CO 14 increases is great enough to cover that. 15 So it's a difficult issue. We do feel like we 16 covered it. And clearly the environment is protected, 17 because we have two things that go opposite directions, one 18 of which is beneficial, one is a loss of benefits and the 19 other is a gain of benefits in the offset. 20 CHAIRMAN LLOYD: On the economic side, Neil, if 21 you -- how many of your size plants would it take to fulfill 22 the minimum ethanol requirements with no waiver in the 23 state? How many times would you have to multiple yourself 24 in order to -- 25 MR. KOEHLER: I think given our relatively small PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 280 1 niche of waste products, that other plants in California 2 would be significantly larger than ours. If it's, let's 3 say, it's the minimum requirement is roughly 450 million 4 gallons and if the plants averaged 25 million, 20 plants. I 5 mean there's the opportunity to have multiple ethanol plants 6 in every county in California, which is the wonderful 7 promise. 8 If I can just respond quickly, because it's, I 9 think this is a very important process issue and I have to 10 appeal to the board to deal with it. 11 And I'll set aside the compliance margins and 12 focus just on CO. And that is that this issue of permeation 13 I heard about yesterday. There have been nine workshops and 14 not at one single workshop did this issue come up. And I 15 believe that the CO debit issue is critical enough. There 16 are enough people that the evidence is overwhelmingly clear 17 that there's a CO issue when you take away oxygenates. 18 The issue on permeation, there's a process in that 19 we heard about it less than 24 hours ago and in those 24 20 hours -- and Bob Reynolds, who is speaking today will have 21 some probably more specific things to say about it -- but 22 that there is not one single test on permeation as it 23 relates to 5.7 percent or two percent oxygen blends. 24 So we have both a technical problem and a very 25 serious process question that I appeal to the board to ask PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 281 1 the staff to get in the light of day, have a workshop in 2 next week, tomorrow, whenever it is, and let's look at the 3 evidence. We have not seen the calculations. 4 It really would be a big mistake if we were to let 5 this kind of environmental backsliding go through on this 6 proposal as is without having some ability for stakeholders 7 to get together and to discuss it and come back and make a 8 meaningful and responsible recommendation to the board. 9 And I would ask you, Dr. Lloyd, to help us out on 10 this very important issue. 11 CHAIRMAN LLOYD: I think it's an issue which need, 12 I think as Mike said, needs to be looked at. On the other 13 hand, Neil, I know in good conscience I've heard about it 14 for many months. I have not seen it quantified, but I've 15 heard about the possibility, and I'm certainly aware of the 16 issue of increased permeability, because as we brought the 17 gas tank issue before us and I remember some conversation, 18 some reading I did around that, I don't remember any 19 quantification, but I know it's a real phenomenon. And I 20 thought that they were raised in some of the workshops. 21 MR. KOEHLER: No. It may be real, but is there 22 anything wrong with looking at it and evaluating it and 23 coming back to recommend appropriate action one way or the 24 other? 25 CHAIRMAN LLOYD: I think we'll discuss that with PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 282 1 staff, and I think I'm sure some of your team are going to 2 maybe add some more -- 3 MR. KOEHLER: Right. It's just that -- 4 CHAIRMAN LLOYD: -- and come back and I'd like 5 to -- 6 MR. KOEHLER: I feel very emphatically about it, 7 obviously, that it's a critical issue. 8 CHAIRMAN LLOYD: I think it's a little bit unfair 9 to staff, Neil, that maybe you became aware of it yesterday, 10 but I don't think -- staff has been talking about it for a 11 while and I think Mike characterizes, as far as I recollect, 12 Mike characterized it succinctly that they didn't do real 13 quantification, just coming to that point now. 14 MR. KOEHLER: Yeah. Nobody's seen the 15 quantification and literally and truly it's not been raised 16 as an issue. 17 So I rest my case. 18 CHAIRMAN LLOYD: Thank you. 19 Dr. Whitten. 20 Sorry. 21 MR. SCHEIBLE: One point. It was probably most 22 clear made to us as we investigated the issue and dealt with 23 the part manufacturers and the letter came into us in mid 24 November from Dupont and basically it says SAE studies shows 25 10 percent ethanol will typically cause a three to four PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 283 1 times increase in permeation rates through most materials. 2 This kind of input made us go and start doing the math and 3 getting all the information we could to see what is the size 4 of this effect. 5 And like I say, at least in our estimates to date 6 say it is relatively significant. 7 CHAIRMAN LLOYD: Thank you. 8 Yes, Dr. Whitten and Bruce Heine, Bob Reynolds, 9 Eric Vaughn. 10 DR. WHITTEN: Good afternoon. I'm here to talk 11 about the carbon monoxide credit and debit issue that was 12 just brought up. 13 I'd like to point out that this issue of carbon 14 monoxide credit goes back quite a bit in time. I was 15 involved in it in 1988 when I testified before the US 16 Congress on the feasibility of a one-pound waiver for 17 ethanol, and a large part of that justifiability of the 18 one-pound waiver for non-reformulated gasoline does come 19 from the ozone effect of carbon monoxide. 20 Later on in discussions with members of 21 congressional staff on the idea of an oxygen mandate being 22 written into the 1990 Clean Air Act, we also talked about 23 the idea that a mandate would also affect ozone from the 24 standpoint of carbon monoxide, and that it would be sort of 25 a bootstrap, not bootstrap, but a built-in suspenders type PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 284 1 of extra added environmental protection to have that 2 mandate. 3 Little did we know at that time that in the next 4 ten years there were very many benefits in addition to the 5 carbon monoxide, as you heard today Dr. Michael Graboski 6 pointed out, things like particulate emissions. 7 I might also point out that there's combustion 8 chamber deposits is another issue from aromatics, which 9 ethanol is involved with. So the idea of an oxygen mandate 10 does have other environmental benefits. 11 I want to point out that carbon monoxide as we now 12 know is also a very much a high emitter issue. There was -- 13 this is last year a study released by CRC where they looked 14 at remote sensing of 172,000 vehicles, and from that data 15 they found that 63 percent of the total carbon monoxide 16 emissions was coming from only ten percent of the vehicles. 17 So it's much more of a high emitter issue than hydrocarbons, 18 because in that same test they found only 47 percent of the 19 total came from ten percent of the vehicles for in terms of 20 hydrocarbons. 21 High-emitter vehicles, off-road vehicles and what 22 we call off-cycle, at least in the case of enrichment, when 23 you put your foot down all the way to the floor and go into 24 open loop operation, all three of those categories CO is 25 much more of a factor than hydrocarbon increases, and the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 285 1 data that exists on carbon monoxide and for off-cycle and 2 high emitters, things like that, also is very consistent, 3 much more so than hydrocarbons, that the only fuel parameter 4 that really benefits these carbon monoxide emissions is fuel 5 oxygen. That's for high emitters, off-road vehicles and 6 off-cycle and enrichment type of operation. 7 There's also data that, as I mentioned this 8 morning in my presentation, in the Caldecott Tunnel where I 9 was talking then about the aromatics changing when oxygen 10 mandate came into being there was a 20 percent reduction 11 seen in carbon monoxide emissions in that Caldecott Tunnel 12 from the use of two percent. So it went from zero to two 13 percent. 14 So it's not unreasonable to believe that the 15 carbon monoxide debit is going to be every bit as much as 16 the carbon monoxide credit, if not more so. 17 CHAIRMAN LLOYD: Have you looked at the 18 permeability issue, Gary? 19 DR. WHITTEN: The variability? 20 CHAIRMAN LLOYD: No, the permeability. 21 DR. WHITTEN: The permeability issue in, well, the 22 Caldecott data didn't seem to indicate there was any 23 permeability from the ethanol that was used at the time. 24 There was some ethanol in the in-use. 25 CHAIRMAN LLOYD: There is ethanol in ambient air PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 286 1 anyway from other sources, stationary sources, consumer 2 products, et cetera. 3 DR. WHITTEN: I agree with Neil Koehler's request 4 that the permeability be looked upon and evaluated in a 5 public workshop and included in analysis, rather than it's 6 coming up all of a sudden and the data and the discussions 7 are -- haven't been presented. 8 CHAIRMAN LLOYD: You're on yellow, when you're 9 on -- 10 DR. WHITTEN: Right. 11 And I also want to mention again that credit, as 12 it is even now, could be higher as was mentioned in some of 13 the peer reviews this morning, in that the airshed modeling 14 indicates that the chemistry of carbon monoxide is perhaps 15 more important to urban atmospheres than the MIR factor, 16 which is used in the credit, so that the credit would be 17 proportional to that MIR adjustment. 18 CHAIRMAN LLOYD: I think we have acknowledged your 19 contribution in that area, Gary, very much, but I think it 20 was explained this morning I think for this particular 21 program where you've got the peer reviewers conferring with 22 the staff that in this case we have to go with the MIR, at 23 the same time not stop science and move ahead, I think as 24 we're going. 25 On the issue there, I think, again, nobody is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 287 1 questioning the CO influence on ozone at this stage. 2 On the other hand, we have the Governor obviously 3 asking for to give the industry flexibility to have oxygen 4 or non-oxygenates, and that staff is trying to balance both 5 of those. 6 DR. WHITTEN: My point is the credit that is being 7 given appears to be a minimal credit based on some of the 8 information that we have at this time. 9 CHAIRMAN LLOYD: So at the start of this you 10 wanted credit. Now you've got the credit, now you want a 11 debit. 12 DR. WHITTEN: Well, I see no reason that the 13 effect of chemistry from carbon monoxide is going to change 14 when you go below two percent oxygen and certainly off-road 15 vehicles and things like that they're not going to be any 16 response to sulfur and some of the other impact. 17 CHAIRMAN LLOYD: Yeah. I think, well, again, 18 there I think two issues, Gary, I think I'm certainly 19 sympathetic to better quantifying a lot of these off-road 20 emissions and off cycle. I don't see, we've been grappling 21 with that for years, I don't see it doing it overnight or in 22 several months, but I would love to join with the industry 23 to find out ways to do that and look at the appropriate 24 resources. 25 DR. WHITTEN: US EPA has quantified off-road PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 288 1 vehicles and have made recommendations and the oxygen effect 2 on off-road vehicles is actually higher than what the credit 3 that ARB is giving for on-road vehicles. 4 CHAIRMAN LLOYD: So we've quantified all the 5 emission sources from all the off-road sources in 6 California? 7 DR. WHITTEN: The Air Resources Board does have a 8 off-road total emissions inventory for off-road sources, 9 yes. It's been quantified. 10 CHAIRMAN LLOYD: Mike, will you comment. I think 11 a lot of those sources, maybe looked at that. 12 You don't want to comment at this time? 13 MR. SCHEIBLE: I can. It will take me a minute to 14 get the right resource in front of me. 15 CHAIRMAN LLOYD: That's okay. Let's come back to 16 it. I won't take your time. 17 Any questions? 18 Thanks very much, Gary. 19 We might have to take someone out of order. 20 There's Steve Mazor from AAA, I think would like to catch a 21 flight. 22 MR. MAZOR: Good afternoon, Dr. Lloyd and members 23 of the board. Thank you for taking me so we can get back to 24 Burbank. 25 Thanks for the opportunity to comment on these PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 289 1 regulations. 2 We know air quality has improved significantly in 3 California over the past few decades and one of the chief 4 reasons for that is cleaner fuels, and the auto club has 5 supported the reformulated gasoline Phase 2 and we continue 6 to support efforts to clean up cars and vehicles that burn 7 gasoline. 8 We're here today and we're hearing you being 9 pulled in two opposite directions. Well, or maybe more. 10 But you listen to the auto manufacturers, the environmental 11 groups and they claim that this regulation isn't going far 12 enough. 13 When I see five ppm sulfur relaxed or bringing the 14 other limits down to what it was in Phase 2 or even cleaner, 15 and then you hear the oil companies, they're saying we don't 16 want to have supply disrupted, we don't want the high price 17 swings and we can't go as far as that, at least for now. 18 We represent motorists who are the people who have 19 to buy and use these fuels and they want both. We want to 20 have the cleanest possible fuels. Our members and motorists 21 have to have smog checks. Smog checks are getting tighter 22 and tighter. We don't want their emissions control 23 components degrading to the point where they have got to do 24 excess repairs. But they want to be able to breathe clean 25 air. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 290 1 But at the same time we hear the fuss every time 2 that there's a spike in prices, and we don't want gas lines 3 like we had in the 1970s. 4 So maybe since we're being pulled in opposite 5 directions, maybe it's a little bit premature to go beyond 6 phasing out MTBE today. The government -- the Governor has 7 said we have to do that. The auto club supports that. 8 Maybe what we need is a mini Auto/Oil program, get auto 9 companies, the environmental groups and the oil companies, 10 lock them in a room and work this out to get the cleanest 11 possible fuel for motorists. 12 CHAIRMAN LLOYD: Expect anybody to come out? 13 MR. MAZOR: What I expect to come out is a plan, a 14 plan to get the cleanest possible fuel -- 15 BOARD MEMBER C.H. FRIEDMAN: You end up with 16 emissions somewhere. 17 MR. MAZOR: -- at the right time without the price 18 swings and supply disruptions that we've experienced. 19 Thank you. Any questions? 20 BOARD MEMBER C.H. FRIEDMAN: You're offering -- 21 MR. MAZOR: Sure. We'd be glad to host. 22 CHAIRMAN LLOYD: Thank you very much, Steve. 23 Now Bruce Heine. Appreciate, Bruce, your 24 patience. One of the disbenefits of coming from the East 25 Coast or thereabouts, you've got no plane to catch this time PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 291 1 of day. 2 MR. HEINE: Thank you, Dr. Lloyd and members of 3 the board and the staff. Thank you for advance or in 4 advance for your attention. 5 My name is Bruce Heine. And I'm here today 6 representing the Renewable Fuels Association. I work, 7 however, for Williams Bioenergy, a company that produces 8 ethanol. We are not only a producer of ethanol, but we're 9 also one of the nation's largest energy and communications 10 companies, based in Tulsa, Oklahoma. 11 Moreover, we also are one of America's biggest 12 owners and operators of pipelines, pipelines that move 13 natural gas here in California, pipelines that move natural 14 gas, liquids and petroleum products elsewhere in the United 15 States. 16 One of the ARB objectives in this process was to 17 provide flexibility where it was possible without 18 sacrificing emission benefits to facilitate the expected 19 significant use of ethanol in California gasoline. 20 Well, it has signs of the market being open, and 21 we've heard several things today that would give you the 22 perception that ethanol is a new fuel to the State of 23 California. It is not. There were significant quantities 24 of ethanol that were used here for three years, that were 25 primarily brought in by rail cars into this community, and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 292 1 it was done successfully. So millions and millions of 2 gallons of ethanol-blended gasoline has been sold in this 3 decade in this state. 4 Okay. In regards to the proposed changes that our 5 industry has looked at in specification changes for 6 denatured fuel ethanol, we've learned a lot of new things. 7 The Air Resources Board staff has helped us to recognize 8 something is going to change, that we'll see specs on 9 sulfur, benzene, olefin, and aromatic content in denatured 10 fuel ethanol. Although it was just a placeholder for 11 discussion and staff has suggested to delay this, we're 12 still learning quite a bit about that. 13 Many ethanol producers at this point are still 14 analyzing the constituents of their ethanol for specific 15 levels, so we're also looking at many options on how to 16 potentially comply with new levels of these standards that 17 would be set in the upcoming year. 18 One significant point, however, is that these 19 standards are not done in a vacuum. They need to be done 20 with industry, they need to be done with ASTM as well. 21 By having a coalition we'll set the standards 22 right, we'll set them fair, we'll set them in a way that 23 doesn't restrict supply, that does provide certainty for 24 refiners to go forth and have the ethanol that they have 25 come to expect. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 293 1 Many of the smaller ethanol plants, however, and 2 some of the big ones, don't currently have the equipment to 3 be able to test for sulfur levels in denatured fuel ethanol, 4 so that's another educational process that our industry is 5 working through as we speak. 6 The regulatory changes that CARB has suggested 7 that we delay, we believe that as we move forward that these 8 regulations, the CARBOB amendments will provide better 9 predictability for refiners and we want to work 10 cooperatively in that effort. 11 One other regulatory issue that has come about in 12 staff's recommendation to change at this point is to lift 13 the oxygen cap from 3.5 to 3.7 percent by weight. 14 EPA has a weight of four percent currently in 15 practice, and we believe staff should move to that level as 16 well. 17 One of the reasons that we say that is an option 18 for an ethanol producer to meet new sulfur standards on 19 denatured fuel ethanol would be to use less of a denaturant, 20 and right now we're able to use five parts per hundred and 21 as little as two parts per hundred, but if we decide to use 22 lower levels, that would increase the oxygen content of the 23 ethanol itself. So we believe that staff should take a look 24 at that and consider a change. 25 Our recommendation, however, from a broad PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 294 1 perspective is we agree that the -- with the staff that they 2 should postpone the CARBOB amendments until next year and 3 the specs on denatured fuel ethanol. It will allow us time 4 to work with the industry, work with staff and work most 5 importantly with ASTM. 6 Lastly, California refiners do have options today. 7 It's nice to see that refiners are going to have an option 8 to implement Phase 3 gasoline in advance of 2003. If in 9 fact they are able to do that, they can negotiate with their 10 ethanol supplier for tighter standards on sulfur or the 11 other parameters to help them comply with the needs that 12 they have. 13 As mentioned earlier, Williams Company is a big 14 mover of liquid products on America's pipeline system. In 15 fact, we own and operate 9,100 miles of pipeline across our 16 country. 17 I heard the mayor of Huntington Park talk today 18 about tracks. I heard another gentleman from CRASH talk 19 about trucks and diesel emissions. Those were all 20 well-founded comments and concerns. 21 However, our company being in the pipeline 22 business and the ethanol business, we've done testing in the 23 past and we believe that the testing that we've done would 24 indicate shipment of ethanol is possible and feasible if 25 done on a ratable basis. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 295 1 So we believe that California refiners are very 2 innovative and they'll find ways to move product to market 3 in the most cost-effective manner and ultimately we think 4 that that may be pipeline. 5 Thank you again for your attention. 6 CHAIRMAN LLOYD: Thank you, Bruce. Appreciate 7 that. 8 Next speaker is Bob Reynolds, Downstream 9 Alternatives. 10 MR. REYNOLDS: Good afternoon, Mr. Chairman, 11 members of the committee. My name is Bob Reynolds. I'm 12 president of Downstream Alternatives. I'm here today in my 13 capacity as a member of the Renewable Fuels Association 14 Technical Committee. 15 I want to speak on two topics. 16 One is ethanol commingling effect, which I will 17 shorten up a little bit from what I've planned. It's been 18 covered quite a bit. 19 And also some on the last permeability issue. 20 I guess on the commingling effect there's been a 21 lot of information presented on different studies, but I 22 would caution that most of these studies have been done on 23 ten percent ethanol blends and it's important that we 24 recognize that here we're probably talking about 5.7. So 25 the actual amount of ethanol in the tank at the refueling PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 296 1 event would be different than that that has been used in 2 most of the studies done to date. 3 And I've provided written, more expanded written 4 version of my comments and I have some examples in there. 5 Also, refueling patterns is a major issue. The 6 assumptions used in refueling patterns can dramatically 7 impact the outcome of any commingling calculation. 8 And if you look at California, there are some 9 things that are unique to California that may not be 10 reflected in some of the commingling studies that have been 11 done. Nationally, compared to national averages, there are 12 more -- fewer refueling events for California automobiles 13 than on average in the United States, due to higher mileage 14 and fewer miles driven. 15 Customer loyalty is also an issue. Most of the 16 customer loyalty or consumer brand loyalty studies that have 17 been done date back to 1985. Since that time we've had 18 major industry consolidation, you've lost over 3,000 19 gasoline stations in the State of California over the last 20 five to ten years due to underground storage tank compliance 21 and closing of marginal stations. All of these things tend 22 to increase a customer's likelihood of purchasing fuel at 23 the same site, which tends to minimize the commingling 24 effect. 25 Also, you have a large portion of your market here PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 297 1 represented by a few marketers, which tends to increase 2 brand loyalty. 3 But I want to move on and talk a little bit more 4 about fuel permeation, since that was brought up. It was 5 brought to my attention only yesterday as well, that there 6 may be some consideration of an emissions adjustment on the 7 rate of permeation of gasoline blends through these fuel 8 system elastomers. 9 And basically I reviewed what data I could and 10 pulled some things, technical papers last night, and there's 11 very little information on this with regards to the studies. 12 First off, there's nothing on a 5.7 percent 13 ethanol blend. None of the existing data was developed with 14 the idea of being projected into this type of an 15 application. Much of the testing was done in a manner to 16 aid in the selection of the proper elastomer for a specified 17 application, not to gauge its ability to contain one product 18 or another. 19 There are dozens of elastomers utilized in vehicle 20 fuel system. Most papers compare only certain elastomers in 21 certain applications. Some of the testing has utilized 22 ethanol content as high as 20 percent in the blend, much of 23 it has used methanol, because that's the worst case 24 scenario, and then said this is applicable to ethanol. But 25 the testing wasn't actually done on an ethanol blend in many PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 298 1 cases. 2 Mainstream of gasoline, to my knowledge, has not 3 been done in a single test or in a technical paper that 4 addressed the permeation rate of a 5.7 volume percent 5 ethanol blend that used reference fuel C with ethanol. 6 The rate of permeation can vary dramatically 7 between elastomer types, sometimes ten or a hundredfold 8 increases. 9 For instance, while SAE 30R7 type hose shows some 10 increase in permeation for ten percent ethanol blends, SAE 11 30R9 type hose shows hardly any increase at all. 12 Permeation rates are also affected by aromatic 13 content. So as you go up in aromatic content, permeation 14 rates are affected. 15 If we're to head down this slippery slope of 16 trying to make these kind of adjustments we'll be looking at 17 the permeation rates of various elastomers or various 18 gasoline components and what they have on an elastomer. 19 The measure of permeation rate for most tests is 20 based on weight loss, grams per fuel loss per meter of the 21 inner surface of the test material. But this work doesn't 22 speciate the components, and I think everybody is in 23 agreement that there tends to be more ethanol in those 24 emissions. 25 Perhaps another important issue is the fact that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 299 1 by the time these regs are implemented, if you look at the 2 federal proposed Tier 2 standards these hoses will be tested 3 on, aged on ethanol blends anyway that the auto makers are 4 using, so over a period of a few years as the fleet turns 5 over this will likely not even be an issue. 6 So these are some very complex issues and I think 7 that it would seem to me that quantification of this matter 8 is sufficiently complex to warrant some type of a workshop 9 or hearing or at least a formal comment period so that these 10 data gaps can be identified, and test programs that address 11 such gaps could be developed. At a minimum, any decision 12 should be based on all of the information that is available, 13 not just a few papers. 14 Thank you. 15 CHAIRMAN LLOYD: Thank you very much. 16 Any questions? 17 Thank you. 18 I think on this I guess we've got someone else 19 here we've got to testify next. I called Eric earlier. 20 Sorry. 21 Then I guess then we have Terry Jaffoni, then Jodi 22 Waters, Scott Wedge. 23 MR. VAUGHN: Mr. Chairman, thank you very much. 24 It's truly an honor to be here with you and the California 25 Air Resources Board. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 300 1 I feel like over the 15 years I've been working 2 with the ethanol industry I've heard a great deal about this 3 board, its deliberations, and some back in Washington 4 described as something of a star chamber. It is actually a 5 rather impressive enterprise and I want to congratulate you 6 and your staff for the enormous amount of very professional 7 work that you've undertaken over the last nine months, or 8 virtually nine months, an extraordinarily professional 9 attempt at changing a regulation that virtually required the 10 use of MTBE in this state, to open up this market to allow 11 for a domestic renewable alternative energy source, like 12 ethanol, to part of your very important market. 13 My name is Eric Vaughn. I'm the president and 14 chief executive officer of the Renewable Fuels Association. 15 It's the national trade association for the ethanol 16 industry. We have 275 member companies, 57 ethanol 17 producers producing ethanol in 27 different states. 18 While virtually all of the ethanol produced in the 19 United States today, some 93 percent is manufactured from 20 the starch component of feed grains, we are today making 21 ethanol from 16 different types of categories of feedstocks, 22 from potato waste, agricultural waste, wood waste, waste 23 paper. There's even a small facility that uses waste M&Ms. 24 I have to tell you, I found it very hard to watch those M&Ms 25 get crushed to manufacture anything like ethanol. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 301 1 The fact is since 1990 when the Clean Air Act 2 amendments were adopted in Washington, the domestic ethanol 3 industry and the nation's farmers, the National Corn 4 Growers' Association, the Farm Bureau Federation and others 5 joined with organizations, staffers from this organization, 6 the California Air Resources Board, and others, to work to 7 approve and achieve a consensus on that monumental piece of 8 legislation. 9 The one legislative initiative, the one amendment 10 that passed the Senate floor that year, was referred to as 11 the Clean Octane Amendment. That amendment was authored by 12 Senators Dole and Daschle, Midwestern leaders, and was 13 passed on the Senate floor. 14 That initiative established the opportunity, the 15 requirement, to add oxygenates to gasoline. Not MTBE, not 16 ethanol, but oxygenates, as a way of moving clean sources of 17 octane to help reduce dangerous emissions, but also, and 18 importantly, to create renewable marketplaces for our 19 abundant natural resources, corn, wood feedstocks and trash, 20 and others, as we helped to enhance domestic national energy 21 security, and also to enhance rural economic development. 22 Nine years ago the domestic ethanol industry took 23 the reformulated gasoline program and the oxygenate standard 24 seriously. We have doubled in size in nine years. We've 25 added 37 ethanol production facilities. Some 750,000 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 302 1 farmers today own and operate ethanol production facilities. 2 Our yields have increased 12 percent on a bushel of corn 3 basis. Our energy inputs have gone down 31 and a half 4 percent. And our marketplace has expanded to include 5 virtually every state in the United States today. 6 Today we offer ethanol blends in 60 service 7 stations here in the California marketplace. We hope with 8 your strong support and effort that number will increase in 9 years to come. 10 Ethanol is not new across the country. And your 11 analysis here is not frightening to the ethanol industry, 12 nor is it considered a challenge. We welcome the 13 opportunity to work with you and staff to fully, fairly, 14 thoroughly evaluate ethanol's application in the 15 marketplace. 16 I would only wish that there was opportunity to 17 work with you and other staffers in Washington as you 18 conduct your business trying to change this program. 19 The domestic ethanol industry remains firmly 20 committed to the oxygenate content requirement in federal 21 law. We will continue to work to maintain that oxygenate 22 content requirement. 23 We believe that your air quality, your 24 environment, your entire ecosystem can be greatly enhanced 25 and improved with the introduction of expanded use of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 303 1 ethanol. 2 I would direct you, if it was at all possible, to 3 look at two federal EPA initiatives that are seriously 4 undergoing active consideration and we believe may be 5 introduced late this year, early next year, as adjustments 6 to the federal reformulated gasoline program, a strong, 7 robust and efficient carbon monoxide credit for oxygenate 8 content above two percent. 9 And I applaud you, Chairman Lloyd, for your 10 ground-breaking work on this and I would ask you to continue 11 to push forward. I think the more robust you can make that, 12 the more aggressive you can make your renewables blend 13 program in this state and the cleaner your air can become. 14 Secondly, and maybe most importantly for many of 15 the marketers in the room, is an annual averaging proposal 16 so that the oxygen content is not measured on a per gallon 17 basis, but can be measured on an annual requirement basis. 18 We would like to work with California since you do 19 have contiguous reformulated gasoline covered areas to 20 extend that to contiguous areas. 21 There would be a way we can work together and 22 cooperatively to accomplish that. 23 If not, the domestic ethanol industry and the 24 agricultural interests will find ourselves in the opposite 25 side from where the California Air Resources Board and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 304 1 others in California are in this clean issue. 2 I would be remiss, though, if I didn't tell you 3 that while we do represent many ethanol producers across the 4 country today, we are strongly enthusiastic about the 5 biomass potential here in California. 6 I have visited often and very aggressively with 7 your rice straw industry. You burn enough rice straw on an 8 annual basis to produce over 312 million gallons of ethanol. 9 That's neither hype nor hope. That's a promise. 10 And if your actions can speak loudly and 11 effectively to an industry like the rice industry, you can 12 turn a waste product and an air pollutant into a clean, 13 renewable alternative fuel and bring the promise of the 14 domestic ethanol industry right here to your own community. 15 Mr. Chairman, I appreciate the opportunity to be 16 here. I spoke to try to be within your time limit and I can 17 try to answer any questions that you might have for me. 18 Thank you very much. 19 CHAIRMAN LLOYD: Thank you very much. I know that 20 Mr. Kenny has been working closely with you back in 21 Washington. I'd love you to be here tomorrow when we have 22 the rice growers back to again confirm the very attractive 23 market that we have been telling them about and -- 24 MR. VAUGHN: Mr. Kenny needs nothing from me, I 25 can tell you, but I can tell you I would be much more PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 305 1 appreciative of the opportunity to work with Mr. Kenny. 2 He's an aggressive advocate for your position. I don't like 3 being on the opposite side of someone so effective. 4 I hope we can work together to promote renewable 5 alternative fuels and work together to expand this market. 6 You do have a terrific advocate in Mr. Kenny back in 7 Washington. 8 CHAIRMAN LLOYD: We have to find a way. Thank you 9 very much. Thank you for taking the time. 10 MR. VAUGHN: Thank you very much. 11 CHAIRMAN LLOYD: And I guess we will convey your 12 message to the rice growers. 13 We have Terry Jaffoni and then I missed a couple 14 of names. Vincent James, Jodi Waters, V. John White, and 15 then Scott Wedge. 16 MS. JAFFONI: Good afternoon. My name is Terry 17 Jaffoni. I'm commercial director of Cargill's ethanol 18 business, and I'm also vice chair of the Renewable Fuels 19 Association. 20 I appreciate the opportunity today to comment on 21 the proposed regulations for California RFG Phase 3. 22 Cargill is more than just an ethanol producer. 23 Some of you may have heard of us. We're one of the world's 24 largest privately held corporations. We are the largest 25 private company in the United States. We are an PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 306 1 international marketer, processor and distributor of 2 agricultural and food products and services. We trade 3 grain, we mill wheat to flour, we mill corn into a variety 4 of products, we have salt mining and processing operations. 5 We process steel. We are in the financial services 6 business. We are also involved in petroleum trading, and 7 number of other businesses. Not to mention our fertilizer 8 business. 9 We are truly a global, international company with 10 some 82,000 employees working at a thousand locations 11 worldwide in 59 countries. 12 We also have quite a bit of activity here in 13 California. We have our salt operations. That's our 14 largest business here in California. And our red meat 15 business -- 16 CHAIRMAN LLOYD: You recognize the advertising 17 section is going to take a big part of your presentation. 18 MS. JAFFONI: Yes. Okay. Well, suffice to say -- 19 I apologize. 20 We have about $400 million invested in the State 21 of California in our various businesses. 22 We entered the ethanol business in 1992 as a 23 result of the Clean Air Act amendments and the role that was 24 set by Congress for oxygenates in the RFG program. 25 Since that time we have built two facilities, one PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 307 1 in Blair, Nebraska, and one in Eddyville, Iowa, and we've 2 invested $150 million in our ethanol business. 3 The combined production from these facilities 4 exceeds 100 million gallons a year. 5 In light of the concerns about price volatility 6 and also some concerns over ethanol supply, I just thought 7 I'd make some comments in that regard. 8 Annual production capacity in the US, including -- 9 includes operating plants and plants under construction is 10 1.8 million gallons in 1999. 11 CHAIRMAN LLOYD: How many plants in California? 12 MS. JAFFONI: I know of one plant in California, 13 which is Parallel Products, of any significant size. 14 CHAIRMAN LLOYD: Are you going to invest in plants 15 in California? 16 MS. JAFFONI: We have not made that determination 17 yet. We're certainly looking at the investment 18 opportunities that present themselves with opportunities in 19 California and the Northeast. 20 CHAIRMAN LLOYD: I couldn't see much brighter ones 21 on the horizon from my perspective. 22 MS. JAFFONI: Well, I agree. Things are looking 23 pretty optimistic. 24 In our analysis we only looked at fermentation 25 sources of ethanol rather than synthetic. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 308 1 There's really outside the United States, Canada, 2 Brazil and several Caribbean basin countries produce 3 fermentation grade fuel ethanol, and Brazil is by far the 4 largest fermentation ethanol producer in the world, 5 manufacturing nearly four billion gallons per year. 85 6 percent of that capacity is committed to domestic use within 7 Brazilian country. Brazilian law requires all gasoline sold 8 to contain 24 percent ethanol. 9 CHAIRMAN LLOYD: How is that germane to 10 California? 11 MS. JAFFONI: Well, what I'm trying to describe 12 here is what the supply situation is in terms of getting 13 ethanol supplies to California. 14 I can just to be succinct about this and 15 recognition of the time, I'll just jump right down to the 16 bottom line if you'd like me to. 17 CHAIRMAN LLOYD: No, I don't like to and I know 18 you've come a long way, but the point is we have limited 19 time, still got a lot of people to testify. 20 MS. JAFFONI: I understand. 21 CHAIRMAN LLOYD: It's good background information, 22 but I'm not sure where it moves us in terms of our decision. 23 MS. JAFFONI: Okay. Well, to encapsulize this 24 into one or two sentences, if I can do that, we may see some 25 CBI ethanol coming into this country. That's Caribbean PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 309 1 Basin Initiative. 2 I'm going to go right to a table here if you'll 3 permit me so I can summarize this. 4 I also apologize, I don't have written comments. 5 CHAIRMAN LLOYD: Even if we get a copy of the 6 table it would be helpful. 7 MS. JAFFONI: I will provide that. I can't put my 8 hands on that table right now. 9 But the demand scenarios that we looked at for 10 California ethanol requirements, we looked at consumption, 11 projected consumption of ethanol and the federal RFG areas 12 at 5.7 percent, and also at ten percent, and we also looked 13 at or made the assumption that 15 percent of CARB gasoline, 14 which approximates not a premium in the CARB gasoline pool, 15 would use ethanol either at 5.7 percent or ten percent. 16 Under those four different scenarios, ethanol demand will 17 range from 550 million gallons per year to 1.34 -- 034 18 billion gallons per year. 19 CHAIRMAN LLOYD: If you can summarize. 20 MS. JAFFONI: Yes, that's what I'm -- you've kind 21 of caught me a little off guard here. I'm kind of -- I 22 didn't expect to speak in the first place today, so I'm a 23 little bit out of order here. 24 But the bottom line is in a low scenario demand, 25 scenario of 550 million gallons per year, there is enough PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 310 1 ethanol in the United States and plus Caribbean basin and 2 plus surpluses of ethanol exist today to supply 93.8 percent 3 of those requirements. 4 Now, in a high case, high-demand case, which is an 5 excess of billion gallons, we would have enough ethanol 6 produced today to supply about half of those requirements. 7 Now, the additional demand for ethanol not met by 8 the underutilized capacity and the incremental CBI ethanol 9 imports would be met by ethanol that's bid away from 10 Midwestern markets where ethanol is used electively for its 11 economic advantage relative to gasoline. 12 Now, according to RFA, about 650 million gallons 13 per year of ethanol are used to comply with the requirements 14 of the federal RFG and oxy fuels program, which leaves 15 roughly 737 million gallons of ethanol consumed in these 16 gasoline extender octane enhancer markets. 17 This product would be available to migrate to the 18 California market as its use isn't subject to gasoline 19 program requirements. 20 CHAIRMAN LLOYD: How would it migrate? 21 MS. JAFFONI: It would have to be bid away. It 22 would have to be priced -- 23 CHAIRMAN LLOYD: How would it get here, what mode 24 of transportation? 25 MS. JAFFONI: Oh, it can come in either in rail PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 311 1 car or by ship. I mean, ethanol comes to the West Coast by 2 ship now and by rail cars, and as was mentioned earlier, 3 ethanol has been supplied to the State of California in the 4 past. 5 And another thing, while I'm talking about the -- 6 if you permit -- the pipeline question's very interesting, 7 because in Brazil ethanol is pipelined as a regular 8 practice, and I had the good fortune to have a nice 9 conversation with somebody yesterday from Petrobras and it 10 was describing what, how they exactly do that, and I think 11 it's technically feasible to do that. 12 CHAIRMAN LLOYD: On that note, I think it's a 13 positive note. Thank you. 14 MS. JAFFONI: Okay. Thank you very much. 15 CHAIRMAN LLOYD: Vincent James. Vincent James. 16 Jodi Waters. 17 MS. WATERS: Dr. Lloyd, members of the board, I'm 18 glad to see that this is a board meeting. I was beginning 19 to think I was at an ethanol convention. 20 There are several things I'd like to bring up from 21 the public's point of view. 22 One of them is that we need to act immediately. 23 In the past when MTBE was brought in as reformulated gas 2, 24 no one did these studies they should have done ahead of 25 time. And the information was there if somebody went out to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 312 1 get them. 2 I understand that some of the other people have 3 commented in regards to the children that are in their 4 neighborhoods and the trucks going through their 5 neighborhoods. Right now we have 7,000 miles of pipeline 6 where MTBE, the gas that is in gas right now is going and 7 flowing to their neighborhoods already. 8 So I'm really in favor of moving to a different 9 kind of gas and I support that. 10 But I think what we need is a public waiver for 11 California at the federal level, and I support Feinstein's 12 bill in that regard. 13 The cost, I've heard it said over and over again 14 that it's just a few cents a gallon, that in the past that's 15 all it's been. It might be from the oil producers' 16 standpoint, but when it comes to California we have what's 17 known here as zone pricing. If they feel that the people in 18 that area can afford to pay $2 a gallon for gas, like they 19 do in San Francisco, then even those they're right next to 20 the refineries, that is an oil company tactic to make more 21 money. 22 These people are not hurting for funds. They have 23 high record profit. So even retooling, the cost of 24 retooling, they do that on a regular basis. It's a tax 25 deduction for them with the IRS. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 313 1 Most people are aware that when we have an 2 explosion at a refinery this is an excuse to increase the 3 prices, that when we are shipping gas out of state that 4 could be used here, versus supplying it to our own people, 5 and then we're having to pay more money here. So I don't 6 think cost should be a factor for this board to consider, 7 when it comes to that. I don't think that if we see gas 8 prices jump by a quarter or 50 cents a gallon after we go to 9 RFG 3 that it's going to be because it was necessary. I 10 think it's going to be an advent that the industry uses to 11 bolster their own profits. 12 I urge you now to go ahead with the new 13 formulation of gas. I'm not in favor of ethanol. It has 14 its own problems. One of the things that we know with 15 ethanol is that out of the tailpipe formaldehyde is 16 increased by a hundred percent over standard gasoline, 17 whereas MTBE was 50 percent. 18 We know what formaldehyde does. Part of the 19 problems with it when you breathe it, it does cause asthma 20 in children, asthma attacks in children. That's a known 21 fact. 22 There's over 3700 studies that indicate the 23 formaldehyde that you breathe in the air causes cancer. So 24 we've got enough evidence on that. 25 We had a pilot program here in the State of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 314 1 California where for six months one of the refiners made RFG 2 2 gasoline, over a million gallons they pumped out, without 3 any oxygenate in it at all and it was successful. It met 4 all the requirements that we need, we needed to have in 5 order for our air to be maintained the way it was. 6 So what we need to have is the mandate taken away. 7 We don't need to have the oxygen in the gas to begin with. 8 And I thank you for your time. 9 CHAIRMAN LLOYD: Thank you very much. 10 Next we have V. John White, representing the 11 Sierra Club. 12 MR. WHITE: Yes, Mr. Chairman. I'm representing 13 today John White, representing the Sierra Club, the 14 Coalition for Clean Air and the Union of Concerned 15 Scientists. We have provided written testimony. 16 And I have -- we'll try to summarize that and then 17 add a couple points that have occurred to me as I've 18 listened to today's deliberation. 19 Thank you, Mr. Chairman and members for your 20 attention. It's been a long day. Lots of interesting 21 commentary and presentations. 22 I'd like to return, now that we've had a walk 23 through the market share discussion, to the purposes of the 24 regulation from our standpoint, and to try to underscore 25 some of the remaining issues that you have before you. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 315 1 To remind us, we have a vital need for the 2 reformulated gasoline to give us emission reductions in the 3 state smog control program, in particular because of the 4 loss of tons of emission reductions that we have suffered 5 from the failure of the smog check program to deliver the 6 necessary reductions. 7 And we can go into the reasons for that in another 8 forum. But you all know the amount of the deficit, which 9 means that we got more tons we need to get from the 10 gasoline. 11 It isn't just the Governor's Executive Order, with 12 all due admiration and respect for the Governor, but the 13 statute. Senator Sher's legislation requires that you 14 achieve equivalent reductions to actual air quality benefits 15 achieved. And I know that's in the eye of the beholder a 16 little bit, but that's an important standard. 17 At the same time while we know everybody is 18 emphasizing equivalents, there are opportunities to realize 19 even greater emission reductions and commensurate public 20 health benefits which are needed even more than we realized 21 before. 22 So we believe it is therefore necessary for the 23 board to adopt measures now to substantially reduce sulfur 24 and evaporative emissions, even beyond the levels 25 recommended in the staff report so the refiners can make PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 316 1 necessary changes at the same time they're complying with 2 the phase-out. 3 We support the removal of MTBE from gasoline and 4 urge the ARB to remove MTBE as soon as possible, while 5 maintaining and improving upon the clean air benefits 6 achieved on the road today. 7 We believe that you can have both clean air and 8 clean water through reformulating gasoline, remove MTBE. 9 But I have to tell you that one of the things that 10 I was a little concerned about in the staff presentation 11 earlier is the implication that the status quo with regard 12 to groundwater cleanup and gasoline leakage somehow might be 13 sufficient. 14 I think that MTBE is dying a commercial death for 15 sins committed by others and the phase-out of the MTBE is 16 not going to remove the MTBE that's in the groundwater, nor 17 is it going to prevent sufficient gasoline leakage from 18 continuing to occur. 19 And given what I believe you've found in the fate 20 and transport of ethanol study, our friends in the ethanol 21 community should take no comfort from the biodegradability 22 of ethanol as a explanation for what happens if it spills 23 along with gasoline into the groundwater, because they're 24 synergistic effects with existing plumes that can occur. 25 So one of the things, I know it's not your job, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 317 1 but it is the job of Cal EPA, to coordinate responses 2 between agencies. 3 As you all may remember, the Air Resources Board 4 Executive Officer in 1995 wrote a letter to the Water Board 5 describing the potential contamination and the indications 6 that MTBE was providing of more widespread petroleum 7 contamination than perhaps had thought to be the case. 8 The Water Board and the Health Department ignored 9 that letter, with the resulting consequences that we've now 10 seen. 11 So while we support the phase-out of MTBE as in 12 the Governor's Executive Order, we think that the level of 13 comfort taken in that action reflects a misunderstanding of 14 the nature of the threat that we still face from the impacts 15 of existing contamination and the fact that it appears that 16 even the new tanks are leaking gasoline. 17 And from our point of view, we should take no 18 comfort from leaking gasoline into groundwater, no matter 19 what's in it, and that that point needs to be reemphasized 20 over and over again as we go through the multimedia issue. 21 As we look forward to the future, you know, as you 22 know this board has a habit of leading the nation on 23 important air quality issues, and as we're finding 24 increasingly the world is also looking to us, but in the 25 case of sulfur, the world leadership on air quality has PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 318 1 already spoken, and they've spoken that the number we need 2 to get to is five parts per million. We need it, the car 3 companies have testified or will testify that they 4 absolutely need and will depend upon that lower level of 5 sulfur to get to the levels that you all are pushing them 6 towards. 7 We will need that level in particular in regions 8 such as Sacramento. You've heard the testimony from the 9 Clean Air Partnership today. This is a region very much 10 dependent on your actions to provide necessary tons for 11 achieving attainment. The smog check tons are already 12 missing, so we need that sulfur standard as soon as possible 13 to get there. 14 There's also a benefit from lower sulfur of 15 reduced fine particle emissions and improved durability, and 16 we think that's an important consideration. 17 We also think that California needs to be a leader 18 for the nation and the region. The Western United States 19 needs the sulfur reductions for visibility improvements and 20 for emerging nonattainment problems in the cities of the 21 West. 22 Our friends in Texas have no comfort that they can 23 take. They have now replaced Los Angeles as the hottest 24 spot for ozone violations in the country. And the Governor 25 of Texas should call a special session and begin immediately PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 319 1 to impose sulfur standards equivalent to what California 2 adopts. If Texas were to adopt the California spec, even of 3 20, it would help you go to five. 4 So and one of the reasons for you to talk about 5 five and get to five as soon as possible is because of the 6 impact it will have on the national debate. I think the 7 fact that you've already done what you've done and headed 8 the direction you've headed in this very difficult 9 environment has helped with EPA to move them to 20, or to 10 30, rather, which I understand is lower than most folks 11 thought they were going to go. 12 So there's a synergy in the way the politics works 13 between you and the rest of the region and the rest of the 14 country. And I think we need to have a dialogue with folks 15 in Texas about those very issues and maybe they will take 16 some comfort from some of our examples. 17 We concur with the recommendation regarding that 18 you've already heard about going to 6.8. 19 And finally we want to be sure that the actual 20 equivalency is achieved in use. You've heard testimony on 21 that. 22 Lastly, I would say that we need to take a look at 23 on-road and off-road engines and getting at those emission 24 reductions through some other means. I think perhaps we 25 should include the gasoline off-road engines in our retrofit PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 320 1 strategies that we've been looking at under the Carl Moyer 2 program and see if we can't maybe get at those carbon 3 monoxide increases in that fashion. 4 So those would be my principal remarks, 5 Mr. Chairman, and I'll take any questions if you have them. 6 CHAIRMAN LLOYD: Thank you very much, John. 7 I gave you a little bit of leeway because you were 8 talking for three organizations and -- 9 MR. WHITE: Thank you, Mr. Chairman. 10 CHAIRMAN LLOYD: -- I'm pleased you didn't abuse 11 that. 12 I'd also like to take this opportunity to thank 13 you for your unflagging work on behalf of the citizens of 14 California and a big supporter in helping us to get to where 15 we need to be and also keeping us honest. 16 MR. WHITE: Thank you, Mr. Chairman. 17 CHAIRMAN LLOYD: Thank you again. 18 And Scott Wedge and then John Cabaniss, Mr. Gary 19 Herwick, and then Walt Kreucher. 20 Scott Wedge not here? 21 John Cabaniss, and then Gary Herwick and Walt 22 Kreucher. 23 MR. CABANISS: Good evening now. I'm John 24 Cabaniss with the Association of International Automobile 25 Manufacturers. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 321 1 And I'll be very brief. 2 You have my written statements. I'll just refer 3 you to that. I'll just make a very few points. 4 With respect to the consumer with the original or 5 earlier staff proposal, AIM was, and I remember companies 6 were concerned about the potential for consumer problems 7 with the fuel. However, with the latest revisions that were 8 just announced a couple of days ago, returning the 9 distillation T50 and T90 parameters back to the Phase 2 10 levels, the caps, those concerns are largely mitigated now. 11 We do support those and we appreciate the staff's attention 12 to that. 13 In light of the air quality situation in 14 California, we've heard a lot today about shortfalls and 15 inventory problems, and the concerns that -- other concerns 16 that are addressed in our written statement. 17 We do support the staff's recommendation with a 18 few caveats. 19 We believe that the board should adopt an 20 alternate approach that goes beyond the staff proposal. 21 Both the auto industry and CARB staff agree that, and we've 22 heard a lot today, that improving gasoline will 23 significantly reduce emissions for California. We need 24 those emission reductions here in California. 25 A year ago when this process started, the auto PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 322 1 industry put on the table a proposal for its recommendations 2 for a cleaner fuel for California. It included many of the 3 things that have been talked about today. Some reductions 4 in T50, continuation of the T90 specification as it is, some 5 reductions in olefins and the fat ppm sulfur that we've 6 heard about. 7 It's projected that this proposal will provide an 8 additional 25 to 30 tons per day of NOx and VOC reductions 9 that won't take care of the shortfalls that are being talked 10 about in many of the districts, but it will help. 11 We recommend that the board adopt this auto 12 proposal, auto industry proposal, as the long-term 13 California reformulated gasoline specification. 14 We understand the need for short-term flexibility 15 in this period of uncertainty as to how to deal with the 16 MTBE phase-out, but we do believe and support that this 17 should be an interim program and should be sunset at an 18 appropriate time. 19 Adopting the long-term specification now would 20 provide the oil industry with adequate notice that 21 California intends to obtain the optimal environmental 22 benefits from the reformulated gasoline program, and that 23 will give them time to factor that into their product and 24 refinery planning. 25 In addition, of course, it's evident from all the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 323 1 work that's going on here in California nationally and even 2 internationally that we're learning, in a period of rapidly 3 growing knowledge about this whole business. And it's 4 undoubtedly true that the oil industry will gain a 5 tremendous amount of information in the next few years on 6 how to replace MTBE in gasoline, while continuing to blend 7 the high-quality gasoline. 8 We believe as well that this knowledge base will 9 provide additional opportunities for California. 10 And it will make the auto proposal that I've 11 mentioned, and in fact it's attached to my statement, the 12 details, will help to make this a feasible, cost-effective 13 and environmentally beneficial program for California. 14 Thank you very much. 15 CHAIRMAN LLOYD: Thank you very much, John. 16 We have had a little bit of discussion earlier. 17 I'd like maybe you and the other auto manufacturers be 18 prepared to answer this on the issue of permeability and, 19 you know, ethanol-based fuels. You have any feeling on 20 that, any comment on that at all or no? 21 MR. CABANISS: Well, I'm not an evaporative 22 expert. I think there are some in the room. 23 But I do know a very limited amount about it. I 24 would say that we know that ethanol blends are much more of 25 a problem for permeability. And I guess I would refer that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 324 1 to another. 2 CHAIRMAN LLOYD: Thank you. Any -- oh, yeah, 3 Matt, question. 4 BOARD MEMBER McKINNON: I just have a very brief 5 comment and this goes to you and your clients and possibly 6 the next three speakers. 7 And that is that this state is doing a very 8 difficult dance between our water quality, our air quality, 9 petroleum industry and the auto industry. 10 And we have one auto manufacturing plant in the 11 whole state and we buy an awful lot of cars in this state. 12 And it's a huge dance that we're doing. 13 And we met before and I just wanted to pass it 14 along in a little more public fashion that it's very very 15 difficult for us to buy all those cars and trucks and to do 16 all this dance and not see some of the jobs in this state 17 that ought to be here with them. 18 Thank you. 19 CHAIRMAN LLOYD: Thank you, Matt. 20 Yes, Gary Herwick, Walt Kreucher and then Ann 21 Schlenker. 22 MR. HERWICK: Good afternoon, Mr. Chairman and 23 members of the board. Appreciate your endurance this 24 afternoon in this durability test of humans and people. 25 My name is Gary Herwick and I'm the manager of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 325 1 Fuels Activities at General Motors Public Policy Center in 2 Detroit. 3 I appreciate the opportunity to provide comment on 4 this critically important issue both to General Motors and 5 to the worldwide automotive industry. 6 Automotive fuel specs such as those under 7 consideration today determine how successful new vehicle 8 emission control regulations, such as the LEV 2 program, can 9 be in providing further mobile source emission reductions. 10 And they are the key to enabling future vehicle 11 and emission control technologies capable of providing even 12 further emission reductions and fuel efficiency 13 improvements. 14 The success of California's reformulated gasoline 15 program in achieving substantial and cost-effective air 16 quality improvements is well documented and has been 17 reiterated here today several times, but there's more to be 18 done. 19 Further reductions of about 50 tons per day of 20 ozone precursor emission may be needed in addition to the 21 currently identified programs, including the LEV 2 program. 22 A key contributor, such as fuel reformulation, 23 cannot be ignored. 24 The reformulated gasoline specification 25 improvements proposed by the Alliance of Automobile PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 326 1 Manufacturers nearly a year ago at the start of the workshop 2 process could provide half of this emission reduction or 3 about 25 tons per day. 4 With the SIP shortfall of this magnitude, it is 5 not enough to simply maintain the air quality benefits of 6 the current RFG2 program. Yet the ARB staff's proposal, 7 according to an analysis provided by the Alliance at the 8 November 15th RFG3 workshop, might not provide any 9 additional air benefit and in fact it could result in a loss 10 in air benefits because it represents a step back from the 11 specifications of the RFG2 program to provide flexibility 12 for the refiners of California gasoline. 13 The Alliance proposal for RFG3 included a cap of 14 five ppm for sulfur and also a modest improvement in the T50 15 spec from the RFG2 specifications. 16 All the data on sulfur reduction, including 17 preliminary information from the latest Alliance zero sulfur 18 testing program clearly demonstrates that further sulfur 19 reduction will produce dramatic emissions reductions. In 20 fact, as we look at NOx emissions reductions, an additional 21 10 to 15 percent can be provided from sulfur reduction from 22 35 parts per million. 23 The sulfur level proposed by the staff, although a 24 positive step, is not sufficient to obtain the maximum 25 possible emissions reductions from the LEV 2 program or to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 327 1 enable new lean burn technologies and lean NOx catalysts. 2 For the reasons stated, General Motors recommends 3 a sulfur cap of five parts per million by 2004 coincident 4 with the LEV 2 program. 5 Perhaps a step somewhere between the staff 6 proposal and the five ppm level for today may be appropriate 7 as a step on the way to near zero sulfur levels, which would 8 ensure that we could get into single digit sulfur levels 9 just as soon as possible. 10 General Motors also recommends keeping all of the 11 T50 and T90 specifications where they are today in the RFG2 12 program in order to preserve the air quality gains that have 13 been achieved by the RFG2 program and also to help in the 14 auto industries' continuing efforts to achieve consistent 15 fuel properties throughout the country. 16 California RFG2 distillation properties across the 17 nation would allow us to improve engine calibrations to 18 provide hydrocarbon emission reductions. 19 There has been a lot of confusion throughout the 20 year-long workshop process about the amount, the duration 21 and even the need for any relaxation of the RFG specs to 22 ensure a stable supply of gasoline while phasing out MTBE. 23 Indeed, some of the confusion has been created by 24 the refiners themselves with some recent announcements. 25 With Chevron already providing Phase 2 compliant MTBE-free PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 328 1 gasoline today and Tosco and BP, Amoco, Arco promising to 2 provide MTBE-free gasoline significantly ahead of the 3 deadline, it is hard to see why a relaxation of the 4 specifications is actually necessary. 5 Although the staff's proposal would keep the 6 current T50 and T90 cap limits, the proposed increases in 7 the flat and average limits would result in significant 8 losses in air benefits. 9 However, if the board determines that some amount 10 of relaxation in the T50 and T90 specs are needed, this 11 temporary variance should be ended by the year 2004. 12 In summary, we recommend reducing sulfur to less 13 than five ppm by the year 2004 and keeping the current RFG2 14 specifications for T50 and T90. However, if any relaxation 15 of these specifications is allowed it should be treated as a 16 temporary variance with a sunset by the year 2004. 17 Thank you very much for your attention. 18 CHAIRMAN LLOYD: Thank you very much. 19 Do you have a comment on the evaporative 20 emissions? I know you've got our expert back there. 21 Probably there's nobody better in the world who can answer 22 that than Harold. 23 MR. HERWICK: That's exactly right, if you'd like 24 to hear from him. 25 CHAIRMAN LLOYD: If he's not too shy to come up PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 329 1 and address the issue. 2 MR. HASKEW: Oh, pshaw. 3 I'm Harold Haskew. I'm an independent automotive 4 consultant, here speaking extemporaneously on my own behalf 5 as a private citizen. 6 But I've waited patiently through this proceedings 7 today, hearing a lot of good information about the whole 8 part of what we're dealing with here. 9 What I have not heard anyone face up to or 10 quantify the evaporative emission increase due to adding 11 ethanol to gasoline. As I look through the staff report it 12 said it's too difficult to quantify. 13 Ethanol is a great fuel and there are great energy 14 issues and good things to do, and maybe in a little while I 15 can do a private survey on some alcohol with water. 16 But it -- 17 CHAIRMAN LLOYD: What do you mean, perhaps? 18 MR. HASKEW: There's not a technical expert in 19 this room with any knowledge that would not tell you that 20 adding ethanol to gasoline will increase the evaporative 21 emissions. They'll all say that. It is something we worked 22 on for 15 years. We've known about and creating all of the 23 real-time evaporative emission issues, and the evaporative 24 emission test procedures, is that the real-time permeation 25 emissions increase with ethanol, because ethanol is a small PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 330 1 molecule. It migrates quickly and passes through permeable 2 materials. 3 Aromatics also are quite an issue in permeation, 4 because most of the rubber materials or elastomers we use 5 are soluble in aromatics. 6 So there is plenty of data and it's sort of like 7 the emperor's new clothes. No one wants to admit that it's 8 there because of political issues and other things. 9 But I really think the board would be at fault if 10 they made a decision to go to an ethanol-containing fuel 11 without first having attempted to quantify the effects of 12 putting ethanol on the evaporative emissions. 13 Thank you. 14 CHAIRMAN LLOYD: Thank you very much. 15 BOARD MEMBER CALHOUN: I can't let you get away 16 without asking at least one question. 17 You said that it would be a mistake for the board 18 to go ahead and adopt regulations without quantifying the 19 effects of the ethanol on the evaporative emission. 20 MR. HASKEW: Yes. 21 BOARD MEMBER CALHOUN: Could the board not proceed 22 and in subsequent months quantify the effects of the 23 evaporative emissions and if they feel as though something, 24 some changes would be warranted, make those changes in 25 subsequent months? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 331 1 MR. HASKEW: It seems to me it's certainly within 2 your power. And a workshop at the soonest would be, I 3 think, very appropre. There is data that exists, it's just 4 one of those things that we haven't talked about. 5 CHAIRMAN LLOYD: And you would be willing to 6 participate? 7 MR. HASKEW: Certainly. I'm on a pay-per-view 8 basis now. 9 (Laughter.) 10 CHAIRMAN LLOYD: We get good value for money. 11 But I'm serious, the kind of expertise that you 12 have is very valuable, and I'm delighted you're still active 13 in the arena to help us on these sort of issues. 14 Thank you. 15 Now we go to Walt Kreucher from Ford. 16 MR. KREUCHER: Thank you, Mr. Chairman and board. 17 Good evening. 18 Ford is pleased to have been a part of the cleaner 19 burning gasoline workshop process to develop the Phase 3 20 standards. 21 We recognize that California has long been a 22 leader in acknowledging the relationship between vehicles 23 and fuels and the importance of fuel quality. 24 As you recall, the auto makers, including Ford, 25 supported Phase 2 gasolines even in the face of adverse PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 332 1 reactions from some television stations when the fuel was 2 first introduced. 3 We recognize that today the staff had to consider 4 a host of desperate views in crafting the proposal that's 5 before you. 6 However, we believe that this proposal has led to 7 at best a wash from a VOC standpoint. And this is not meant 8 to be a criticism of the staff. 9 As you know, I deal with fuel quality issues 10 around the world, and I deal with lots of regulators on fuel 11 quality issues, and I can assure you that some of the most 12 technically competent people dealing with fuel quality 13 issues work for you. And I mean that. 14 In the interest of brevity and compromise, let me 15 jump quickly to my recommendation. 16 We recommend that the board adopt the proposal 17 before you with two modifications. 18 The first is to sunset the T90 and T50 variances 19 at the end of 2004, so that you grant the flexibility for 20 the next four years. 21 The second change would be to take the sulfur flat 22 limit, move it from 20 to 15; take the sulfur average, move 23 it from 15 to 10. If you do that, you will have a proposal 24 that does provide true air quality benefits, considering all 25 the uncertainties, and one that is cost effective and will PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 333 1 truly provide a world-class fuel. 2 And I yield the balance of my time to the great 3 State of California. 4 CHAIRMAN LLOYD: Thank you very much, Walt. And 5 also thank you for your work over the years particularly on 6 the Auto/Oil program. 7 Any questions, comments? 8 BOARD MEMBER FRIEDMAN: Is staff going to comment? 9 CHAIRMAN LLOYD: I think we'll probably get to 10 that in the wrap-up discussions. 11 BOARD MEMBER CALHOUN: Why do you have such strong 12 feelings, Walt, about sunsetting the T90 and the T50 at 13 2004? I realize that -- go ahead. 14 MR. KREUCHER: We've looked at T90, T50 issues 15 around the world. We've looked at them in Europe. We've 16 looked at them in Japan. And all those areas today are 17 meeting the levels that you are today. 18 Now, some of those areas are doing it with very 19 low sulfur fuels. Certainly Europe will be, we're told that 20 on December 22nd Europe will adopt a proposal to incentivize 21 10 ppm fuel. In the next couple of years they will 22 introduce that. They will make the incentives available. 23 So everybody around the world in that 2004 time 24 frame will be at the types of fuels I described. 25 In my opinion, the United States does not need to PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 334 1 have higher T50 and T90 gasolines than the rest of the 2 world. We are truly a technically capable country and we 3 can meet and deliver high-quality fuels just like the rest 4 of the world can. 5 BOARD MEMBER CALHOUN: Thank you. 6 CHAIRMAN LLOYD: Thank you. 7 BOARD MEMBER C.H. FRIEDMAN: Could I ask a quick 8 question? 9 What about the cost? I know that that may or may 10 not be relevant here, but -- 11 MR. KREUCHER: The study that we did taking sulfur 12 from 30 to 5, all the way from 30, all the way down to 5, 13 which is not what I recommended, although long term you may 14 have to go there, we believe that that cost is about two 15 cents per gallon. 16 BOARD MEMBER C.H. FRIEDMAN: What about the cost 17 of fuel in Europe? 18 MR. KREUCHER: Cost of fuel in Europe is largely 19 driven by taxes. 80 percent of the cost of fuel in Europe 20 and Japan is tax. It's strictly social policy. They are 21 trying to get consumers into smaller vehicles and out of big 22 SUVs and that's how they choose to do it is through fiscal 23 policy. 24 CHAIRMAN LLOYD: Yes, Mark. 25 BOARD MEMBER DeSAULNIER: Does staff have any PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 335 1 estimate, knowing that the price of the per gallon is going 2 to be argued, but if we took Ford's suggestion, do we have 3 any idea what that would cost, rather than going from 30 to 4 5, going to 20 to 15 on the flat, and 15 to 10 on the 5 average? 6 MR. SCHEIBLE: It will be very rough but -- 7 BOARD MEMBER DeSAULNIER: Open for discussion. 8 MR. SCHEIBLE: In the ballpark, five ppm decrease 9 in sulfur is probably a couple tenths of a cent a gallon, 10 but I mean that's very rough. But I mean it's not a penny 11 and it's not zero. 12 The sunsetting of the T90 and the T50 proposals 13 would end up being probably above half a cent, between half 14 a cent and a penny, because those are large volume pushers. 15 The refineries would, when those sunsetted, be forced to 16 move several percent of the gasoline components to other 17 products and then find replacements to them or do capital 18 investments, so they could further refine the hydrocarbon in 19 the refinery. 20 I'm not going to guarantee those numbers. Those 21 are just giving you a ballpark. 22 BOARD MEMBER DeSAULNIER: It would be somewhat 23 safe to say that if you took their suggestion it would be 24 probably less than a penny a gallon? 25 MR. SCHEIBLE: Probably. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 336 1 And I'm going to turn to staff and make sure they 2 don't disagree. 3 Dean's going to say something. 4 BOARD MEMBER DeSAULNIER: Courage is an admirable 5 thing. 6 MR. SIMEROTH: I'd like to put some qualifiers on 7 what Mike was saying. 8 BOARD MEMBER DeSAULNIER: We don't want to hear 9 from you then, Dean. 10 MR. SIMEROTH: Okay. I can be quiet. 11 The main impacts is not so much the producing 12 fuels with the properties being set, but it's the volume of 13 the fuels that are being produced. 14 And what it would mean is necessity to import more 15 at higher costs and that's where the real costs impact 16 starts coming in here. We're taking flexibility away from 17 the refiners who supply the volume that they indicated in 18 their presentation and we indicated in our presentation 19 would be more imports at a cost. That's the qualifier on 20 it. 21 BOARD MEMBER DeSAULNIER: Thank you. 22 CHAIRMAN LLOYD: I can see from Al's face back 23 there, I'm not sure he agrees with that, but you'll get a 24 chance. You'll get a chance. 25 I keep forgetting about the court reporter. We'll PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 337 1 take a couple more and then get there. 2 I guess we jump down now to -- oh, sorry. Ann 3 Schlenker. 4 Sorry, Ann. 5 MS. SCHLENKER: Thank you, Mr. Chairman, members 6 of the board and ARB staff. 7 DaimlerChrysler is pleased to have the opportunity 8 today to provide testimony on the proposed Phase 3 gasoline 9 regulations. 10 We have been engaged with the staff during the 11 past 12 months as the contents of this proposal have 12 evolved. 13 Our understanding throughout the entire workshop 14 process was that staff had two particular goals that they 15 were attempting to achieve with the recipe of Phase 3 16 gasoline. 17 This slide was actually created by ARB staff and 18 it was presented as the second page of every single one of 19 the workshops which in other words says the goals of Phase 3 20 were to provide flexibility, removing MTBE while preserving 21 the real-world benefits. And then in addition they were to 22 obtain additional reductions that are technically and 23 economically reasonable. 24 It appears that the second goal has had less focus 25 during the proceedings today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 338 1 We move on. Pollution prevention has taught us 2 that fuel is really raw material to the vehicle. But unlike 3 other raw products to the vehicle system, auto manufacturers 4 are not the ones responsible for the purchase of the raw 5 material. 6 That responsibility rests with the shared retail 7 customer of the auto and oil industries. Hence we depend on 8 ARB's leadership and other regulatory bodies to assess the 9 air quality needs and then establish linked vehicle and fuel 10 regulations to achieve that result. 11 Effective fuel quality improvements can only be 12 imposed by board action. DaimlerChrysler continues to 13 believe that fuels have pivotal role in achieving further 14 emission reductions and encourages the board to consider the 15 immediate impact available from the on-road fleet with 16 improvements to gasoline specifications. 17 Statewide emission reductions continue to be 18 sought by California as evidenced by the LEV 2 vehicle 19 emission requirements. 20 If we look at this chart on the left-hand side, 21 the first bar shows what the South Coast District has 22 determined as a SIP need. In other words, the M2 was a 23 25-ton-per-day reduction in ROG plus NOx, and the black box 24 was a 75 ton per day with a net 100 ton per day necessary. 25 LEV 2 is going to deliver the 57 ton per day and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 339 1 this is cast out in 2010 in the South Coast District. Hence 2 there's a 43-ton-per-day shortfall that has not been filled 3 as of yet. 4 And as we look forward to the EMFAC 2000 there's 5 the potential that that shortfall could be substantially 6 more. 7 Unfortunately, we note that most of the emission 8 reductions associated with the Phase 3 gasoline sulfur 9 control are not being put back towards the black box. 10 Rather, the goal appears to be simply to provide additional 11 flexibility so at the end of the day the gasoline emissions 12 performance is only minimally improved. This is alarming 13 and contrary to the second goal or the objective of looking 14 for further emissions reductions. 15 What we see is a month ago the ARB proposal for 16 Phase 3 specifications would have netted about 25 tons per 17 day. This is really just to show a trend ARB is now 18 forecasting about a 10-ton-per-day reduction only from this 19 recipe. And this is without taking into effect the 20 potential commingling RVP-associated emissions increases 21 that have been heard today. ARB addressed a point 1 psi 22 increase. We've heard from others that it could have been a 23 point 4 or point 5. 24 Refiner flexibility should be allowed within the 25 limits of achieving cleaner air, but not the other way PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 340 1 around. 2 The need to phase out MTBE should not overshadow 3 or offset the opportunities to further improve air quality. 4 We are therefore supportive of limited temporary 5 flexibility for the petroleum industry as they learn how to 6 manufacture an MTBE fuel. However, we also support a sunset 7 provision to these, the flexibility provided. 8 In other words, the T50, T90, aromatic and RVP 9 relaxations we propose that by December 31st, 2004, those 10 provisions be sunset and similarly at the same time that we 11 move towards the five ppm sulfur limit. 12 We've been engaged throughout the year, and the 13 auto industry has proposed what we thought was a reasonable 14 Phase 3 gasoline specification. 15 We are alarmed to see that most of our 16 recommendations have not been taken forward as we attempt to 17 fill this black box. 18 Previously concerns have been expressed about 19 supply and price impacts associated with the MTBE phase-out. 20 We direct your attention again to the rest of the nation 21 that's going to move forward with a 30 ppm average sulfur 22 specification which will indeed expand the pool of compliant 23 fuel for California. 24 In summary, DaimlerChrysler is forced to express 25 disappointment to staff's proposal for Phase 3 RFG. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 341 1 We believe the staff has failed to capitalize on 2 significant emission reductions available for improvements 3 in gasoline formulation. 4 We believe the board should correct this failure 5 and demand cleaner fuel for cleaner air in California. 6 We request that an action today the board insert a 7 December 2004 sunset provision into the flexibility that's 8 granted to the refiners with a further ratchet of the sulfur 9 cap in that same time frame. 10 Thank you for your attention. 11 CHAIRMAN LLOYD: Thank you very much. 12 And any questions or comments from the board? 13 Thank you, Ann, very much. 14 It looks as though that finishes the testimony 15 from the auto industry. 16 We've got maybe about eight people to sign up to 17 coming up here. I just wanted to -- could you put your 18 hands up again if you're still here. Suzanne Phinney, 19 Thomas Ring, Dennis Lamb. Okay. Jim Farassett, Isla 20 Gentry, Charlie Peters, Azibuike Akaba. Okay. 21 So we've lost some, but we've still got a number 22 left here. 23 Okay. Suzanne Phinney with GenCorp. Then Thomas 24 Ring, Dennis Lamb. 25 MS. PHINNEY: Mr. Chairman and members of the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 342 1 board, good afternoon. And I'm extremely grateful to be 2 saying good afternoon instead of good evening. 3 My name is Suzanne Phinney. I'm with GenCorp, the 4 parent company of Aerojet, an aerospace manufacturer and 5 stationary source here in Sacramento. 6 I've been actively involved in the Clean Air 7 Partnership, and you heard from the partnership earlier, for 8 the last ten years and have also served on the boards of the 9 partnership's two founders, the American Lung Association of 10 Sacramento Immigrant Trails, of which I'm immediate past 11 president, and the Sacramento Metropolitan Chamber of 12 Commerce, and I'm a past vice president of public policy 13 there. 14 The Sacramento community has worked diligently to 15 do what we can to reduce air emissions in our region. And I 16 have to tell you, it's been frustrating because so many 17 options are not available to us because they hinge on state 18 and federal action to control mobile sources. 19 As you probably heard, NOx emissions reductions 20 are very important to our region's ability to reach 21 attainment by 2005, and therefore the sulfur content in the 22 reformulated gas is especially important to us. 23 If we can't reach attainment by 2005, then the 24 brunt of that the federal EPA will descend upon the 25 stationary sources in this community, because of the way the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 343 1 federal Clean Air Act is drafted. 2 All of us urge you to reduce the sulfur content as 3 low as possible. Public health protection and economic 4 development in our region are dependent on everyone, 5 including our state and federal comrades, to take aggressive 6 and timely actions to reduce NOx. 7 Thank you. 8 I kept it brief. Do I get brownie points for 9 that? 10 CHAIRMAN LLOYD: You sure do. You sure do. No 11 NOx ones, though. 12 MS. PHINNEY: Any questions? 13 CHAIRMAN LLOYD: Any questions? 14 Thank you. Thank you very much. 15 Thomas Ring. No? 16 Dennis Lamb. 17 MR. LAMB: Good evening. Thank you for enduring 18 all of us late into the hours here. 19 CHAIRMAN LLOYD: Not representing WSPA or any of 20 the majors? 21 MR. LAMB: No. As a matter of fact I'm not. 22 My name is Dennis Lamb and I'm an independent 23 consultant. 24 And although my comments will be supportive of 25 certain proposals made by the auto industry and by the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 344 1 environmental interests, I'm speaking for myself here 2 tonight with a long history of involvement in this group, 3 national issues going back to the Clean Air Act, the reg neg 4 that I served with Dean Simeroth on and into Phase 2 CARB 5 diesel, and have a particular interest, of course, in some 6 of the things that in the past we've been, by we I mean my 7 former involvement in the oil industry here, has been 8 responsible for, and in particular things such as T50 and 9 RVP. 10 This week, as you all know, we celebrated, I guess 11 if you want to call it celebration, but it was 48th 12 anniversary of Pearl Harbor. But on December 7th, I opened 13 my e-mail only to find that there had been an attack on T50. 14 The supporting rationale seemed to be that there 15 was new data. I'm not sure about that, but I'm hopeful that 16 I'll soon learn what the data is that is new, since the 17 staff proposal, because I believe all of the data, the 1998 18 data, was in place at the time of the staff proposal and 19 certain things were justified by that data, so I'm not sure 20 what happened to incentivize the idea that T50 would creep 21 up another couple of degrees. 22 In addition to that, there seemed to be just the 23 simple statement that that wouldn't result in any 24 degradation of equivalency. Anxious to see how those 25 calculations were made and how that pans out, since we all PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 345 1 have heard repeated times today, that at least in the 2 hydrocarbon calculation, it's a very very close call. 3 The main reason we're here today is because of 4 mistakes made back in 1990, perhaps. And the Congress in 5 its wisdom mandated oxygenates in RFG and that was a 6 mistake. 7 The staff proposal for RVP is a compounding of 8 that mistake. The proposal facilitates oxygenate use with 9 relaxed caps or credits for RVP levels that are already in 10 place. This is backsliding on evaporative emissions. 11 The present cap of 7 pounds per square inch would 12 be raised to 7.2 under the staff proposal. And although 13 credit would be given for RVP below 6.9, refiners already 14 produce 6.7 to 6.8 RVP, depending on whether you accept 15 CARB's own enforcement division numbers or the internal 16 industry survey. 17 Now, this provision is contrary to the principle 18 established in the Clean Air Act amendments of 1990 in 19 section 211 K 7. That principle was insisted upon by 20 environmental interests. The principle prevents backsliding 21 in the cases where flexibility is offered. 22 In this case, adherence to the principle would 23 dictate that RVP cap of 7.0 remain in place and that credit 24 only be given for RVP lower than 6.8, which is a level 25 confirmed by the oil industry's own data. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 346 1 The board should be very conservative when 2 considering RVP. At least two very significant questions 3 remain unresolved, the effects of EMFAC 2000 and the 4 increased RVP effect of commingling ethanol fuels with other 5 complying fuels. And in addition the equivalency issue, 6 particularly in relation to the hydrocarbon, is a very very 7 close call. 8 Although it has been stated that commingling may 9 not be a problem for 80 percent of the state, air districts 10 such as the Bay Area must confront the problem, and other 11 districts may soon also have to face that issue. 12 The state's request to EPA for an oxygenate waiver 13 suggests that the board should not hide behind the very 14 oxygenate mandate that has caused the problem of MTBE 15 contamination, but do what it can, what can be done now to 16 minimize the problem in the future. 17 In regards to RVP, you can at least act 18 conservatively and retain the 7.0 cap and address 19 commingling by setting the point for credit at the RVP level 20 being produced at the present time, that is 6.8 pounds per 21 square inch. 22 Thank you. 23 CHAIRMAN LLOYD: Thank you very much. 24 I notice that you moved to Arizona. Is there 25 any -- I thought that they use ethanol in Arizona? PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 347 1 MR. LAMB: Yes, they do. 2 CHAIRMAN LLOYD: Do you have any observations? 3 MR. LAMB: Well, my background would give me a 4 certain amount of tainting in that regard also. As you 5 know, I envy Eric Vaughn as he stood here and talked about 6 bills that were passed in Congress that did mandate 7 oxygenates. 8 As the initial instigator of the Bilbray 9 legislation, you know, I have my own biases in that regard. 10 I'm not anti-ethanol. I've never been anti-MTBE. 11 I am very pro-choice in that regard, and let the economics 12 and air science of the issues determine who the winners will 13 be. 14 CHAIRMAN LLOYD: Thank you, Dennis. 15 Any questions? 16 Thank you, Dennis. 17 We have Jim Farassett. 18 The only one with basically zero sulfur fuel. 19 No, okay. 20 Isla Gentry. 21 No? 22 Charlie Peters. 23 MR. PETERS: Chairman Alan Lloyd and committee, 24 the board, excuse me. I'm Charlie Peters of Clean Air 25 Performance Professionals, which is a coalition of motorists PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 348 1 which is actually worldwide. 2 I have to comment on what it's been like to 3 participate in the issue of air quality in California. 4 It's been an absolutely, as far as I can see, an 5 absolute miracle at what's been happening. 6 Starting back I became quite involved back about 7 1990, and in 1992 I went to Washington, D.C. and testified 8 on the enhanced IM issue for the State of California and 9 there was nobody from the State of California, 10 bureaucratically there, there was just four people that went 11 there and testified. 12 I've had the great pleasure of testifying in the 13 Capitol probably close to a hundred times and watched this 14 and watch it move over time and it's been absolutely 15 exciting to participate in. It's been absolutely exciting 16 to watch the public awareness and the people here on this 17 board and the Air Resources Board respond to public concerns 18 and watch things move, watch the Governor take on the issue 19 and it is fabulous. 20 And California, in my view, is once again taking 21 the lead, setting the standards for the world that are 22 appropriate. 23 I became pretty confused when I first started to 24 view the issue what oxygenates were supposed to do. I was 25 in the automotive repair industry, did a lot of smog checks. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 349 1 And to me it made no sense to try and change the air fuel 2 mixture, which, every bit of information I've seen for any 3 oxygenate used in cars, tends to degrade the car. So the 4 only cars that get affected by putting oxygenates in it or 5 effectively changing the air fuel mixture are the cars that 6 are broken. 7 As far as I'm concerned, the appropriate public 8 policy on broken cars is to fix them. So you've got a very 9 small percentage of the cars that are broke, and those cars 10 are gross polluters, and the effect that you make on that 11 car is very minimal, and all the rest of the cars just get 12 worse gas mileage and become broken sooner. 13 In this process I ran across one thing that was 14 particularly interesting, and that was to watch the process 15 of implementation of RFG in centralized testing in 16 Pennsylvania. There the gas laws, the Governor signed them 17 to implement those policies. The public participation 18 created concern in the Legislature and the Legislature 19 overrode and passed legislation to eliminate the 20 oxygenated -- the RFG oxygenated fuel and the centralized 21 testing there. 22 The Governor vetoed that. 23 Legislature went out for reelection and they came 24 back for one week after the election with the old 25 Legislature. They were going to be back in session for five PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 350 1 days. And in two days they put together one bill that 2 covered both issues and overrode the Governor. 3 The Governor of the state was significantly 4 threatened that this was going to cause a huge damage to the 5 state and so on and so forth, but quite magically what the 6 Legislature decided to do stood. 7 And they do not -- they have a competitive 8 marketplace I and M program there today. There's huge 9 opportunities to make it better. And they only have RFG 10 with oxygenates in a small part of Pennsylvania. 11 And EPA hasn't raked the State of Pennsylvania 12 yet. 13 So what is happening here is really important and 14 what we do is important. 15 And I have testified a number of times that I 16 think the appropriate action for the State of California is 17 to make oxygenates voluntary in gasoline. And so and get a 18 label on the pump what we're selling to the public, and let 19 the market take care of the issue, and I think it would be 20 very quickly and I think the public of California become 21 very aware of these issues. 22 And what I'm seeing is just extremely exciting. 23 And thank you and keep going. 24 BOARD MEMBER C.H. FRIEDMAN: Thank you, 25 Mr. Peters. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 351 1 I think our final witness is Mr. Azibuike Akaba. 2 Is that correct? 3 Mr. Akaba. 4 MR. AKABA: Good afternoon or good evening, board. 5 My name is Azibuike Akaba. I'm with Communities for a 6 Better Environment, and one of the staff scientists there. 7 And as you know, we've been pushing for a ban on 8 MTBE from the beginning and now we're at the point where you 9 all are implementing a phase-out, which we're very happy to 10 see that you're going to start enforcing it. 11 But I guess the question I have to ask is a couple 12 of questions, but one in particular to the staff is 13 around -- I see the issues about or the support around 14 flexibility that's built into the proposal, but I'm not 15 really clear about the language around the enforcement, the 16 enforcement margin. 17 So if somebody could, like if the oil companies 18 aren't able to meet the standards by the end of the year 19 2000, are you going to push it to the year 2005 or -- so 20 what kind of enforcement measures are set up? 21 MR. KENNY: Do you want me to answer that? 22 CHAIRMAN LLOYD: Yes, please. 23 MR. KENNY: The standards basically when they go 24 into effect are regulatory standards and so to the extent 25 that the oil companies do not comply with gasoline that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 352 1 meets the specification, they would be in violation. And 2 that would be essentially subject to penalties. 3 The time frame, though, is not 2000. The time 4 frame essentially is at the end of 2002. 5 MR. AKABA: Yeah, yeah. 6 What kind of penalties? Because what we've seen 7 before in the Bay Area is that the oil refineries are paying 8 negligible penalties, averaging like $153. That was the 9 average. And we want to see penalties that are articulated 10 that actually deter the violations. 11 MR. KENNY: Yeah. The penalties in the Health and 12 Safety Code essentially are in the multiple ranges. They 13 range from essentially $10,000 per violation to 20 to 50 and 14 also to $250,000 per violation. 15 In addition to that, there are variance provisions 16 that you might be familiar with, and the variance provisions 17 if in fact they are taken advantage of require the companies 18 to pay the state 15 cents per gallon for every gallon of 19 gasoline that's produced under variance. So the deterrence 20 is fairly substantial. 21 MR. AKABA: Okay. The other question is so I 22 think until I began explaining about why -- I mean, you said 23 you did a survey and you averaged, people were coming up 24 with 22 parts per million in the sulfur, so you might have 25 answered it earlier, but I wanted to find out like what has PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 353 1 to happen for it to reach five parts per million on the 2 sulfur levels? 3 MR. KENNY: Well, again, what will happen is 4 essentially once the regulatory standard, if adopted by the 5 board, goes into effect, that 20 parts per million, the oil 6 companies would then be using, would then be producing fuel 7 at a variety of different sulfur levels. Those sulfur 8 levels for certain companies could be quite low, essentially 9 below the 20 part per million level. In terms of exactly 10 how low they're going to go, as to approaching the five, we 11 can't tell you that right now, because we don't know in 12 terms of what the future numbers will be. 13 We would anticipate that we would see on average 14 sulfur levels probably across the industry of somewhere 15 right around 10 parts per million. 16 MR. AKABA: So why can't you move the standard to 17 10 parts now if you expect that to be the result in the 18 future? 19 MR. KENNY: Well, what we're trying to do today is 20 essentially again really propose that two imperatives be 21 accomplished. One is the removal of MTBE and at the same 22 time what we're trying to do is maintain the air quality 23 benefits and provide flexibility to the oil companies to 24 produce gasoline for the State of California, and avoid any 25 kind of supply problems. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 354 1 MR. AKABA: Okay. Also I'm concerned about the 2 ongoing contamination of the property of MTBE during the 3 next -- to the year 2002, and who is responsible for paying 4 for the cleanup during that time? Because I haven't seen 5 that in the paperwork, and I would like to know who is 6 responsible. 7 CHAIRMAN LLOYD: I think that's an issue that will 8 be addressed and should be addressed at the January 18th 9 meeting of the Environmental Council there that Secretary 10 Hickox is chairing. We're addressing the water issues and 11 the contamination, as well as the air issues. And at least 12 I'm not well equipped to answer that at the moment. 13 MR. AKABA: Okay. All right. Then I'll just 14 submit written comments about the stuff that's pretty much 15 been reiterated. 16 CHAIRMAN LLOYD: Appreciate that. And I would 17 encourage you to come also to the January 18th meeting, 18 because those are, obviously, critical issues. 19 Thank you very much. 20 Any other questions? 21 Thank you. 22 We have Stanley Van Vleck. 23 MR. VAN VLECK: Thank you very much, Mr. Chairman 24 and members. Stan Van Vleck, actually here in part as a 25 courtesy, because we had an individual Manuel Cuna, who you PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 355 1 may know better, who was going to testify before you, 2 contacted me last night, had an emergency come up and so I'm 3 here on his behalf. I will be more truncated than Manuel, 4 most likely. Probably will not have the flair of Manuel 5 either. So you'll have to forgive me for probably being a 6 little bit calmer as well. 7 CHAIRMAN LLOYD: I don't know that we'll ask 8 forgiveness. 9 MR. VAN VLECK: Thank you very much, Dr. Lloyd. 10 If I can, I really would like to summarize, 11 because we do have written testimony. 12 First, I'd like to identify some of the key people 13 that we're representing here on behalf of an agricultural 14 coalition. I'm going to list off some of the key groups if 15 I may. Those include Nissei Farmers' League, which Manuel 16 represents, Western Growers' Association, California Farm 17 Bureau, a lot the Central Valley Farm Bureau organizations, 18 California Cotton Ginners' and Growers' Association, one of 19 my clients, the Almond Haulers' Association, California 20 Cattlemen, and Agricultural Council of California and 21 numerous other groups, to name a few. 22 Our bottom line is that we just want to make sure 23 whichever process is adopted, it's a process that assures as 24 best as possible that we do not have the price spikes and 25 that we create incentives for those alternatives that are PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 356 1 coming up, whether it's through financial or other types of 2 incentives, to allow these things to come on line, so we do 3 not have the problems that we've seen in the past. 4 And that's our fundamental issue. 5 We will be brief and I will truncate significantly 6 what we had. 7 CHAIRMAN LLOYD: Thank you very much. 8 And I did get a chance to read what you're stating 9 here and, clearly, as you know, the Governor's encouraging 10 biomass to ethanol in some of his initiatives at the Valley 11 Summit talks there about biomass to energy in that case, but 12 it can also be to ethanol and you're building the 13 infrastructure to get that part going. 14 So I think we're very supportive of his initiative 15 there and we'd like to extend that to, obviously, to 16 ethanol. 17 And I think we're very cognizant, and clearly we 18 don't want any price spikes. I think we've learned from the 19 past on that issue. I think we all have. 20 But, Ms. D'Adamo, did you want to say something 21 after that? 22 BOARD MEMBER D'ADAMO: First of all, I apologize. 23 I didn't see your testimony, so I will ask a question that 24 perhaps is already answered in your written testimony. 25 But do you see any red flags with the current PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 357 1 proposal that is before us on this price spike issue? 2 MR. VAN VLECK: There are some issues, and I'm not 3 as familiar as I probably should be, because of my 4 last-minute being brought up here. 5 But there are some issues on some recommendations 6 that have been made by the board, if I may, and I can just 7 quickly reference them. 8 It deals with proposed regulation title 13 9 pertaining to the RFG3 amendments, file notice Z99-1012-06. 10 That may be able to be related as a December 8 document that 11 we have. 12 And, again, I apologize for not having more 13 information, but our fundamental issue is whichever approach 14 that you adopt, please be as sensitive as possible to the 15 issue of supply, so we don't have to deal with price spikes. 16 And to what Dr. Lloyd said, we wholeheartedly 17 would endorse the ability to use the biomass to ethanol and 18 other types of incentives that would assist in this process. 19 CHAIRMAN LLOYD: Yes, Mr. Kenny. 20 MR. KENNY: The only thing I would add to that is 21 I did talk to Mr. Cuna last night, and he just simply wanted 22 to iterate that one of his key things is he was worried 23 about making sure they had sufficient supplies and they were 24 concerned also about price spikes, so they asked that we 25 essentially watch both those issues. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 358 1 CHAIRMAN LLOYD: Okay. Thank you. 2 Thank you very much. 3 MR. VAN VLECK: Thank you for your time and for 4 all of you going through this this evening. 5 CHAIRMAN LLOYD: Thank you. 6 I think our last witness, unless we get somebody 7 else rushing here, is Robert Bruce Bullard, representing 8 himself. 9 MR. BULLARD: I hoped to be last but not least, at 10 least. 11 I'm going to tell you what I do. It's kind of 12 interesting what I do. I call myself an environmental 13 philanthropist and I'll probably get a few laughs out of 14 that. 15 Well, I didn't get any. 16 It is a fun process. I have been very vocal about 17 getting some things done about MTBE. I'm more of an 18 interaction consultant in what I do and I probably crossed 19 all the areas that everybody in the room is familiar with. 20 But I think the point is, and I'd like to really 21 sincerely say something, I think the problem with MTBE is 22 probably one of the worst problems we've ever seen in an 23 environmental situation. In case you don't know, it's going 24 to go worldwide if it hasn't already done that. And I've 25 had some conversations that people at fed EPA and various PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 359 1 other agencies that are working on this and Europeans are 2 making inquiries about whether to use this in their country 3 or not. I hope they're telling them the truth about this. 4 To make it long and short, I think we should get 5 rid of MTBE. I'm not too sure that ethanol is a good 6 choice. 7 Frankly, I don't know exactly what we should do 8 our shouldn't do. 9 I think we should look to science. I think we 10 should make good decisions and we don't want any more ethers 11 in our water, I don't think. I think we should get rid of 12 ether. 13 I think maybe ethanol should be very highly 14 questioned. Maybe an interim possibility, but I don't think 15 we should use ethanol as a base fuel forever. 16 If we were using liquid compressed air or liquid 17 compressed nitrogen, we probably wouldn't even be here 18 today. Neither one of those pollute. And there's studies 19 going on at Washington University right now. I don't know 20 if they can economically manufacture these two products 21 right now, but I can tell you this. 22 If you use liquid nitrogen, compressed or liquid 23 compressed air, there would be no pollution, because you 24 can't pollute with either one of these items. I'm not 25 talking about a combustant, I'm talking about a propellant. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 360 1 You don't burn it. You just run it through a rotary valve 2 system and you have a vehicle that operates quite 3 efficiently. You can also use rotary values with normal 4 fuel systems. 5 And this is a new technology, by the way, ladies 6 and gentlemen. 7 Rotary value systems do not produce pollution the 8 same way that standard valve systems do. This is a brand 9 new technology. This is some things that we should be 10 looking at. 11 I think that we should have looked at mechanical 12 solutions instead of chemical solutions to begin with and we 13 might not be here today either. 14 Those are my conclusions. 15 And I think we need to get rid of ether all 16 together worldwide, not just in this country, not just in 17 this state. Ether needs to go. Anything that's water 18 soluble should be heavily considered to be not in there. 19 Myron Memlin has very heavily stated if there's 20 any way that you want to poison an entire group of people, 21 putting a poison substance, water soluble, into gasoline is 22 good way to do it. Make a dandy weapon. 23 Anyway, that's about it, guys. 24 I've enjoyed being here today and I've enjoyed 25 doing what I have done and sharing information with probably PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 361 1 I've crossed about six different areas of this and I want to 2 tell you it's been an amazing, enlightening experience. 3 Thank you. 4 CHAIRMAN LLOYD: Thank you for staying at least to 5 the end. Thank you very much. 6 That is the last witness, the end of the public 7 testimony. 8 Are there any other written comments raising 9 points not already in the record that should be summarized 10 on this point? 11 Mr. Kenny. 12 MR. SCHEIBLE: There are a few, and staff will 13 summarize them very efficiently. 14 CHAIRMAN LLOYD: Let me ask the court reporter, do 15 you need a break. 16 (Discussion with reporter.) 17 (Thereupon a short recess was taken.) 18 CHAIRMAN LLOYD: I think we're going to recommence 19 with the staff summarizing written comments. 20 I guess the bad news is we're not quite sure how 21 long this is going to take. The good news is that the 22 cafeteria is remaining open so for those of you who want 23 something there to eat, you can get it. 24 Mr. Kenny. 25 MR. VENTURINI: Mr. Chairman, Mr. Simeroth will PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 362 1 summarize. We're going to do this very briefly, because 2 basically essentially all of the items and issues that are 3 in the letters and so forth have already been discussed 4 already, so we'll do this very expeditiously. 5 MR. SIMEROTH: There was 113 total, but we're not 6 going to summarize all of them. 7 From the independent oil marketers in California 8 we received a total of 48 letters from various companies, 9 individuals represented. The content was basically the same 10 as the testimony from CMA today. 11 We received a letter from the State of Nebraska 12 regarding ETB as a potential oxygenate. We feel it has the 13 same properties as MTBE and before used it should be subject 14 to the environmental fate transport analysis and Governor's 15 environmental policy. 16 American Society for Test Methods asked us to work 17 with them on ethanol issues for defining denatured ethanol. 18 We think that's appropriate and we'll be contacting them. 19 Dupont Automotive supplied us a letter, a number 20 of papers including SAE papers on the permeation issues 21 demonstrating that the permeation issue as regards to 22 ethanol is real and providing some quantification. 23 We received three letters from elected officials 24 regarding the Kern small refiner issue, two assemblymen, Jim 25 Flores, Roy Ashburn; and State Senator Charles Poochigian. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 363 1 If I mispronounced that, I apologize to him. 2 The California Trade and Commerce Agency submitted 3 a memo that raised questions and issues that have been 4 raised by others today. 5 California Manufacturers' Association also sent a 6 letter on issues regarding availability of ethanol and 7 long-term status of the federal oxygen mandate. 8 We received ten letters from community groups also 9 concerning items discussed today. 10 16 letters from various businesses concerned about 11 price increase. 12 We had 50 letters from private citizens that 13 request delay concerning the price and supply issues. 14 And that completes my summary. 15 CHAIRMAN LLOYD: Any further comments? 16 Yes, I will now close the record on this agenda 17 item. However, the record will be reopened when the 15-day 18 notice of public availability is issued. Written or oral 19 comments received after this hearing date, but before the 20 15-day notice is issued, will not be accepted as part of the 21 official record on this agenda item. 22 When the record is reopened for a 15-day comment 23 period, the public may submit written comments on the 24 proposed changes, which will be considered and responded to 25 in the final statement of reasons for the regulations. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 364 1 Again, just a reminder to the board members that 2 at this time to disclose ex parte communications. 3 And I guess I will start that off and I've got 4 three ex parte communications. 5 On November the 11th I met with Neil Koehler, 6 Parallel Products at CEC, conversation relating to the 7 hearing on biomass-to-ethanol report. We discussed the 8 treatment of oxygen and predictive model, CO debit and NOx 9 impact, off-road sources, off-cycle emissions. 10 On November 29th met with Jay McKeeman, CIOMA, 11 with Secretary Hickox and several ARB staff at the Cal EPA. 12 Discussed the issues of cost impacts on independent oil 13 producers and desire for additional CEC analysis. 14 And then on November the 2nd we met with Mike 15 Kulakowski, William Klein, Bruce Irion, over at the Equilon 16 Refinery in Martinez. Had an excellent tour of the 17 refinery, discussed regulatory flexibility, sulfur standard, 18 de minimis levels of MTBE in gasoline distribution network. 19 That was it. 20 So maybe going from Ron if you've got any. 21 BOARD MEMBER ROBERTS: Nothing. 22 BOARD MEMBER PATRICK: Yes, Mr. Chairman, I have 23 three. 24 I met yesterday with Ken Comey and Tom Purves and 25 JM Kulakowski with Equilon Enterprises, and we talked about PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 365 1 the December 7th letter that was signed by Mr. Kulakowski on 2 behalf of Equilon, and it's a part of the public record. 3 I spoke by telephone with Brooke Coleman from the 4 Bluewater Network. And his concerns were primarily the 5 last-minute change of baseline data that was being used, and 6 also his interest in preserving the real-world emission 7 benefits that were required by SB 989. 8 And I also had two conversations with Jake Belin 9 Jr. on the 1st, with Chad Tuttle as well, from Kern Oil and 10 Refining Company. One was on November 17th and then a 11 telephone call on December 1st. And that discussion was the 12 progress of the negotiations between CARB staff and Kern Oil 13 in dealing with the small refiner issues, and those issues 14 mirrored their written comments and Mr. Tuttle's testimony 15 today. 16 CHAIRMAN LLOYD: Thank you, Supervisor. 17 Joe. 18 BOARD MEMBER CALHOUN: Mr. Chairman, the 11th of 19 November I met with Mr. Miller and Mr. Kulakowski at 20 Equilon. Made a tour of the refinery. And this was in 21 Wilmington. We talked about the proposed Phase 3 gasoline 22 and the need for flexibility, the need for having 23 flexibility in order to meet the requirements. 24 On the 17th of November I met with Mr. Ray 25 Bottacavolli and Gary Herwick of General Motors. That was PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 366 1 here in Sacramento. We talked about the proposed regs for 2 the gasoline. And our discussion was essentially what 3 Mr. Herwick presented here today, and but he placed a 4 special emphasis on the need for a driveability index. 5 And on the 6th of December I had a telephone 6 conversation with Mr. Brooke Coleman of Bluewater Network, 7 and we talked about the untimely disclosure of data that was 8 being used for the baseline for the regulations. We also 9 discussed backsliding. 10 BOARD MEMBER DeSAULNIER: Mr. Chairman, I had a 11 meeting with Ellen Shapiro from the Alliance of Auto 12 Manufacturers, and John Cabaniss Jr. from the Association of 13 International Automobile Manufacturers on December 2nd in my 14 district office in Concord. Our discussion was consistent 15 with their public testimony today. 16 I had a phone conversation with Brooks Coleman on 17 December the 2nd, and, again, it was consistent with his 18 testimony today. 19 And also on the 2nd of December I had a phone 20 conversation with Dwight Wiggins, the president of Tosco 21 Refining Company, that was largely the same testimony as 22 Mr. Bordvick from Tosco gave today. 23 That's it. 24 CHAIRMAN LLOYD: Thank you. 25 BOARD MEMBER C.H. FRIEDMAN: I had two contacts. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 367 1 I had a phone conversation with Brooke Coleman of 2 Bluewater Network. And my phone conversation was apparently 3 just about identical to that of Supervisor Patrick and you, 4 Mr. Calhoun, and consistent with his testimony today. 5 I also had a meeting yesterday, the 8th of 6 December, with Ms. Ellen Shapiro, Alliance of Automobile 7 Manufacturers, and with John Cabaniss Jr. of the Association 8 of International Auto Manufacturers. And that also was 9 consistent with his testimony today, concerning particularly 10 the need for further reductions in sulfur parameters and the 11 T50, T90 parameters. 12 BOARD MEMBER FRIEDMAN: Nothing. 13 CHAIRMAN LLOYD: Dee Dee. 14 BOARD MEMBER D'ADAMO: Mr. Chairman, I had three 15 contacts. 16 One, this morning I met with a group of 17 individuals representing the automotive industry, Walter 18 Kreucher from Ford; Gary Herwick from GM; John, I apologize 19 if I'm not pronouncing your name properly, Cabaniss, 20 Association of International Auto Manufacturers; Ann 21 Schlenker with DaimlerChrysler; and Ellen Shapiro, Alliance 22 of Auto Manufacturers. And the conversation with me was 23 consistent with their testimony that they presented today. 24 On October 28th I met with Paul Knepprath with the 25 American Lung Association, Janet Hathaway with NRDC and PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 368 1 Sandra Spelliscy with Planning and Conservation League, 2 again consistent with the comments they raised today 3 regarding backsliding, their interest and desire in lowering 4 the sulfur content. 5 Though not within the 45-day period, I wish to 6 also disclose that I had a meeting in my Modesto office with 7 Ed Manning of the Western States Petroleum Association, also 8 consistent with his association's testimony today, regarding 9 T50, T90 supply issues and cost issues. 10 BOARD MEMBER McKINNON: Mr. Chairman, I had three 11 ex parte communications. 12 The first of which was with Ed Manning and John 13 Gagen, pretty much as described a moment ago about the cost 14 issues and kind of the Ven diagram we saw and some of the 15 material in the letter. 16 I also had a meeting with Robert Miller and Mike 17 Kulakowski at Equilon on the 11th of November. That's at 18 the refinery in Wilmington. Again, covered pretty much the 19 same issues in terms of the changes in the ven diagram that 20 was described earlier. And also covered some issues in 21 terms of how the refinery actually worked. 22 Then on the 2nd of December I met with Ellen 23 Shapiro from the Alliance of Automobile Manufacturers, and 24 John Cabaniss of the Association of International Auto 25 Manufacturers. And we discussed the potential effects this PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 369 1 could have, as they disclosed today in the hearing. 2 That's it. Thank you. 3 CHAIRMAN LLOYD: Thank you very much. 4 I guess we'll throw it open to a discussion with 5 the board. 6 Dee Dee. 7 BOARD MEMBER D'ADAMO: First of all, I would just 8 like to say that I found this whole process very 9 enlightening and I was very impressed, not just with staff, 10 but with the sincere desire by all of the stakeholders, most 11 of which were present today and gave very helpful testimony. 12 And I've been sitting here today trying to think 13 of how we can come up with a balance to achieve the 14 Governor's goals, the state Legislature's goals and at the 15 same time achieve some of the goals that have been outlined 16 by a variety of the stakeholders, and also at the same time 17 maintain flexibility that is so very important to the 18 industry that is going to have to comply with this 19 regulation. 20 I think that probably one of the best ways to 21 accomplish that is to provide for a real smooth transition. 22 And what I'd like to see is if there was a way 23 that we could move forward with the regulation as proposed, 24 with perhaps a requirement that staff report back to the 25 board on a couple of key issues that kept coming up today. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 370 1 Namely, the sulfur issue and the T50 and T90 issue, which 2 appear to somewhat go hand in hand, depending upon what is 3 going to end up happening with the sulfur issue and with the 4 proposed action hopefully on the federal side. 5 Another issue that I'm kind of concerned about, 6 and that has to do with the performance of the vehicles and 7 with LEV 2 coming up the interrelation between lower sulfur 8 and RFG and the new standards that the auto manufacturers 9 will have to comply with. 10 So in light of all of those issues, I thought that 11 it would be helpful if we could hear back from the board, or 12 excuse me, from staff within a short period of time about 13 perhaps what the future looks like it will bring on down the 14 line, maybe a year after this regulation takes effect, 15 perhaps some proposals, giving all the stakeholders plenty 16 of time to see where we are headed, because I think as 17 Professor Friedman keeps referring to this, this really 18 should be viewed as an interim measure, one of many steps 19 ahead toward achieving greater progress. 20 CHAIRMAN LLOYD: Thank you. 21 Want a response from staff on that Dee Dee or -- 22 MR. KENNY: I think all those are things that we 23 actually can quite easily do and we would actually be very 24 happy to do those. 25 CHAIRMAN LLOYD: Supervisor DeSaulnier. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 371 1 BOARD MEMBER DeSAULNIER: First off, I'd like to 2 say congratulations to staff, given the assignment that we 3 were given, you did a terrific job, I think. 4 And it was also very encouraging not to hear 5 anyone say that we can't make the deadline on removing MTBE, 6 because we've heard those comments in the past. 7 But I think you've done a good job and I think 8 we're all very pleased that we're going to make that 9 deadline at the very worst, and that's very encouraging. 10 And we're going to be able to do it at a very 11 cost-effective, I think, basis. Although living in the Bay 12 Area, and somebody said something about $2 gasoline, Ron, 13 unfortunately, I think, was in the back, so I don't want to 14 go through Ron's whole testimony, but my constituents are 15 very sensitive to that as well. 16 I would suggest that I think Dee Dee's suggestions 17 I agree with, and at the appropriate moment I'd be happy to 18 make a resolution supporting the staff agreement, and also 19 incorporating the idea of having a report back. 20 My suggestion would be, and maybe, Mike, you can 21 respond to this, if we just can get a report back perhaps in 22 six months, only because I view this very much as a work in 23 progress, and whatever we can get from you I think is 24 helpful, because we're going to have to respond to people 25 who ask us questions, particularly, as you can tell, around PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 372 1 the sulfur issue. 2 For those of you who don't know our background, 3 you'd probably be surprised to know that I have four of the 4 five refineries in Northern California are in the county I 5 represent. And I generally work very good with, I think, 6 the petroleum industry, but because of that, I believe that 7 we can make progress. And I think as we go through this we 8 work together on the capital cost, we can work with them to 9 think of ways to make it easier and more cost effective for 10 them to bring the sulfur limits down. So that is of 11 particular interest to me. 12 And also because of those refineries and other 13 chemical facilities, along with the comments from people 14 from South Central LA, I think CARB staff we need to develop 15 some kind of mechanism to reach out to local jurisdictions 16 to let them know what's happening. I sat here and listened 17 and thought about truck traffic in my own jurisdiction and 18 the kind of capacity increase in whatever that might cause 19 related to public safety. 20 So I would encourage you or maybe as part of the 21 motion to ask staff to go ahead and do that. 22 BOARD MEMBER CALHOUN: Mr. Chairman. 23 CHAIRMAN LLOYD: Yes. 24 BOARD MEMBER CALHOUN: I'm also concerned about 25 the impact that the increase in evaporative emissions will PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 373 1 have on the air quality. We know that there is a 2 significant increase in the vapor pressure, and this is 3 certainly going to permeate the tubing and some of it's 4 going to escape into the atmosphere. 5 So I think that there ought to be some kind of a 6 study performed to assess the overall impact of the 7 evaporative emissions and include that as part of the memo 8 that we're talking about also. 9 BOARD MEMBER FRIEDMAN: I'm really glad you said 10 that, Joe, because I fully subscribe to Dee Dee's thoughtful 11 approach, except on the issue of the permeation, because 12 staff can't report back in a very timely way. People have 13 to go into the lab and do the studies that indicate to us 14 what the ozone impacts is going to be, and that I assume 15 that's going to take about a year, and I don't want to see 16 us make a fatal mistake. We ought to be able to change what 17 we do if we learn from those studies that this is the wrong 18 way to go, that the permeation effect is so deleterious to 19 the environment. 20 So we need to come back at some reasonable time 21 beyond the relatively short-term reviews and suggestions 22 that have been made, so that we address that issue 23 specifically on the basis of data that is generated in our 24 laboratories. 25 MR. KENNY: If I might make a suggestion, we are PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 374 1 planning to essentially look at the commingling issues and 2 to then report back to you as we basically acquire 3 information on those over time. And I think this is an 4 issue that actually ties into that and we can actually 5 report back in the same context. 6 BOARD MEMBER FRIEDMAN: What's a fair time frame 7 do you think? About a year, maybe a little bit more? 8 MR. KENNY: Well, one of the difficulties, for 9 example with the commingling, is that we're going to need to 10 see the fuels out there in practice to get a sense. I mean, 11 we've been assuming certain scenarios and now we need to see 12 how they actually play out. 13 With regard to the evaporation issue and the 14 permeation issues, we simply need to probably do a fair 15 amount of discussion and work on that. 16 I think we can report back to you on those issues 17 as quickly as possible, but probably commingling will take 18 longer than evaporation, and we may not have all the 19 information on evaporation. 20 CHAIRMAN LLOYD: I might suggest on that that we 21 take advantage of some of the offers we've had today to 22 incorporate the people there and do a more extensive project 23 at the same time while we try to maybe design some 24 experimental studies that would get us to those points. 25 Professor Friedman. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 375 1 BOARD MEMBER C.H. FRIEDMAN: I'd like to join 2 Ms. D'Adamo in thanking the audience for their patience and 3 for their thoughtful and crisp, especially being held to 4 five minutes or so, comments and information. 5 This has been a steep learning curve for me and 6 I'm still learning, but I felt this was a very informative 7 and useful long day. 8 I too think that considering we have the left and 9 the right and the middle and everybody, some wanting more 10 stringency, others saying there's not enough flexibility, I 11 think we have got as good as we can fine tune it at this 12 stage, recognizing, at least for me, as you would, that this 13 is a very transitory standard. 14 That is to say it is a work in progress, in your 15 terms, Mr. Kenny. 16 And I see it as just a way station triggered by 17 the need to eliminate the MTBE on what is a continued road 18 of progress that I hope the fuel industry will continue to 19 take the lead in with the automobile manufacturers towards 20 zero emissions. And in terms of fuel toward further and 21 further reductions in not only sulfur and T50 and the T90, 22 but to the extent possible and with technological advances 23 I'm constantly amazed at how cleaner and cleaner fuel can 24 get and must get. 25 And I think we have every right to look to the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 376 1 fuel industry and hope and expect that they will continue to 2 figure out ways to continue to improve our fuel. 3 And so I think this needs at least every six 4 months or some realistic period for the staff to take a 5 look, even though we won't have kicked in with our new Phase 6 3 fully until the year 2001 or 2002, but some are beginning 7 to do it. Tosco and others have said they are going to 8 phase out MTBE much more quickly. 9 So if on a periodic basis, but a regular basis, I 10 would hope the staff could keep vigilant for every 11 opportunity in concert with the industry to achieve further 12 reductions and monitor it. 13 And I would hope that we could have a baseline 14 that is monitored and kept maintained so that when, as we 15 surely must, we look at this again in a not-too-distant 16 future, there will be common ground and there will be less 17 opportunity for honest disagreement as to what the numbers 18 are and what we're looking at, and what the standards are. 19 I also hope that there's something can be done 20 about ethanol. By that I mean with Albuquerque and Denver 21 and Brazil, there must be a way, again perhaps joint 22 efforts, to begin to develop some real data on what the 23 effects of ethanol are in usage. 24 So that assuming we continue the need to add 25 oxygenate and especially assuming that we're going to begin PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 377 1 to convert rice straw or other things and develop an 2 industry in it, we've ought to know what we're doing. 3 Thank you. 4 CHAIRMAN LLOYD: Mr. McKinnon. 5 BOARD MEMBER McKINNON: I'm very optimistic coming 6 out of this process in how this process worked. There was a 7 lot of compromise and a lot of hard work and a lot of people 8 put themselves together to try to make this work. 9 And I keep remembering kind of the fundamental 10 driver for this was had we done nothing and had the Governor 11 done nothing, there would be a great deal of damage to 12 groundwater in the State of California. 13 So the Governor responded quickly to a problem 14 that would have cost taxpayers a lot more money had he not 15 responded. 16 Now we've moved through this step. Clearly there 17 were tradeoffs between auto and petroleum, and I think 18 people worked hard to make that work. 19 I really support the motion in terms of it being a 20 work in progress. I wouldn't want to ever be aware of the 21 kind of testimony we got from Huntington Park today that 22 maybe more and more we can consider taking the sulfur out of 23 the crude at the front end in every way we can. There may 24 be a day that the technology and diesel is such that very 25 very low, very very low sulfur diesel with that technology PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 378 1 really makes dramatic change and gives us more flexibility 2 both in stationary and mobile source areas. 3 So, again, I'm very very optimistic about the 4 direction we've headed right from the beginning in dealing 5 with the groundwater problem to the point we're in today. 6 Thanks. 7 CHAIRMAN LLOYD: Thanks. 8 Supervisor Patrick and then Mr. Roberts. 9 BOARD MEMBER PATRICK: Thank you very much. 10 Yes, I too would like to thank staff and thank 11 everybody that gave testimony today. 12 We had an awful lot of people who spoke today and 13 under sometimes less than perfect conditions, but I think 14 it's important that everybody spoke and everybody had the 15 opportunity to give their input. 16 And I think there were a whole lot of complex 17 issues that were brought before us today from all different 18 sides of this. 19 And so I too am supportive of the motion and 20 support it as an interim measure, because I think we do have 21 more work to do, there's no doubt of that. 22 And I would especially like to thank staff for 23 working with the folks from Kern Oil. Kern Oil of course is 24 located in Kern County. They are the small refiner that 25 we're been talking about. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 379 1 And I think one of the things that gives me 2 greatest pride about the staff is the tremendous flexibility 3 that you show and the tremendous creativity that you show 4 and yet always keep public health uppermost. 5 And I think that the resolution that you came to 6 is one that we can all live with. 7 And thank you, Mr. Venturini, thank you, 8 Mr. Simeroth, for the work that you did on that. I know it 9 required a tremendous amount of your time to do that. 10 And I'm very comfortable with what we're doing 11 today as an interim measure, because I think the complexity 12 that all sides were talking about today is something that 13 we're going to have to be dealing with in the future. 14 So with that I, too, support the motion. 15 CHAIRMAN LLOYD: Supervisor Roberts. 16 BOARD MEMBER ROBERTS: Thank you, Mr. Chairman. 17 First of all, while I'll maintain a concern over 18 cost and cost increases, while I think that whatever we do 19 will contribute probably to higher costs, I think the 20 fundamental problem is not this. I think we need to 21 continue to work towards cleaning up the air. It's 22 unfortunate that that's created an environment in California 23 where there's -- it contributes to the lack of competition 24 and plays into the hands of higher prices which, if 25 anything, is pretty clearly stated in recent studies that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 380 1 were done here, but it shouldn't stop us from trying to 2 obtain the end result. 3 About a year ago we tackled the issue of diesel 4 exhaust and we went further than the staff wanted us to 5 then. 6 And I guess I have some concerns, and I'm not 7 really sure what the motion is, but let me list my concerns 8 and then I'll figure out if I can fit into the motion. 9 I think we ought to be establishing a sulfur count 10 of five ppm by the year 2004. And, you know, I'm not sure 11 when we're talking about an interim solution whether we're 12 saying that or not. 13 I think we should end the relaxation of the T50 14 and T90 specifications also by that time. 15 And I think the staff is talking about getting 16 information on commingling which, while we have concerns, we 17 don't have a lot of information. 18 I guess my greatest concern is regarding ethanol. 19 There seems to be some strong evidence that the evaporative 20 emissions are going to increase significantly. I don't know 21 what that is. 22 I'd like to see some very specific directions into 23 quantifying that and then I think it raises the next issue, 24 that is how do you mitigate it. 25 And it isn't enough just to say we're going to get PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 381 1 rid of MTBE, but to jump from one thing to another and have 2 a whole series of problems that result from it, I'm not sure 3 that that's something I'm ready to clap over. 4 So for me a motion, and we can take these things 5 singularly or all at once, but if it is including some cap, 6 as I said, with respect to sulfur, with respect to the 7 relaxation of those other standards and with some very 8 specific instruction to staff regarding evaporative 9 emissions, then I'm not sure what we've done here today. 10 CHAIRMAN LLOYD: I think -- 11 BOARD MEMBER ROBERTS: So if somebody can clarify 12 what the motion is. 13 CHAIRMAN LLOYD: I was just going to make a few 14 comments before, then get staff to clarify, or Ms. D'Adamo, 15 to clarify the motion. 16 Again, I want to reiterate what has been stated 17 before and I again thank staff, I guess, with Steve, with 18 RCC help there, and Gordon and with Dean, Peter, Mike. I 19 know they've borne the brunt of all this. And Tom as well. 20 Again, I've seen you put in many hours and hours into this, 21 and I come away from today feeling although I'm technically 22 equipped, I'm also not well equipped to look at the whole 23 variety of issues on the area here. 24 And I'm also left with the, again, with the 25 impression of the complexity, the area that we don't feel PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 382 1 fully satisfied in any of these areas, but I'm also, again, 2 very impressed with the amount of effort that the industry 3 has provided here to provide technical studies which are 4 really helpful, has highlighted in some case some of our 5 deficiencies. And those obviously we have to recognize and 6 they're going to add to make us stronger in the future. 7 I think the issue of I think Dee Dee dealt with 8 the sulfur issue and, again, I'm tempered from the desire, 9 personal desire, here to get as low as we can on that issue, 10 but I'm also tempered by the realization that we have to be 11 responsible here in terms of economic sense, and so that's a 12 real personal challenge for me to marry that, because I want 13 to get lower. 14 But on the other side I would echo Professor 15 Friedman's point that as we go to the fuels of the future 16 and, as I think Walt Kreucher mentioned, the world is 17 actually going to lower and lower sulfur fuels, looking at 18 diesel and gasoline, and I don't think, again, it takes a 19 rocket scientist from the industry which should be able to 20 tell them that this is where we're heading. The world is 21 heading that way. 22 If in fact we don't like command and control, 23 there are many opportunities out there. And we thoroughly 24 applaud Tosco's efforts here to step out today, Arco's 25 issues to step out originally with ECD on the diesel issue, PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 383 1 and then previously to some of the work on the cleaner 2 burning. 3 I think there are opportunities there and in fact 4 I will challenge the industry here to in fact work with us 5 as we get down those arenas, because I think the world is 6 shrinking. 7 The other part of that is if we look at the new 8 technologies, we see we have significant new developments. 9 We have our California fuel cell partnership, which is going 10 to require increasingly cleaner and cleaner fuels. And if 11 in fact the energy industry is going to play in that arena, 12 we're going to have to have clean fuels for reforming, which 13 will in turn dictate that. 14 So I think we clearly we would love to see that 15 part of it, because we would like to see the electric drive 16 train in there. So that's going to be very important. 17 And I'm encouraged also not only with seeing the 18 developments with ethanol here and the contributions that 19 that can make and the biomass ethanol and the increase in 20 the production of ethanol from home-based and power products 21 and others, and that we can do that. 22 Also, they can play a significant role as we get 23 into the arena of fuel cells for reforming ethanol and 24 methanol. 25 So I think these things are changing over the PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 384 1 years. So while we look at the potential increasing 2 importation of fuel to California, we should also look at 3 introducing these technologies. 4 And, that again, brings us back to the point I 5 think that was raised about the truck traffic. I don't 6 think that's received much attention so far. And that is 7 what increase in emissions are we going to get from the 8 transportation side. 9 And again I would encourage staff, I don't know 10 how we work with CEC in that arena or whatever other 11 agencies there to really look at that issue. And I think 12 that's something I would like to see, maybe even we can 13 address by the January 18th meeting. Not in detail, I mean. 14 I don't want to -- you guys deserve a little rest here, but 15 maybe other parts of the board to take a look at that. But 16 I think that is a real issue. 17 And but again as I mentioned earlier, these are 18 opportunities also for the introduction of natural gas, to 19 use some of the mechanism that we put in place by the board 20 with the Moyer program and I think that's going to be very 21 helpful. 22 The water issues with ethanol we'll have to 23 address on the 18th, because as commented by some of the 24 speakers, unless in fact we address the water issues, no 25 matter what we put in there, whether it's how much cleaner PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 385 1 burning gasoline, if in fact it has some of the toxics in 2 there and stuff we don't want to get into groundwater, it's 3 still going to be there through no fault of the fuel, but 4 from deficiency of the containers. 5 The whole issue of the evaporation permeability 6 commingling we see, and I'm pleased to see that we have 7 addressed the issue of the contribution of CO to ozone, and 8 I think we've made considerable progress there. 9 On the other side of that, we've seen a number of 10 speakers talk about the downside of that. I think we need 11 to be able to quantify that, and I would strongly recommend 12 and endorse the other program in that to ask staff to come 13 back and take advantage of some of the expertise we see in 14 the room today, because that could be an important issue. 15 And, clearly, before we do anything irreversible here we 16 want to be able to quantify that, and I agree with 17 Supervisor Roberts on that. 18 And the other part of it I think some of the 19 issues with EMFAC which were brought up today, I think those 20 are important issues which will come back to us I guess in, 21 I think, in March. 22 MR. KENNY: In March. 23 CHAIRMAN LLOYD: In March. 24 So the issues raised by the industry, parts of the 25 industry there, I think were very helpful and will help us PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 386 1 make some of those even stronger there. 2 So I think again I would like to maybe get some 3 clarification on what we're proposing here, so that we can 4 actually get to a vote. 5 BOARD MEMBER D'ADAMO: If I could, although I 6 agree with you, my personal opinion is I'd like to actually 7 go where perhaps Supervisor Roberts was headed with an 8 actual sunset and actually lowering sulfur, but I think that 9 based on the testimony I just don't feel that I'm prepared 10 to go there yet, especially since I think that the industry 11 made a very compelling case as to their need for 12 flexibility, the supply issues, the cost issues. 13 And what I'm hoping is that if we could hear back 14 from staff, I'd be open to discussion about that, but say 15 June of the year 2000, hear back from staff about whether or 16 not we have some additional opportunities before us that 17 would, based on either a waiver, EPA's lowering of the 18 sulfur, additional information on commingling, perhaps if we 19 can have that, take that additional information and use it 20 to our advantage, I'm hoping that sulfur on -- because of 21 some of these other factors, that it will be going down 22 anyway, and that the industry will be able to take advantage 23 of the tradeoffs so much more than we expected today, and 24 that it will result in whatever the recommendations are of 25 staff, whether it's in June of the year 2000 or somewhere PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 387 1 down the line, that it would result in maintenance of the 2 flexibility and our sensitivity to the cost and the supply 3 issues, so that we don't lose anything, the industry doesn't 4 lose anything more than what they're already subject to 5 today, and at the same time we could achieve some additional 6 air quality benefits. 7 BOARD MEMBER C.H. FRIEDMAN: Could that be 8 included in the resolution relating to the October 2000, 9 bring back to us for the CARBOB and specifications for 10 denatured ethanol for use in motor vehicles, and could that 11 be a time also for a preliminary report, if not a definitive 12 report? Is that too soon on some preliminary results of the 13 effects of ethanol? And I mean if we can expand that 14 particular action, that's a little beyond June. 15 MR. KENNY: I think with regard to the permeation 16 and commingling issues, I think we may be able to provide 17 you with information by that time. I was looking at Tom and 18 Mike over there earlier, and both of them thought that it 19 would take probably close to a year, which is that is a 20 little short of a year, but I think it's probably reasonable 21 for us to try to shoot for that. 22 BOARD MEMBER C.H. FRIEDMAN: If more is coming 23 right around the corner, we can always buck it, take it a 24 back a month or two. 25 MR. KENNY: The other suggestion I might make is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 388 1 that to the extent that there's at least an interest in 2 having kind of an ongoing briefing on what is happening, we 3 could at least still provide you with six-month updates on 4 what is happening. I mean, there are a lot of issues here, 5 whether it's essentially the truck traffic, whether it's the 6 permitting that would be ongoing, whether it's the vehicle 7 performance, what's happening on sulfur, the T50, T90 8 issues. We can try to provide you every six months with at 9 least our sense of kind of the state of the land with regard 10 to those issues. And so you have that. 11 And then as part of the CARBOB proposal in October 12 we would also simply provide you with as much information as 13 we have on the commingling and -- excuse me, the evap issues 14 at that time. 15 CHAIRMAN LLOYD: Were you rolling into the more 16 definitive estimate of implications of truck traffic and 17 transportation? 18 MR. KENNY: I am rolling all of that in in terms 19 of the six-month report. Essentially what the goal there 20 would be to provide you with an update every six months, 21 pretty much in June and December, on an ongoing basis as we 22 go through implementation. I mean, there will be a lot of 23 issues throughout implementation and what will probably 24 realistically happen is that the earlier reports, for 25 example in June of 2000, it will probably be a lighter PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 389 1 report, and then as we move further into implementation the 2 reports probably would get more substantive and more 3 detailed. 4 CHAIRMAN LLOYD: I would say also if there's 5 anything that really jumps out quickly in the next three 6 months, you can bring it up in March. 7 MR. KENNY: Absolutely. 8 CHAIRMAN LLOYD: Just if something key comes up 9 there. 10 Supervisor Roberts, are you comfortable with -- 11 BOARD MEMBER ROBERTS: Maybe comfortable isn't the 12 word. Maybe it's a little puzzled. I guess I'm a little 13 concerned. I don't know at what point we sort of unleash a 14 billion dollars' worth of spending to correct what we have 15 as a problem, and then we're going to get some periodic 16 reports that are going to look at those items, sulfur 17 standards, commingling, truck transportation. I'm not sure, 18 you know, if today we're taking action that's going to set 19 off all that spending. I guess I'm concerned because you 20 got all these unanswered questions. 21 BOARD MEMBER C.H. FRIEDMAN: Maybe I'm -- can I, 22 because actually if -- first of all, I think the estimates 23 have ranged from something less than -- 24 BOARD MEMBER ROBERTS: Pick a number. 25 BOARD MEMBER C.H. FRIEDMAN: Most of that PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 390 1 apparently is to get rid of MTBE, to phase it out, no matter 2 what we do we're under a directive to do that. 3 Our new formulas aren't going to -- I mean, that 4 has to do with mixing mostly, as I understand it, and the 5 costs are nowhere near that magnitude. And that mix, I 6 think, clearly is going to be changing. You folks did a 7 Phase 2 and now we're confronted with a Phase 3, and I 8 eagerly look forward to Phase 4. Nobody else may, but -- 9 (Laughter.) 10 BOARD MEMBER C.H. FRIEDMAN: I think we have sent 11 a pretty clear signal that some of us at least feel that 12 that's inevitable. Unless miraculously we don't even need 13 to set a standard, because they've all done -- but I know 14 what you mean, it's -- but what more can we do? What would 15 you suggest? I mean in sunsetting to me is problematic 16 because all that does is it says at the end of a certain 17 time there won't be any standard. Or did you want to -- are 18 you suggesting -- 19 BOARD MEMBER ROBERTS: You're sunsetting the 20 relaxation of the standards. You're not doing away with the 21 standards, as far as the T50 and T90 are concerned. 22 BOARD MEMBER DeSAULNIER: I think we share similar 23 sentiments. I certainly am with Ron. 24 But maybe Mike can help us with this, but my 25 understanding of the motion, and I'll second it if this is PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 391 1 the right understanding, is we're moving resolution 99-39 2 and incorporating into that that you're going to report back 3 in six months, and given the understanding that commingling 4 and permeation is going to take longer, but you're going to 5 give us an update on where we are, we're going to deal with 6 the truck traffic and notify local jurisdictions where there 7 are major refiners. 8 And then the last thing I think, which I'm a 9 little bit troubled with too, is I agree with Ron that I 10 would like to send a very strong message that by some period 11 of time, 2004, whether the appropriate time is to put that 12 into reformulated 4, but how you work with the sulfur issue 13 and some kind of sunset on the T50 and the T90 as part of 14 the update. You work with the petroleum interests to see if 15 you can do that and how close you're coming, keeping the 16 costs as constrained as possible. 17 CHAIRMAN LLOYD: But I thought Ron was going a 18 little bit further than that in saying to now are we going 19 down a path where we're committing to a path where we may be 20 incurring costs and then part the way down there we're going 21 to find some critical issues we're going to be spending 22 significant dollars and we can't retreat. 23 But, you know, I'm asking you whether that in fact 24 is true or what we're doing here will -- that's not going to 25 be the case. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 392 1 BOARD MEMBER ROBERTS: That's exactly the concern, 2 Mr. Chairman. 3 MR. KENNY: The motion that I heard basically was 4 there were two sort of issues, I guess, that are out there. 5 The motion I initially heard was one that, as 6 Supervisor DeSaulnier said, was looking at adopting the 7 regulation as proposed today, with the reporting back 8 obligations, looking at all of these issues, and then that 9 would give the board the opportunity to make determinations 10 as to whether or not there are other places the board should 11 consider going. 12 I have heard Supervisor Roberts suggest that in 13 fact going in that direction does leave on the table the 14 issue of the expenditures that would be essentially put in 15 jeopardy if in fact it is better to essentially go do a 16 lower level now, or at least to put that in some kind of 17 concrete point in time. 18 And I think that's an issue really that I can't 19 answer for the board. I mean, I think it's one that the 20 board has to look at and determine which way they would 21 prefer to go. 22 CHAIRMAN LLOYD: But the industry always have the 23 option, if they want to go further at this time they can do 24 that. 25 MR. KENNY: Absolutely. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 393 1 MR. SCHEIBLE: Just from a technical perspective, 2 we deal with an issue like incremental reduction in sulfur, 3 you go from 20 to 15 or 20 to 10, that's probably on a 4 smooth cost-effectiveness curve and you can cost that out. 5 When you go to a cap of five, you've gone into a 6 different dimension. You've changed the access to imports. 7 You've required a tremendous additional capital investment, 8 because it's not just adding a little bit more sulfur 9 capacity, it's really changing how you run your refinery. 10 So staff could probably advise you now that a 11 slight increment in sulfur reduction would not have too 12 large a cost. Going to a cap of five would be something 13 that when we looked at it it was very expensive. 14 On issues like the restoring the T50 and T90 caps, 15 if I were a refiner I don't know what I would get out of a 16 couple of years of a slightly less stringent standard. I've 17 got to plan for more than a couple years period. So maybe 18 that works, maybe it doesn't. We really can't give you much 19 advice on that. 20 But we'd be happy to work on it and come back in a 21 few months and say does it make -- what would be the cost 22 benefits of going these additional steps, how would the 23 investment strategy work, what seemed to be the options. 24 BOARD MEMBER FRIEDMAN: Mike, wouldn't it send a 25 clearer signal if we adopt a suggestion of one gentleman of PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 394 1 about going 15 and then 10, that we really mean business 2 about getting at some point in time to 5 or below? I mean, 3 is there a reason not to do that now? 4 MR. KENNY: I think there is a reason not to do 5 that now. And I think basically what we are looking at in 6 terms of trying to move forward today and the proposal that 7 we brought to you today was one that was really designed 8 simply to maintain the benefits and to get rid of MTBE, and 9 that getting rid of MTBE was really the driver here that we 10 were trying to take advantage of. 11 Now, as we get rid of the MTBE, Mike just talked 12 really the supply issues. What we're trying to do is make 13 sure that we don't get into a situation which the cost 14 increases or the price increases the consumers face are 15 substantial. 16 So what we're trying to propose really is kind of 17 the middle of the road, the balanced approach, that 18 essentially allows us to get rid of MTBE, preserve the water 19 in the State of California, and at the same time get some 20 additional air quality benefits, but also make it very clear 21 that what's going to happen for the future that we are going 22 to be driving down towards zero emissions on the 23 technologies, all of them, and the key driver probably in 24 the fuels area is going to be sulfur. 25 So I think what we tried to do and what we would PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 395 1 recommend is that the board adopt the staff proposal as it's 2 been proposed with modifications, and then at the same time 3 have the reporting back to the board as a whole so that we 4 can basically keep you very well apprised, and that as 5 opportunities exist you can take advantage of those 6 opportunities and grab the additional emission reductions 7 that the state can use. 8 CHAIRMAN LLOYD: But I think again that the soft 9 spot in that assumption there is this whole issue of 10 evaporation, the commingling or the permeation, and clearly 11 that's why it's very very important why staff come back on 12 that part of it. 13 But and then obviously the only way we're going to 14 be able to find out about it actually is to go out there and 15 look at that and then report back and then we can do that at 16 that time. 17 MR. KENNY: That's true. 18 BOARD MEMBER C.H. FRIEDMAN: I just want to 19 underscore, I think that we're under a legislative mandate 20 that in the mix we take into account our best sense of what 21 will assure a continued adequacy and availability of supply 22 and that, of course, relates partly to price. 23 So I think we are walking that tight rope, dancing 24 that fine line. 25 And yet I think and I hope that there will be PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 396 1 opportunities and that we in concert, as this evolves, in 2 concert with the industry, who have certainly shown good 3 faith, and some of whose members have stepped up and said 4 we'll beat your deadlines, and all have said that they can 5 do it, so I think we can improve. 6 MR. KENNY: One thing I can assure the board is 7 that basically in the next couple years we'll be back to you 8 with the latest SIP iteration and the SIP iteration will be 9 one that is clearly going to need additional emission 10 reductions. And we will then in that SIP be proposing to 11 you every possible emission reduction that we can identify. 12 I think you can at least feel fairly assured that 13 in fact this staff will be looking for every possible 14 emission reduction that's on the table or that is under the 15 table, so that we can bring them to you and make sure what 16 we're driving toward is attainment. 17 CHAIRMAN LLOYD: Yes, Supervisor Roberts. 18 He wants the one under the table. 19 BOARD MEMBER ROBERTS: The difficulty here is that 20 we're saying here we're going to get rid of the MTBE, we're 21 going down this path that given the questions we have may 22 actually result in an increase in environmental impacts. 23 It's not clear to me that what we're entering into 24 with all the unknowns in here on emissions and other things, 25 and we're saying that, you know, I thought we were maybe we PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 397 1 were getting close to something, because a few minutes ago 2 when it was being described that we can't get to five ppm, 3 but you know what, you can do ten. I mean, we found out 4 that we're really at 20 or 22 today, but now we're saying 5 we, for some reason we can't make any other change, except 6 what's in front of us, in spite of the fact what's in front 7 of us is filled with all sorts of questions about what are 8 the real impacts. And I'm having a problem with that, Mike. 9 MR. KENNY: Actually, I'm hearing that. The 10 impacts essentially associated with commingling is for 11 example an impact that we -- 12 BOARD MEMBER ROBERTS: It's more than just the 13 commingling. It's also the -- if we're going to use 14 ethanol, there's whether you talk about existing cars, 15 whether you talk about those containers we visited not long 16 ago, and you start to put that product in there, you're 17 talking about increasing substantially the number of 18 emissions. I don't hear any mitigation for that. I don't 19 hear any answers for that and I'm seeing a bigger black box 20 that you're going to have to fill. I mean, you've always 21 had to go under the table and over the table and everywhere 22 else. What you're doing is you're lifting that table and 23 making it harder to do. 24 MR. KENNY: One thing we had looked at, I was 25 going to mention about commingling and the permeation PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 398 1 issues. We think that in fact we have covered the 2 commingling potential consequences. We're not certain, but 3 we feel relatively confident of it. We at least have the 4 opportunity to double check and make sure that in fact we're 5 correct as the future unfolds. With regard to the -- 6 BOARD MEMBER ROBERTS: I'm less concerned about 7 that than I am with the other. 8 MR. KENNY: With regard to the permeation, we've 9 made it -- we don't think that a CO debit is at all 10 appropriate and so the discussions today that have been had 11 with regard to CO debit are ones in which we do think that 12 in fact the permeation offsets any basis for providing the 13 CO debit. So as a staff we did not provide proposals for a 14 CO debit. 15 To the extent that we did provide a CO credit, we 16 think that in fact the biggest issue there is whether or not 17 that CO credit may be a little bit larger than it should be. 18 If it is a little bit larger than it should be, 19 it's probably not substantial such that it will overwhelm 20 what we were trying to do here and take away the benefits. 21 We do still have a fairly substantial amount of NOx room in 22 this particular rule, so we feel okay there, but at the same 23 time we do agree with the board that it's important to go 24 back and look at these permeation issues and it may be that 25 in fact that that CO credit needs to be relooked at. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 399 1 MR. SCHEIBLE: Another point on permeation, the 2 baseline is today's fuels with MTBE and the information we 3 have indicates that ethanol substantially has more 4 permeability than non-oxygenated fuels. It just has 5 slightly higher permeability than MTBE. So in keeping the 6 baseline the same, if you just fix two percent oxygenated 7 fuel with ethanol for MTBE fuel, there would not be much 8 impact, but we have to study that and quantify it better. 9 CHAIRMAN LLOYD: Are some of these issues going to 10 be addressed in EMFAC 2000 when it comes back to us in 11 March? 12 MR. SCHEIBLE: The total amount of resting losses 13 and things like that that are affected by permeation, but 14 actual testing and study and better quantification will -- 15 CHAIRMAN LLOYD: No, no. I understand that won't 16 be. But the relative amount of tailpipe evap and that type 17 of thing will be there. 18 MR. SCHEIBLE: Yes. 19 CHAIRMAN LLOYD: So we have a little bit better 20 handle on the potential risks that we have on there. 21 BOARD MEMBER C.H. FRIEDMAN: I'm wondering if 22 you -- do you have a proposal of some sort? Is there 23 anything specific that -- 24 BOARD MEMBER ROBERTS: I guess I'm trying to think 25 of how we can tie something into the subsequent actions PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 400 1 that -- and I guess we just have to run the risk that by 2 initiating something now that you may spend some money that 3 you're -- you end up spending a little more later, that 4 you're not in a position to initiate all of the things you 5 want. 6 But I would like to see as a part of this that we 7 come back with a program as how we can get the sulfur cap 8 down and to come back with the information on the 9 evaporative emissions to the best way we can, and what are 10 the mitigations going to be for those. 11 And the discussion I think of the relaxation of 12 the other standards, when that can conceivably end. 13 I think I can feel comfortable going ahead with 14 this if I know for sure we're going to come back and address 15 those things in a very specific time frame and it may mean 16 that by pushing ahead on this it's going to cost a little 17 more to do it at another day, but so be it. 18 BOARD MEMBER C.H. FRIEDMAN: I think that's where 19 I am exactly what you just expressed. I think what we're 20 confronted with and anyone is who is, I guess, pioneering, I 21 guess nobody has done this, so we're boldly going where no 22 one was gone before, and so you do certainly take a deep 23 breath. I mean, clearly the science is all over the place, 24 I mean -- 25 CHAIRMAN LLOYD: Not quite that bad. PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 401 1 BOARD MEMBER C.H. FRIEDMAN: It reminded me of a 2 bunch of lawyers arguing all day long. 3 MR. KENNY: I do think that what Supervisor 4 Roberts is proposing is something that we were intending to 5 provide as part of the six-month reviews. I think it's 6 important to actually look at those things. 7 CHAIRMAN LLOYD: What I would also, I would 8 endorse those comments, but I would also actually just 9 encourage the industry, because we have a lot of expertise 10 out there to work with us to get to the bottom of these 11 issues. I mean, you've heard the issues coming before the 12 board here, you've heard our concerns, you know, but on the 13 other hand we want to work with you. We're probably trying 14 to keep all of you a little bit unhappy, but we need to get 15 cleaner air as quickly as we can. So work with us, help us 16 to address these issues then, and I think that we'd all be 17 much happier and I think that Supervisor Roberts and all the 18 rest of us will be assured that we're going down the right 19 path, because I'm sure nobody wants to go down the path 20 where we're basically throwing away money. 21 BOARD MEMBER C.H. FRIEDMAN: She so moved, I'll 22 second. 23 CHAIRMAN LLOYD: I just had one question on the 24 resolution. On page 12 when you talked about the capital 25 cost for refineries, I thought it was lower than the number PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 402 1 quoted here. About one billion dollars, page 12 at the top 2 it says -- 3 MR. SCHEIBLE: I think we'd say it's significantly 4 less than $1 billion, but that doesn't really probably carry 5 the context. 6 BOARD MEMBER C.H. FRIEDMAN: I thought that -- 7 MR. JENNINGS: That paragraph is also just the 8 original proposal. 9 CHAIRMAN LLOYD: This is still about the original 10 proposal? 11 MR. JENNINGS: The first paragraph talks about the 12 original estimates, about the original proposal, and then 13 the second paragraph talks about how the cost we think that 14 will be lower. 15 CHAIRMAN LLOYD: But that billion dollars, though, 16 isn't reduced in the second paragraph anywhere else. 17 There's nothing -- no -- nothing less than that billion 18 dollars shows up lower in that same context. 19 MR. JENNINGS: Sounds like we should add a clause, 20 and the capital costs will be considerably lower. 21 CHAIRMAN LLOYD: Please. Well, not considerably. 22 Define what you mean by considerably. I like the idea of 23 half or less or whatever, but something that reflects -- 24 BOARD MEMBER DeSAULNIER: Less filling. 25 MR. SCHEIBLE: We'll definitely report back on PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 403 1 that issue also. 2 CHAIRMAN LLOYD: But, again, I thought I was 3 reflecting what I had heard from staff that later estimates 4 were actually significantly less than $1 billion. 5 BOARD MEMBER D'ADAMO: I believe also industry 6 gave lower estimates, maybe some testimony that we could use 7 from that. 8 MR. KENNY: We'll modify it to reflect that. 9 CHAIRMAN LLOYD: So do we have -- all in favor, 10 let's take a show of hands, as we make no mistake there. 11 All in favor put their hands up. 12 (Show of hands by all members.) 13 CHAIRMAN LLOYD: It's unanimous. 14 Thank you very much. Thank you, board. 15 Thank you very much, staff. 16 Thank you for everyone here. 17 We will reassemble at 9:00 tomorrow. I think 18 there was some talk of 8:30, but we'll reassemble at 9:00 19 o'clock. That's when we told the rice industry we'd be 20 here. 21 (Thereupon the meeting was adjourned 22 at 7:27 p.m.) 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 1 CERTIFICATE OF SHORTHAND REPORTER 2 3 I, JANET H. NICOL, a Certified Shorthand Reporter 4 of the State of California, do hereby certify that I am a 5 disinterested person herein; that I reported the foregoing 6 meeting in shorthand writing; that I thereafter caused my 7 shorthand writing to be transcribed into typewriting. 8 I further certify that I am not of counsel or 9 attorney for any of the parties to said meeting, or in any 10 way interested in the outcome of said meeting. 11 IN WITNESS WHEREOF, I have hereunto set my hand 12 this 19th day of December 1999. 13 14 15 16 Janet H. Nicol 17 Certified Shorthand Reporter License Number 9764 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345 1 CERTIFICATE OF SHORTHAND REPORTER 2 3 I, VICKI L. OGELVIE, a Certified Shorthand 4 Reporter of the State of California, do hereby certify: 5 That I am a disinterested person herein; that the 6 foregoing hearing was reported in shorthand by me, Vicki L. 7 Ogelvie, a Certified Shorthand Reporter of the State of 8 California, and thereafter transcribed into typewriting. 9 I further certify that I am not of counsel or 10 attorney for any of the parties to said hearing nor in any 11 way interested in the outcome of said hearing. 12 IN WITNESS WHEREOF, I have hereunto set my hand 13 this nineteenth day of December, 1999. 14 15 16 VICKI L. OGELVIE 17 Certified Shorthand Reporter License No. 7871 18 19 20 21 22 23 24 25 PETERS SHORTHAND REPORTING CORPORATION (916) 362-2345